PSG has R1.7bn cash to invest

INVESTMENT group PSG, which on Wednesday reported a significant increase in recurring headline earnings per share for the half-year to August, has R1.7bn in cash to invest in its portfolio and new investments.

The group – which owns stakes in banker Capitec, agribusiness investor Zeder and private schools group Curro – reported R931m in recurring headline earnings for the half-year, a 16% increase on the previous comparable period. Non-recurring headline earnings rose 19% to just more than R1bn.

CEO Piet Mouton said the plan was to invest most of the cash into its existing portfolio, especially in greenfield opportunities in the private-equity portfolio. "In addition, we have identified certain new investment opportunities which we are unfortunately not at liberty to discuss at this point in time."

Mouton said most of the cash had been earmarked for PSG’s private-equity investments.

PSG Private Equity, formerly listed on AltX as Paladin Capital, posted its second consecutive half-year gain in earnings after 2014’s platinum mining strikes contributed to a 49% erosion in its recurring headline earnings.

This year, its recurring earnings rose 13%. It contributed R49m to PSG’s recurring headline earnings.

"Many of these greenfield opportunities have now turned profitable," said Mouton. "We are excited about this as it proves the business models are working."

PSG’s cash pile also gives it a measure of protection against a potential sovereign credit ratings downgrade, which seems likely after fraud charges have been brought against Finance Minister Pravin Gordhan.

"These developments may increase the probability of a downgrade later this year, as it adds to the political uncertainty that ratings agencies have been flagging," said Tumisho Grater, an economic strategist at alternative investments house Novare.

Grater said SA’s five-year credit default swaps spread reached a three-month high, trading above 260 basis points, after news of Gordhan’s summons spread. The swaps are a measure of a country’s credit risk as perceived by investors.

But Mouton said PSG did not carry much debt, with most of its underlying investments being "lowly geared".

"At group level, we have R2.3bn of debt and R1.7bn of cash – therefore net debt of R600m."

This does not take into account R1.85bn in preference investments the group has made, as well as intergroup loans due to PSG. "The group and many of its underlying companies have also fixed a significant portion of their interest-rate exposure in respect of debt to ensure it is protected from negative spikes in interest rates."

For now, initial investments will be done using cash, although Mouton said the group’s low gearing gave it greater flexibility to take on debt.

The group has funded acquisitions at Capitec and Curro through a number of rights issues. Mouton does not think a potential downgrade would deter shareholders.

"Raising cash – through rights issues or placements – for investing in quality opportunities will always attract investors," he said. "We also believe that one should continue to invest in your business through good and bad cycles as you will be disproportionately rewarded when the cycle turns for the better."

While the group’s recurring headline earnings rose compared with August 2015, they declined compared with the second half of the previous year. Mouton said PSG’s portfolio companies usually had stronger second halves.