Johannesburg, 14 August 2020 – GCR Ratings (“GCR”) has downgraded PSG Financial Services Limited’s (“PSGFS”) national scale long term and short term issuer ratings to A+(ZA), and A1(ZA) respectively, with the outlook accorded as stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|PSG Financial Services Limited||Long Term Issuer||National||A+(ZA)||Stable Outlook|
|Short Term Issuer||National||A1(ZA)|
At the prior rating review in December 2019, Capitec was valued at R48bn and accounted for over 70% of the PSGFS’ investment portfolio value. This stake underpinned a total investment portfolio value of c.R68bn and provided a significant source of dividend income. While PSGFS will retain a small stake in Capitec, the downgrade reflects the smaller portfolio value of around R18.6bn post the unbundling. Positively, diversification within the portfolio will improve, albeit that the concentration of investments in South Africa still constrains the ratings somewhat.
PSGFS’ success in growing early-stage investments into strong companies is evidenced through its portfolio of high-quality assets, including PSG Konsult Limited (“PSG Konsult”) (rated A+(ZA) by GCR), Zeder Investments Limited (“Zeder”) and Curro Holdings Limited (“Curro”) (rated BBB+(ZA) by GCR), as well as several other public and private investments. Notwithstanding recent pressure on equity prices, value creation has been significant, as evidenced by the 11%, 5-year compound annual growth rate in the investment portfolio’s value to end FY20. Nevertheless, PSGFS’ investment portfolio will be considerably smaller without Capitec, particularly as its financial position does not benefit directly from the unbundling.
PSGFS’ key ratings strength remains its conservative gearing profile. Using the special dividend received from Zeder, PSGFS repaid its c.R1bn in redeemable preference shares, with the only financial obligations remaining being the bi-annual dividend in respect of the perpetual preferences shares, with a market value of R1.5bn at FY20. Based on the projected investment portfolio value, this would equate to gross loan to value of just 8%, or11% using GCR’s stressed loan to value ratio. PSGFS also maintains unutilised facilities for transactional purposes, with two different banks. Management has indicated that there are no plans to reintroduce debt over the short to medium term.
Liquidity also remains strong. PSGFS has over R2bn in cash at present, which will comfortably cover the expected investment requirements in FY21. To ensure sufficient cash flows for investment requirements going forward (as PSGFS will no longer have the Capitec dividends), the group will be retaining all income (and only pay ad hoc dividends in the future), compared to the previous dividend payout policy of 100% of free cash flow. Sources of income include fees earned by PSG Capital, management fees, and dividend income PSGFS’s remaining investments, primarily PSG Konsult and Curro. The residual R2.8bn stake in Capitec will also be available for sale should a significant investment opportunity arise.
The stable outlook reflects GCR’s view that PSGFS maintains a portfolio of high-quality investments, and that the financial profile will remain robust over the medium term, with sufficient financial resources to meet all investment requirements.
Downward rating pressure could arise if 1) there is an unforeseen increase in debt; 2) cash inflows fall below expectations, and PSGFS is required to source external funding; 3) PSGFS divests from another of its core investee companies.
|Primary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Patricia Zvarayi||Deputy Sector Head: Corporate Ratings|
|Johannesburg, ZA||Patricia@GCRratings.com||+27 11 784 1771|
Risk Score Summary
|Rating Components and Factors||Risk Scores|
|Country risk score||7.00|
|Sector risk score||6.00|
|Portfolio size and diversification||(3.50)|
|Investment quality and track record||(1.00)|
|Management and governance||0.00|
|Leverage and capital structure||3.00|
|Total risk score||13.50|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Investment Holding Companies, August 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Corporate Sector Risk Scores, July 2020|
PSG Financial Services Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||A-(ZA)||Stable||August 2006|
|Short Term Issuer||Initial||National||A2(ZA)|
|Long Term Issuer||Last||National||AA-(ZA)||Stable||December 2019|
|Short term Issuer||Last||National||A1+(ZA)|
|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 exposures 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.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|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||See GCR Rating Scales, Symbols and Definitions.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Weighted Average||An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.|
SALIENT POINTS 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument;.
The credit ratings have been disclosed to PSG Financial Services Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
PSG Financial Services Limited participated in the rating process through management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from PSG Financial Services Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 29 February 2020;
- Four years of comparative audited numbers;
- Analyst presentations;
- Detailed facility breakdown;
- Cash flow projections; and
- Published documentation relating to the unbundling of Capitec.