Announcements

GCR affirms PSG Konsult Limited’s rating of BBB+(ZA); Outlook Stable

Johannesburg, 24 June 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to PSG Konsult Limited of BBB+(ZA) and A2(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 Konsult Limited (“PSGK”) based on the following key criteria:

PSGK is South Africa’s largest broker and advisor network, with offices across the country. The rating is supported by PSG Group, which maintains a 63% shareholding in PSGK and has demonstrated support by following its rights in previous share issues and maintaining board representation. PSGK’s market position is enhanced by its well defined strategy, within the complimentary business lines of wealth management, asset management and insurance. In addition, significant investment in IT systems and back-office support capacity has positioned PSGK’s business units to attract new advisors/brokers into its network and expand its client base with little additional cost. This has been borne out in improved margins over the past three years. PSGK has also developed robust risk management procedures to monitor the various risks facing the business, including regulatory compliance and counterparty risk.

PSGK has reported strong growth across all its fee and commission generating businesses, bolstered by rising assets under management, as well as the conversion of assets to discretionary mandates. Added to this is the greater diversification offered by the insurance premium income now generated from Western Group Holdings Limited (“Western”). Although large working capital absorptions have been evidenced in all years under review, consistent with the expansion of the business, PSGK has reported robust growth in cash flow from operations. Moreover, with limited capex and investment spend over most years, cash holdings have risen from R261m at FYE12 to R945m at FYE15, while R160m in debt has been repaid.

Aside from some small facilities, PSGK settled all term loans during 2H F15 in an effort to de-risk the business. Nevertheless, gross debt rose to R428m at FYE15 (FYE14: R412m), related mainly to lending facilities provided to clients in the stockbroking business, which are secured by the underlying JSE equity securities held by the clients. Underpinning access to capital, a R30m overdraft facility is available to PSGK, while the company retains strong relationships with banking counterparties, suggesting additional funding could be raised relatively easily and on short notice if required. In addition, cash flows are monitored daily to ensure PSGK can meet all its statutory capital and liquidity requirements across the various businesses.

Although PSGK has benefitted from a strong equity market performance, the weak local economy is likely to constrain the wealth management environment. Nevertheless, PSGK’s small market shares in key business segments suggests substantial opportunity for growth.

Continued robust organic growth, resulting in rising recurring income and widening earnings margins could lead to positive rating action. However, a sustained downturn in the domestic economy could negatively impact fee and commission income, while severe market volatility could result in liquidity constraints. Any exposures that increase PSGK’s risk profile may lead to negative rating action.

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (September 2011)  
Long term: BBB(ZA); Short term: A2(ZA)  
Outlook: Stable  
   
Last rating (August 2014)  
Long term: BBB+(ZA); Short term: A2(ZA)  
Outlook: Stable  
   

ANALYTICAL CONTACTS

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

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, update February 2014

PSG Konsult reports (2011-2014)

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

Budget Financial plan that serves as an estimate of future cost, revenues or both.
capital The sum of money that is invested to generate proceeds.
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.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
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.
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.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.
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.
JSE Johannesburg Stock Exchange.
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.
Mandate Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
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.
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.
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.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Stock Exchange A market with a trading-floor or a screen-based system where members buy and sell securities.
Under Review Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.
Working Capital Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.
   

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 Konsult 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 Konsult with no contestation of the rating.

The information received from PSG Konsult and other reliable third parties to accord the credit rating(s) included;

  • Audited financial results of Company per 28 February 2015
  • Five years historical audited financial statements
  • Investor presentation
  • Latest internal and/or external report to management
  • Budgeted financial statements for F16
  • Details of funding facilities

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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