Johannesburg, 3 August 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to PSG Financial Services Limited of A+(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to PSG Financial Services Limited (“PSGFS”) based on the following key criteria:
PSG Group Ltd (“PSG”) is a JSE-listed investment holding company, with the underlying investment portfolio operating across diverse industries. PSGFS is an intermediate holding company in the group legal structure and is the entity through which the group invests in underlying subsidiaries, joint ventures and associates. Thus, PSGFS’ performance and credit ratings are determined by PSG. GCR does assume high transferability of funds between PSG and PSGFS.
PSG’s business risk profile remains supported by the scale of the investment portfolio, being R56bn at year-end FY18 (based on the sum-of-the-parts value), largely underpinned by the listed nature of key assets creating high investment transparency and liquidity. That said, it also exposes the group to the inherent volatility of equity markets. This is exacerbated by the high asset concentration of investee companies, whilst the moderately strong collective creditworthiness of the portfolio is also noted.
GCR positively considers management’s successful track record in terms of delivering on its investment strategy focused on long-term value creation, as evidenced by the five-year compound annual growth rate (“CAGR”) of 20% in recurring earnings per share and 29% in sum-of-the-parts value per share. This can be attributed to the conservative investment approach, particularly in respect of new ventures, whilst significant strategic influence over investee companies is a requirement.
PSG maintains low market value leverage (“MVL”; debt to investment portfolio value) at the holding company level of 4% (FY17: 4.4%), given minimal debt levels and strong value appreciation in the portfolio. In GCR’s view, PSG has sufficient headroom in its leverage position to withstand a full drawdown of all its available facilities (pref and bank lines) even under a stressed equity scenario of its assets.
Interest cover based on free cash flow equates to a strong 4.7x (FY17: 4.4x). PSG benefits from reliable dividend providers, although cognisance is taken of the lack of diversity in its income streams.
The ratings also reflect PSG’s strong liquidity, with current cash balances of around R500m (FY18: R1bn). However, cash resources could be applied as and when market opportunities arise. Thus, financial flexibility is boosted by the fact that PSG has the ability to monetize certain investments to an extent (without losing strategic control) as its largest investments are listed, whist having undrawn committed banking facilities of R1.4bn.
Upward rating movement would necessitate improvements in the portfolio’s characteristics, including enhanced asset diversity and/or underlying credit quality of investees. Ratings pressure could be triggered by a material decline in the equity values of investee companies, or more aggressive financial policies. The underperformance of investee companies, which leads to a reduction or discontinuance of dividend flows, would also be negatively considered.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (August 2006)
|Long term: A-(ZA)
Short term: A2(ZA)
Last rating (July 2017)
Long term: A+(ZA)
Short Term: A1(ZA)
|Senior Analyst: Corporate Ratings|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
PSGFS Issuer rating reports, 2006-17
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY>
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Drawdown||When a company utilises facilities availed by a financial institution or an international lender there is said to be a drawdown of funds.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
PSG Financial Services Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to PSG Financial Services Limited with no contestation of the ratings.
The information received from PSG Financial Services Limited and other reliable third parties to accord the credit ratings included:
- The 2018 audited annual financial statements (plus prior four years of comparative audited numbers)
- Investor presentations
- Funding schedule at FY18
- Cash flow forecasts
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms PSG Financial Services Limited’s rating of A+(ZA); Outlook Stable.