Announcements

GCR affirms PSG Financial Services’ rating of A(ZA); Outlook Stable.

Johannesburg, 17 Sep 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to PSG Financial Services 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 has accorded the above credit rating(s) to PSG Financial Services (“PSGFS”) based on the following key criteria:

PSGFS is the sole asset of PSG Group (“PSG”) and the entity through which the group invests in underlying subsidiaries and associates. Accordingly, its performance and credit rating are determined by PSG.

The group has demonstrated a strong track record of investing in companies to the point where they can be listed and ultimately become leaders in their industries. This has been demonstrated through the sustained rise in the sum-of-the-parts valuation to top R20bn at FYE14 (before funding). While Capitec Bank’s (“Capitec”) valuation declined slightly, value enhancement was driven by increases from Curro Holdings (“Curro”) and PSG Konsult, as well as generally positive movements in some of the smaller investments.

Recurring headline earnings rose 14% to R818m in F14, driven by strong growth from PSG’s four core investments. However, earnings pressure was experienced by some of the smaller investments, impacted by the weaker operating environment. Nevertheless, strong dividend inflows from Capitec and to a lesser extent PSG Konsult have been utilised to support growth in Curro and Zeder Investments. Whilst Curro requires further investment in F15, the other large businesses have sufficient internal cash resources.

PSG reported an increase in debt to R3.7bn at FYE14 (FYE13: R2.4bn), which mostly relates to underlying subsidiaries and has no recourse to PSG. PSG itself is conservatively funded through the use of perpetual preference shares, with the only debt comprising R615m in redeemable preference shares. Accordingly, gearing metrics have remained well below the group limit of 40%, while interest and preference share dividend coverage is strong.

PSG’s outlook is a function of the prospects of the four major underlying businesses, but particularly Capitec. In this regard, while PSG Konsult, Curro and Zeder Investments continue to perform well, Capitec is facing a more challenging operating and regulatory environment.

Positive rating action could derive from more balanced cash flow generation across group companies, reducing the reliance on Capitec. Particularly when Curro becomes cashflow positive, this would see group cash generation improve, while reducing cash absorptions. An improvement in the operating environment would support smaller investments, and thus bolster inflows. However, a weaker earnings performance from core investments would be negatively viewed, but particularly if this arose from Capitec, given its dominant contribution to cash flows. Increased utilisation of debt at a group level as a preferred funding vehicle could warrant a review of the rating.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Aug/2006)
Long term: A-(ZA); Short term: A2(ZA)
Outlook: Stable

Last rating (Oct/2013)
Long term: A(ZA); Short term: A1(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Committee Chairperson
Omega Collocott
Sector Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated August 2014
PSG FS rating reports (2006 – 2013)

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.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating Was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

PSG Financial Services 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 rating/s has been disclosed to PSG Financial Services with no contestation of the rating.

The information received from PSG Financial Services and other reliable third parties to accord the credit rating(s) included the 2014 audited annual financial statements (plus four years of comparative numbers), audited accounts from PSG Konsult, Zeder Investments and Curro, as well as applicable SENS announcements, cash flow forecasts, and corporate governance and enterprise risk framework, as well as other industry specific 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.

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 Risk

The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.

Dividend Cover

The extent to which a company’s dividend is matched or exceeded by the earnings available for distribution to shareholders.

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

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.

GCR affirms PSG Financial Services’ rating of A(ZA); Outlook Stable.

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