EDITORIAL: Will Capitec unbundling be the making of Piet Mouton?
The news that PSG was considering unbundling all, or a part, of its 30% stake in Capitec was widely welcomed by the market as a way of forcefully addressing the persistent and growing discount the investment holding company was trading at relative to the cumulative value of its underlying investments.
Two weeks ago, when PSG reported results for the year ending February, Capitec accounted for 74% of the listed holding company founded by investment doyen Jannie Mouton, whose bet on high-growth companies challenging established businesses in finances and private education turned the 25-year company into one of the must-haves in fund managers’ portfolios.
This usually took the form of buying big stakes in very small unlisted businesses that PSG would take under its wing and incubate. This meant providing strategic input on “core strategy” and capital allocation, as well as supplying capital to get them to grow at exponential rates.
But in trends observed across many investment holding companies, shares in Capitec, which made substantial inroads in the upper echelons of the SA banking industry, were about 32% cheaper if held through PSG than they were by buying them directly. This has made Capitec both a discount and concentration headache for PSG.
CEO Piet Mouton — who took over from his father, Jannie, in 2010 — now finds himself in a similar dilemma to the one that confronted Johann Rupert and Remgro in relation to its stake in FirstRand, but he needs to do more than just spin off the Capitec stake.
Like Remgro, PSG holds a stake in a company that accounts for such a large share of its value and for which it exercises some, but not defining, strategic influence over.
PSG has other concerns about continuing to hold such a large stake in a bank. According to regulations being promulgated, PSG is at risk of being regulated to the same degree as the underlying financial institution it is invested in.
True, spinning off the entire Capitec stake now can avoid many problems down the line but it could rob PSG of its biggest moneymaker at the time when companies are scrambling for cash to ride out the Covid-19 outbreak.
Mouton might be persuaded to cut the stake to perhaps 10%, allowing PSG to circumvent the onerous regulations and continue to receive and invest the cash generated from the bank’s dividend, once that resumes.
Assuming he gets the deal through, there is a chance he would be swapping the Capitec discount with another from PSG’s asset management business, PSG Konsult, which will account for about 45% of the group’s value.
The unbundling of the Capitec stake, whether all or a portion of it, cannot and should not be the only measure Mouton is contemplating to narrow the valuation gap and release shareholder value.
It should be the start of deal-makings to address the long acknowledged fundamental problem that there are too many entry points into PSG, which makes the holding company relatively more unattractive to investors as they can easily replicate PSG’s portfolio themselves.
What better way of remedying this than by doubling down on companies it already intimately understands and believes in? PSG should make an offer to minorities and delist one or two of these entry points.
That should go a long way in narrowing the discount and free up Mouton to identify and build the next Capitec or PSG Konsult just as his father developed a track record of spotting opportunities in large markets and reputation as one of SA’s most respected stewards of shareholder capital.
The jury is out on whether he can adapt to market conditions in a way that generates the same mesmeric returns investors got used to under his father, who has elicited comparisons with one of the world’s most famous investors, Warren Buffett, and referred to as the “Boere Buffett”.
Showing he can add the same value to the portfolio businesses is the surest way to erase a discount such as the one PSG faces.
As one analyst put it, Piet has had the benefit of learning at the foot of the master. It’s now time he showed everyone he can fill his shoes.