PSG Group Ltd results robust

Wealth management business, PSG Konsult, has managed to produce double digit growth (13%) in its headline earnings per share. 

Interim results for the PSG Group for the period ending 31 August 2016 were robust with recurring headline earnings per share having increased by 16% against the prior years comparable six month period. In addition to the earnings growth investors searching for yeild would be pleased with the 25% increase in the interim as well.

While the results looked good they were not completely unexpected with the company’s listed holdings having already released results to precede that of the groups. The sum of the parts (SOTP) valuation as of 31 August 2016 is considered at R228.32, making the PSG Groups current pricing a discount of between 10% and 11% to this valuation. A breakdown of the company’s SOTP is illustrated in the chart below. 

Capitec Holdings which makes up nearly 50% of the group parts valuation has seen headline earnings grow by around 20% (in the last interim period) with over 100 000 clients being added a month to highlight the group’s disruptive nature in the local banking industry. Furthermore Capitec is looking to launch its new credit card offering very soon. It may be argued that Capitec is trading a Price to Earnings (P/E) premium in the current market environment with a forward P/E of around 22, although earnings growth is managing to keep up with the current pricing of the share.

Curro Holdings is the next biggest part in the PSG valuation. Trading on a P/E of 132 this part of the business does seem expensive despite earnings growth of 51% in the last interim period. Growth is however anticipated to be exponential going forward as the group moves towards its goal of having 200 schools and 80 campuses by the year 2020. The PSG Group has also highlighted a renewed focus on private university education being fast tracked in lieu of the current uncertainty in the tertiary education space.

The Zeder holdings part of the PSG stable is largely a reflection of the Pioneer Foods business in which Zeder has a 27% interest. This part of the business is underperforming due to the current drought situation in South Africa which has in part equated to a 3% fall in recurring headline earnings per share.

The wealth management business PSG Konsult has managed to produce double digit growth (13%) in its headline earnings per share. 

While the PSG results at face value look good, market participants will need to assess whether the group’s sum of its parts are fairly valued relative to their respective expectations for earnings growth. The PSG Group’s holdings have historically performed well, however another area of concern would be the large weighting of Capitec Holdings in the parts valuation. While Capitec is the fastest growing bank in South Africa, it does pose a risk in banking sector sympathy, should a Sovereign ratings downgrade occur at year end.  The recent summons of finance minister Pravin Gordhan to court for possible fraud charges bears witness to banks being particularly vulnerability to matters affecting treasury (see chart below on banking sector reaction to the news). Ratings agencies are set to review the country’s debt rating in early December. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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