PSG is more than Curro and Capitec

When most investors think of the PSG Group they will think of the company’s massively successful investments in Capitec and Curro. They may also consider the substantial interests it holds in two other listed companies, PSG Konsult and Zeder Investments.

Certainly almost all of the current value in PSG Group is held in these four companies. However, as CEO Piet Mouton reminded attendees at the group’s AGM in Stellenbosch on Friday, PSG is not a typical investment holding company.

“There is a fundamental difference between PSG and most investment companies,” he said. “We have been very good historically at early stage investments. We were there from the beginning with PSG Konsult when there were only five brokers, and with Curro when it only had three schools. We use PSG Alpha to find these kinds of investments, and hopefully they can have similar success to the big companies in the group.”

For investors, therefore, the opportunities within the PSG Group should be as much about what is already established in its portfolio as what is coming next.

The criteria

PSG Alpha’s mandate is to identify and invest in companies with “exceptional growth potential that could become significant assets in the broader PSG Group”. As Mouton noted, there are particular things it is looking for.

“We have learnt a lot of lessons throughout the years,” he said. “One thing that’s very important is that it’s as easy or difficult to build a big company as a small company. So if you do get it right, the industry must be big.”

Banking and education are obvious examples. Capitec has nearly 10 million customers, but it is still only the fourth largest bank in the country by market capitalisation. Curro has over 52 000 learners in its schools, but estimates that the potential market of learners who can afford its offerings is three million.

“If we do get it right, then we should be able to reap big benefits,” Mouton said. “The market dynamics must also make it attractive.”

This means either that there should be large, inefficient, incumbents, as was the case when Capitec started 20 years ago, or it should be highly fragmented, as is the case in the financial advice industry where PSG Konsult began.

“You also can’t just do the same as the industry has done,” he continued. “You have to approach it differently, think differently about the same problem, such as bringing a retail thinking to banking.”

The next big thing?

Investors can therefore have justifiably high expectations for three of PSG Group’s more recent investments – Energy Partners, Evergreen and Stadio.

Energy Partners provides cost efficient and sustainable energy solutions through applications such as solar and steam. What makes it different is that its model is primarily to own and manage these assets at clients’ premises and then sell the electricity that is produced.

At its most recent year end, it had R112 million in assets. PSG Group believes this is a tiny fraction of the opportunity.

The company estimates that the entire electricity market in South Africa represents R2 trillion in assets. Just 1% of that would be R20 billion, which illustrates just how much room there is for the company to grow.

Evergreen, on the other hand, operates in a market that is highly fragmented, with largely undesirable offerings. It builds and manages high-end retirement villages.

PSG Group took a 50% interest in Evergreen in April this year, when the company had 501 units. That number has already grown to 547, and it has a target of 1 047 by year end. In just five years, it plans to have built 4 928.

Finally, Stadio was unbundled from Curro late last year. It offers tertiary education through a number of different brands.

The opportunity in this space, said Mouton, is very obvious when you look at enrolment numbers in South African tertiary institutions.

In 2009, 334 718 children passed matric with a university exemption. Only 164 518 could be accommodated. By 2016, the number of exemptions had grown to 442 672, yet the number of admissions was only marginally higher at 171 930.

“There is not a lot of new capacity being created. Stadio already has 13 campuses across South Africa and ambitions to expand the footprint way beyond this.”

When it listed in October, the company had 13 000 students. Its target for the end of the current financial year is 35 000.

The future

What is also telling about these investments is that they are all based in South Africa. PSG’s founder and chairman, Jannie Mouton, has said repeatedly that the group has no interest in looking internationally, because he believes that the best opportunities are in the local market.

“Don’t waste your brain becoming an expert on what’s wrong in South Africa,” he told the AGM. “Rather look at the opportunities. Focus on how you can make a difference, employ people, and make South Africa a better place. That’s what we stand for.”

Apart from the positive sentiment this expresses about the country, it also means that investors don’t need to worry about the company destroying value by making ill-advised offshore acquisitions. This has been an issue for a number of other local firms.

For Jannie Mouton, however, the opportunities for doing business in this country remain positive.

“I have never sold a PSG share, and I recently bought more,” he said. “This should tell you what I think about PSG’s future.”

Patrick Cairns owns shares in PSG Group.

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