ZUKISA LUSWAZI: PSG — the makings of a long-term winner

PSG Financial Services is a great example of a long-term winner whose valuation has looked full at almost any time over the past decade but has nonetheless done well for the patient investor as it delivered growth underpinned by strong fundamentals. 

Even in recent years forward price-earnings multiples looked expensive, trading at a notable premium to the market. Despite this, we have long liked and owned the company, meaningfully increasing our stake over the years. This is due to our conviction that the market has never fully appreciated the size and quality of the business PSG is set to become over time. Even on what looks like a full rating today, we believe it remains attractive and consider the forward price-earnings multiple of about 17 times undemanding given the size and durability of its long-term growth prospects. 

PSG is an advice-led financial services group with operations in wealth management, insurance and asset management. Founded almost 30 years ago, it has grown a strong wealth management franchise in PSG Wealth; built well-regarded insurance operations (distribution and underwriting) in PSG Insure; and nurtured a respectable asset manager in PSG Asset Management. 

Particularly noteworthy is its transformation and growth over the past decade. The group CEO and CFO took the helm in 2013. They then embarked on a disciplined journey of cleaning up, institutionalising, investing in, resourcing and strengthening the group’s businesses. This process built strong franchises with favourable positions from which they can compete for long-term market share and win.

Today PSG is a high-performing company and its largest business — PSG Wealth — is well positioned for superior long-term growth. Complimenting this is its small but fast-growing underwriter, Western National, whose progress over the years has been impressive. Execution in both businesses has been strong, and we think their futures are bright. 

PSG is all about PSG Wealth. It enjoys an extraordinary set of circumstances that have supported its growth to date and should see it thrive further in years to come. PSG Wealth is a respected wealth manager with the largest non-life/non-bank-tied wealth advisory force in SA, and operates in a large and fragmented financial advisory market. It runs a time-tested revenue-sharing business model with its advisers. This respects their autonomy and allows them to build independently run advisory practices within the PSG stable. In addition, they benefit from the support of a strong centre that takes away the administrative burden of running advisory practices. This frees advisers up to do what they do best — serve clients well and grow their practices. 

The business model is attractive to independent financial advisers (IFAs) and bank-tied wealth managers alike. IFAs are attracted because growing regulatory and compliance pressures on financial advisers are compelling them to find a home for their practices. Wealth managers are driven by the superior economics of being a wealth adviser within PSG compared with being bank-tied. 

We think this is a superior model that should take a meaningful share of the adviser market and advised assets, building on the progress of the past decade. Many small advisory firms hold significant assets under advice and could find a home in PSG. There also remains a sizeable pool of bank-tied wealth managers who could credibly build their own wealth practices within PSG and be more prosperous. 

The power of this business model cannot be underestimated. It is optimised to serve advisers well (who are thus empowered to serve their clients well) and rewards them fairly for their efforts. In return, the group receives its fair share of adviser revenues. As the business scales it unlocks growing financial resources to accelerate investment in many areas, particularly in technology and infrastructure, driving the flywheel of growth, scale efficiencies and reinvestment.

This in turn enables advisers to continuously modernise and compete harder, entrenching PSG Wealth’s attraction to advisers and clients, which drives further market share gains (organic and inorganic). To date this virtuous circle has translated into growth in the adviser base and, more importantly, superior flows generated by PSG Wealth compared with the overall retail industry.   

Given its low market share of no more than 13% of industry assets and an increasingly competitive business becoming more attractive to both advisers and clients, we think it is highly probable that this business will continue to take share. This would translate to good growth in its main drivers and continue to build on the growth in earnings we have seen over the years.

The million-dollar question is how long PSG Wealth can sustain above-average growth. It is difficult to know exactly, but considering how small PSG Wealth is relative to the overall industry, there is considerable opportunity to grow its assets under management/advice as its superior model continues to win market share. Other industries, such as pharmacy retail, serve as a case study of how strong corporate players with winning business models can sustain market share gains for long periods at the expense of weaker players ceding share. It would therefore not be surprising to see PSG Wealth emerge as a major long-term winner. 

Western National is PSG’s underwriter, focused on commercial risk lines. It is a small player in commercial insurance, with a differentiated service model that has earned commendable long-term gross written premium (GWP) growth off a low base. Execution over the years has been excellent, with significant reinvestment into the business to improve its quality and deliver sustainable growth. Reassuringly, growth has been accompanied by rising underwriting margins, which helps support our view that the quality of underwriting has been good and that market share gains are sustainable. Given its low industry share, we expect this business to continue to deliver above-average GWP growth as it continues to scale its winning service model.

PSG continues to trade at a high-teens price-earnings multiple, which we think is reasonable given its calibre. It is a high-quality business with high recurring revenues, healthy margins and strong returns, bolstered by an ungeared balance sheet and strong long-term growth prospects. Importantly, it is under the stewardship of a strong and experienced management team that is aligned with shareholders. For these reasons we believe the stock should continue to deliver for the patient investor.

PSG’s structural growth story is extremely valuable in these uncertain economic times, and we believe backing the best and winning businesses, at fair valuations, is a strategy that should serve our clients well over the long term. 

• Luswazi is equity analyst at Coronation Fund Managers.