Johannesburg, 29 July 2016 — Global Credit Ratings has today upgraded the national scale issuer long term rating assigned to PSG Financial Services Limited to A+(ZA), with the short term rating affirmed at A1(ZA). The outlook is accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to PSG Financial Services Limited (“PSGFS”) based on the following key criteria:
PSG Group Ltd (“PSG”) is a JSE-listed investment holding company operating across diverse industries. PSGFS is the primary asset of PSG and the entity through which the group invests in underlying subsidiaries and associates. Accordingly, PSGFS’ performance and credit rating are determined by PSG.
The rating upgrade takes into consideration the strengthened average credit quality of PSG’s investment portfolio, supported by the improved credit profiles of its three largest listed investee companies, Capitec Bank Holdings Ltd (“Capitec”), PSG Konsult Ltd (“Konsult”) and Curro Holdings Ltd (“Curro”). The group’s well-defined investment strategy is considered a key strength, based on the long-standing and highly regarded management team, which has demonstrated a successful track record of building early-stage investee companies for long-term value creation. This is evident from the substantial value enhancement in the asset portfolio YoY, with the sum-of-the-parts value reported at R40.4bn at FYE16, up from R10.3bn at FYE12. Nonetheless, note is taken of the inherent exposure to share price fluctuations.
PSG displays relatively high asset concentrations, with its three largest investments, Capitec (39%), Curro (23%) and Konsult (13%), representing a substantial 75% of its sum-of-the-parts total assets. This is partially mitigated by a degree of business diversity, reflected by investments in several different industries, albeit that the focus on core investments will continue to expose the group to the financial performance of these entities. Furthermore, with a number of investments remaining in a growth stage, PSG has been largely dependant on the consistently strong dividend streams from Capitec and Konsult (both of which are exposed to regulatory capital restrictions). Nonetheless, cash inflows from corporate sources cover the group’s low operating expenses and financing costs. Overall, profitability has been robust, with consolidated recurring headline earnings having reported a compound annual growth rate (“CAGR”) of 32% over the past five years to R1.6bn in F16.
The holding company has a track record of maintaining a solid liquidity profile. PSG has cash balances of around R2bn at present, which together with low gearing, R400m in undrawn short-term credit lines, and a demonstrated ability to access the equity markets for growth capital, is considered more than sufficient to meet any potential investment or operational requirements.
Upward rating movement over the medium to longer term could be driven by greater emphasis on asset diversity and more balanced cash flow generation across group companies, reducing the reliance on Capitec in particular. Downside pressure could arise if GCR observed a more aggressive financial policy and/or the underperformance of any core investments that could curtail cash flows. Should the underlying credit fundamentals of key investee companies deteriorate, this could also have a potential negative bearing on the rating.
NATIONAL SCALE RATINGS HISTORY
Initial rating (August 2006)
|Long term: A-(ZA)
Short term: A2(ZA)
Last rating (August 2015)
Long term: A(ZA)
Short term: A1(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
PSGFS issuer rating reports (2006-2015)
RATING LIMITATIONS AND DISCLAIMERS
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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.|
|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.|
|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.|
|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.|
|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.|
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 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 credit ratings have been disclosed to PSG Financial Services Limited with no contestation of the rating.
The information received from PSG Financial Services Limited and other reliable third parties to accord the credit ratings included:
- The F16 audited annual financial statements (plus prior four years of comparative numbers)
- Investor presentations
- Funding schedule at FYE16
- Other non-public 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.
GCR upgrades PSG Financial Services Limited’s rating to A+(ZA); Outlook Stable.