Johannesburg, 28 July 2017 — 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 operating across diverse industries. PSGFS is the primary asset of PSG and the entity through which the group invests in underlying subsidiaries and associates. Accordingly, PSGFS’ performance and credit rating are determined by PSG.
The ratings are underpinned by PSG’s clearly-defined and successful investment strategy focused on long-term value creation, borne out by the strong asset portfolio growth from R13.8bn at FY13 to R52.4bn in FY17. Whilst the investment portfolio displays asset and sector concentration to financial services, this is partly mitigated by the relative mix of businesses in several different industries, which provides a degree of diversity, as each has varying sensitivities to the local economy through differences in cyclicality of operating and capex needs. Moreover, the group is looking to actively expand its educational and energy offerings, although portfolio evolution is a mid- to long-term process.
PSG has demonstrated a consistent earnings performance through the economic cycle, with consolidated recurring headline earnings having reported a compound annual growth rate (“CAGR”) of 30% over the past five years. To this end, most key investee companies show fairly defensive business models underpinned by annuity type income inflows. Nonetheless, the overall portfolio is yet to mature to a level where PSG receives diversified dividend income streams, with only two key assets largely underpinning cash flows at present. While this exposes the group to potential cash flow volatility, this is partly offset by the fact that the largest investee companies and key dividend contributors have sound credit risk profiles.
GCR views PSG’s financial profile as strong, supported by conservative leverage, with the market value-based leverage metric reported at a low 4.4% (FY16: 5.6%) and interest cover based on free cash flow equating to 4.4x (FY16: 3.8x). In addition, the group exhibits strong liquidity, with an estimated cash balance of around R1.8bn (including expected short-term inter-group loan repayments) and undrawn credit facilities of R400m. As most core investments are listed, this further enhances the group’s financial flexibility.
Upward rating movement over the medium to longer term could be driven by greater emphasis on asset diversity and more balanced cash flow generation across group companies. Improvements in the underlying credit quality of investees could also potentially provide ratings uplift. Conversely, a move towards aggressive financial and investment policies, resulting in a material deterioration in the average credit quality of its investment portfolio could place pressure on the ratings. 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 2016)
Long term: A+(ZA)
Short Term: A1(ZA)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
PSGFS issuer rating reports, 2006-16
RATING LIMITATIONS AND DISCLAIMERS
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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.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|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.|
|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 rating.
The information received from PSG Financial Services Limited and other reliable third parties to accord the credit ratings included:
- The 2017 audited annual financial statements (plus prior four years of comparative audited numbers)
- Investor presentations
- Funding schedule at FY17
- Other non-public information
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.