Johannesburg, 13 December 2019 – GCR Ratings (“GCR”) has revised PSG Financial Services Limited’s (“PSGFS”) long and short-term national scale Issuer ratings to AA-(ZA)/A1+(ZA) respectively, from A+(ZA)/A1(ZA), with the outlook accorded as stable.
GCR released new Ratings Framework Criteria in May 2019, and a new Criteria for Rating Investment Holding Companies in November 2019. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review under the new methodology, and the ratings have been removed from “Under Criteria Observation”.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|PSG Financial Services Limited||Issuer Long Term||National||AA-(ZA)||Stable Outlook|
|Issuer Short Term||National||A1+(ZA)|
South African-based PSG Group Limited (“PSG”) is a JSE-listed investment holding company. PSGFS is an intermediate holding company in the group’s legal structure, and the sole entity through which the group invests in underlying subsidiaries, joint ventures and associates. PSGFS’ performance and credit ratings are inherently linked to PSG, as GCR assumes a high level of transferability of funds between PSG and PSGFS.
The ratings reflect the group’s concentrated but successful portfolio of key investee companies, very low levels of leverage and strong liquidity.
PSG’s strategy focuses on building domestic, early-stage investments for long-term value creation across a broad range of industries. Its strategy is to acquire influential stakes in companies with high-growth potential and good management teams, supply strategic and board oversight, and provide these entities with greater access to capital. The investment portfolio is sizeable, with a valuation of just over R65bn at October 2019, but highly concentrated. Firstly, all of the investments are located and predominantly operate within South Africa, although some of the investments do conduct a small amount of business outside the country. Secondly, there are very large single name (and therefore industry) concentrations within the portfolio. As of October 2019, Capitec Bank Limited (not rated by GCR), PSG Konsult Limited (A+(ZA) rated), Curro Holdings Limited (BBB+(ZA) rated) accounted for 72%, 10% and 6% of the portfolio respectively.
In part, the concentrations reflect the relative success of the investments. All of the above investments have grown from an early-stage to become strong challengers, but not necessarily dominant players, within their respective industries. Furthermore, the five-year compound annual growth rate (“CAGR”) in PSG’s share price has been 17%, compared to that of the JSE ALSI of 2% (as at August 2019). For these reasons together with the ongoing conservative investment approach in respect of new ventures, GCR believes the investment track-record to be a positive ratings factor. This is partly counterbalanced by the relatively weaker collective average portfolio quality assessment, mainly weighed down by the PSG Alpha exposure, which holds PSG’s immature/startup businesses.
The financial profile is a strong positive ratings factor. Leverage is low, with less than R2.5bn of preferences shares (both perpetual and redeemable) being the only debt. Even stressing the portfolio value, it still equates to over R50bn, with the long-term loan to value registering at a minimal 5%, well below GCR’s 20% benchmark. GCR also views positively the lack of direct lending to, or guarantees for investee companies and reliable dividend providers, although cognisance is taken of the lack of diversity in PSG’s income streams. Liquidity is also considered to be strong, due to the minimal refinancing risk, liquidity of the majority of investments due to their listed nature (although PSG does not include such investments in its liquidity management) and largely matched dividend upstreaming of receipts from investee companies to shareholders. Due to this, GCR believes that uses versus sources are likely to be maintained well above 2x going forward.
The stable outlook reflects GCR’s view that the financial profile will remain at its currently very robust levels over the rating horizon and that there is likely to be no material change in the investment portfolio.
GCR is unlikely to raise or lower the ratings over the next 12-18 months. An upward ratings movement would require greater diversification of the investment portfolio, which is unlikely to be a short-term change due to PSG’s investment strategy, and presuming there is no change in financial policy. A downward movement would result from a deterioration in the quality of investee companies or negative change in the financial profile.
|Primary analyst||Sheri Morgan||Senior Analyst: Corporates|
|Johannesburg, ZA||morgan@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Matthew Pirnie||Sector Head: Financial Institutions|
|Johannesburg, ZA||matthewp@GCRratings.com||+27 11 784 1771|
|Committee chair||Patricia Zvarayi <email@example.com>||Deputy Sector Head: Corporates|
|Johannesburg, ZA||patricia@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Investment Holding Companies, Nov 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Corporate Sector Risk Scores, December 2019|
|GCR Financial Institutions Sector Risk Scores, December 2019|
PSG Financial Services Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||A-(ZA)||Stable||August 2006|
|Issuer Short Term||A2(ZA)|
|Issuer Long Term||Last||National||A+(ZA)||Stable||August 2018|
|Issuer Short Term||A1(ZA)|
RISK SCORE SUMMARY
|Country risk score||7.50|
|Sector risk score||7.50|
|Size & Diversification||-4.00|
|Investment portfolio quality & track-record||0.50|
|Management and governance||0.00|
|Leverage and cash flow||3.00|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Concentrations||A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Environment||The surroundings or conditions in which an entity operates (Economic, Financial, Natural).|
|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.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Issuer Ratings||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Rating Horizon||The rating outlook period.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
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 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.
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 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 information received from PSG Financial Services Limited and other reliable third parties to accord the credit rating included:
- The audited financial results for February 2019;
- Four years of comparative audited numbers;
- Unaudited interim financial results to August 2019;
- Industry presentations;
- A detailed facility breakdown and cash flow forecast.