Announcements

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

Johannesburg, 28 Aug 2015 — 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:

PSG Group (“PSG”) is an investment holding company with interests mainly focusing on the financial sector, although now spanning several industries. PSGFS is the primary asset of PSG and the entity through which the group invests in underlying subsidiaries and associates. Accordingly, its performance and credit rating are determined by PSG.

PSG has demonstrated a track record of investing in and supporting companies to the point where they become leaders in their industries. This has helped drive a compound annual growth rate (“CAGR”) in recurring headline earnings of 26% from F10 to F15, with F15 recurring headline earnings rising by a review period high 39% to R1.1bn. Most key businesses reported growth in excess of 15% in F15, with Capitec Bank Limited (“Capitec”) and PSG Konsult Limited (“Konsult”) in particular contributing strongly to earnings, despite a challenging operating environment. Reflecting the strong earnings and equity price performances by the listed investments, PSG’s sum-of-the-parts (“SOTP”) valuation climb to R33.4bn at FYE15 and at R39.8bn 6 May 2015, from R13.8bn at FYE13.

Although on a consolidated basis PSG’s debt increased to R4.8bn at FYE15 (FYE14: R3.3bn), due to the expansion of the underlying businesses, debt at the underlying businesses have no recourse to PSG and all security is only over the assets of the company that has assumed the debt. At the holding company level, PSG is lowly geared, with interest bearing obligations (excl. non-redeemable preference shares) at 6 May 2015 amounting to R1,037m (increased from R679m at FYE15) and primarily comprising of redeemable preference shares of R930m. Non-redeemable preference shares have remained stable at R1.4bn since FYE14. Thus, gearing relative to the SOTP value was just 2.6% at 6 May 2015 (FYE15: 2.4%), and including non-redeemable preference shares was 6.1% (FYE15: 6.3%), well below PSG’s comfort level of 40%.

Cash flow forecasts remain a key management tool used to PSG, with forecast inflows and expected requirements prepared for a rolling 12 month period. Supported by strong dividend income from Capitec and Konsult, as well as management fees from Zeder Limited, projections indicated that PSG will have sufficient cash to meet investment and dividend requirements.

More balanced cash flow generation across group companies, reducing the reliance on Capitec would be positively viewed. In this regard, an improvement in the operating environment would also support smaller investments. However, given the significant earnings and SOTP contribution, the PSG rating remains closely linked to the fortunes of Capitec. Thus, an uplift to the Capitec rating could lead to a similar uplift for the PSG rating. Conversely, anything that impacts Capitec’s financial position could have a negative impact on PSG. Underperformance from other core investments could also have negative impact, were it to curtail dividend flows or require large capital injections from the group

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (August 2006)  
Long term: A- (ZA); Short term: A2(ZA)  
Outlook: Stable  
   
Last rating (September 2014)  
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  
Patricia Zvarayi  
Senior Analyst  
(011) 784-1771  
patricia@globalratings.net  

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015

PSG Financial Services reports (2006-2014)

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

CAGR The compound annual growth rate is the year-on-year percentage growth rate of an investment over a given period of time.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Corporate Governance Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
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.
Credit Rating Agency An entity that provides credit rating services.
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.
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.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
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.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.
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 Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
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. 
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
National Scale Rating The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
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.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
REPO In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
   

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 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 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

  • 2015 audited annual financial statements (plus four years of comparative numbers),
  • 2014/2015 audited accounts from PSG Konsult, Zeder Investments and Curro,
  • Applicable SENS announcements,
  • Details of funding facilities
  • Cash flow forecasts,
  • Corporate governance and enterprise risk framework

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.

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