Before and, indeed, after the announcement by PSG Group that it was “seriously considering” the potential unbundling of most of its stake in Capitec Bank, shareholders and analysts were speculating that the investment holding company may look to delist one or more of its businesses.
The unbundling, it believes, should “unlock value for PSG Group shareholders” by narrowing the discount it currently trades at to the sum of its parts. As of Friday, that discount was 20% – far lower than the gaping 36% just months ago.
A Capitec sale, already
Post-unbundling, PSG said it planned to retain 4.9 million Capitec shares (a 4.3% stake in the bank) via PSG Financial Services. But on June 5 Capitec announced to the market that PSG Financial Services had already reduced its interest in the bank by 1.04% to take the overall stake to 29.65%. This raised roughly R1 billion in cash for PSG.
Prior to this transaction, the sum-of-the-parts calculation on PSG’s site showed approximately R1.9 billion in cash, which included R1.7 billion received as the special dividend from Zeder. But at that stage PSG Group also had just over R1 billion in “other debt” specified.
Fast-forward to Friday and the debt has been completely extinguished while the cash balance remains a healthy R1.7 billion.
The proceeds from trimming the Capitec stake have already been put to work. Something is at play.
The clear-as-daylight answer is in comments made by CEO Piet Mouton at PSG Group’s Covid-19-lockdown-induced virtual presentation in late April. The executive team in Stellenbosch has long wrestled with the issue of the substantial holding company discount. Here, Mouton didn’t mince his words.
“Historically, we believed that being listed was important.” This provided a direct incentive to management, he explained. But, with increasing “red tape” he says it’s obvious why “many more companies would opt to operate in an unlisted environment”. It is understood that he has made similar comments to others in recent months.
Aside from the Capitec stake (which is to be unbundled), there remain four listed entry points to the group: financial services outfit PSG Konsult, private education play Curro, tertiary business Stadio (itself spun out of Curro) and agricultural holding company Zeder.
It is these last two, says Small Talk Daily research analyst Anthony Clark, that are obvious candidates for delisting.
What is Zeder up to?
If you strip out the cash, Zeder is currently trading at a discount to the sum of its parts of north of 50%. This is the “festering boil that the market picks away at” says Clark. Analysts and shareholders have long criticised the discount in Zeder. It has done some work to streamline its portfolio (particularly at Capespan), but the discount persists.
Over and above the corporate machinations at parent PSG, Zeder is busy with some housekeeping of its own. In a transaction not yet announced to the market, it has disposed of its entire holding (32.1%) in listed Quantum Foods at R5 a share in a single block trade.
Clark broke this news on Friday. It is noteworthy, he says, that Zeder has suddenly done its first transaction in years.
This would’ve netted a further R300 million in cash, leaving Zeder in a situation where 38% of its market capitalisation is currently made up of cash (a total of R1.4 billion).
From here, Clark figures there are two permutations.
One, Zeder pays a special dividend that returns a substantial amount of cash to PSG (it paid a smaller special dividend from the sale of the Pioneer Foods to Pepsico than originally guided, which leaves a sour taste in the mouths of many shareholders). PSG could then use that cash, along with its existing war chest, to make an offer to remaining shareholders and delist Zeder.
The other remaining listed asset inside Zeder is a 41% stake in specialist retail and trade group Kaap Agri. Delisting this business is Clark’s second theory. Kaap Agri is materially off its high of R64 (achieved on listing in June 2017). Its aggressive pursuit into the fuel sector has not been judged well by the market at all. Could a delisting, which would cost about R1 billion, be a possibility? This would leave Zeder with a portfolio that is completely unlisted, which should help the market narrow the discount to the underlying portfolio, says Clark.
Stadio needs cash
The build-out of Stadio’s two tertiary campuses (in Durbanville and Centurion) is chewing cash. And while its capex funding needs over the medium term will be nowhere near those required by Curro in its development stage, it will still require around R1 billion over the next two years.
It cannot follow the Curro funding model of issuing equity to fund this build-out given a very depressed sector and rating; Stadio is at a price-earnings ratio of 10 and its market cap is just R1.2 billion. Clark notes that Stadio is currently the worst-performing education stock on the JSE.
Its only option, therefore, is debt.
It has already secured a R200 million revolving credit facility from Standard Bank, but this is nowhere near enough. This has seen the business move from a net cash position to a net debt position.
Using debt will result in a heavily-geared situation, and with an economy all but obliterated by Covid-19, there may not be as much demand for tertiary schooling in the next few years as originally forecast. This means the assets will have been put down but won’t be making a sufficient return to repay the capital, explains Clark.
He says Stadio’s growth requirements could “easily be funded by PSG [if delisted]”.
“They can take the risk,” he adds. And PSG would “rapidly benefit from an uplift in earnings and cashflow” once the campuses are built and filled with students.
“Is it going to happen? I don’t know … [but] it makes natural sense that it should occur.”
Right now, everything is in play
It is easy to see a vastly simpler PSG in just months (and don’t expect the retained stake in Capitec to stick around … it has already found use for R1 billion!).
Post-Capitec – and potentially Zeder and Stadio – there would only be the group itself, PSG Konsult and Curro left on the market. If conditions change, especially as the fallout from Covid-19 rattles through the economy, that number might be lower still.
This is very clearly Mouton stepping out of the shadow of his visionary father, moulding a ‘new’ PSG in his image.
In April, this author suggested that the possibility that PSG Group may be looking to delist itself, while far-fetched, remained intriguing.
It still might be a leap too far in current markets. But, tellingly, those whispers have not died down. If anything, there are a few more murmurs these days than there were two short months ago.
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