Johannesburg, 27 July 2021 – GCR Ratings (“GCR”) has upgraded PSG Konsult Limited’s national scale long-term issuer rating to A+(ZA) while the short-term issuer rating has been affirmed at A1(ZA). The Outlook is Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|PSG Konsult Limited||Long Term Issuer||National||A+(ZA)||Stable Outlook|
|Short Term Issuer||National||A1(ZA)|
The upgrade reflects PSG Konsult Limited’s (“PSGK”) ability to sustain strong credit fundamentals amidst a challenging operating environment through 1) maintaining a solid balance sheet, 2) consistent track record of earnings stability and cash flow generation, and 3) established wealth management franchise. We believe the core Wealth management business is a fairly sized market player (Assets Under Administration (“AUA”) of c.R357bn) with a strong distribution network (underpinned by a large and stable advisor network) and supportive digital capability. The group remains debt free, with a growing base of highly liquid assets (supported by consistent positive operating cash flows) that provides ample buffers for potential stress events and strong annuity-like revenue allowing for very stable Earnings Before Interest Taxes Depreciation and Amortisation (“EBITDA”) margins of 20% over the last five years. The sector risk score has also been uplifted to reflect the higher level of regulatory oversight (versus standalone asset/wealth management peers) of the group (due to its classification as the controlling company of the insurance business, overseen by the Prudential Authority and Financial Sector Conduct Authority).
The competitive position assessment balances PSG Wealth’s stronger competitive characteristics against much smaller market shares of PSG Asset Management and PSG Insure. PSGK is a South African based financial services group anchored to the South African market, consistently generating around 93% of its revenue in the country across three operating divisions (namely PSG Wealth, PSG Asset Management and PSG Insure).
PSG Wealth contributes 64% to recurring headline earnings per share (“HEPS”) making it the core revenue generator. This business has proven to be quite resilient during economic stress, has an established and recognisable franchise in the South African market, and along with fairly sized AUA of around R357bn at FY21, competes with some of the bigger financial institution’s wealth management businesses. The strength of this business is moderated by the lack of scale in the insurance and asset management businesses, which have very small market shares in their respective operating segments. However, good revenue and client diversification, coupled with a strong distribution network, positions the entity well to defend its existing market status while providing a strong platform for future growth. The client base is largely retail focussed (PSGK has over 390,000 individual and corporate clients) and the large registered advisor network is an integral part of the distribution channel (932 advisors spread across 263 offices throughout South Africa and Namibia as at FY21). Additionally, product offerings across the three business segments are viewed to be complementary and reflect similar levels of profit stability. This attests to the somewhat lower risk nature of the group’s income streams.
Earnings and Risk is ratings negative, balancing a low risk investment portfolio and profit stability against below average margins. The majority of investments are held in cash and cash equivalent assets which drives fairly consistent investment returns. The strong annuity-type income characteristics of the Wealth and Asset management businesses, coupled with consistently above average underwriting margins of PSG Insure, provide a high level of margin stability as evidenced by an EBITDA margin that has seldom deviated from the 20% mark over the past five years. However, ongoing investment in digital platforms and the extensive advisor network results in a somewhat higher cost base, resulting in profit margins below larger scale global and regional peers. GCR expects EBITDA margins to remain stable at 20% (on an IFRS basis), however, should there be a significant rise in AUA or AUM, PSGK could capitalise on scale efficiencies and improve profit margins.
The strong leverage and cash flow assessment reflects the absence of interest bearing debt and sound levels of cash flow generation through the years. The Wealth and Asset management businesses are viewed to be capital light with strong annuity type income features, supporting the groups’ high capitalisation, with a regulatory solvency metric of 2.13x at FY21. We do not believe PSGK will introduce any debt over the rating horizon, while group solvency is expected to be managed around the 2x level, with an accommodative dividend policy that sustains a strong leverage and cash flow assessment.
PSGK continues to maintain a strong liquidity position, supported by a low risk investment portfolio (largely comprised of cash and cash equivalents), consistently positive operational cash flows and ungeared balance sheet. The stability in the balance sheet structure has allowed for strong adjusted liquid asset coverage of uses above 2x. In line with our expectations for EBITDA margins of 20% and no plans to introduce debt into the capital structure, liquidity coverage is projected to remain above 2x over the next 12-18 months.
No group support has been factored into the ratings due to the investment holding status of the parent (PSG Group Limited).
We have placed the outlook on Stable as PSGK is expected to maintain an ungeared balance sheet with strong liquidity. The proven track record of delivering consistently stable EBITDA margins underpins our view that earnings and risk are sustainable at current levels due to a resilient business model. While competitive position is expected to remain constrained given the ongoing economic challengers and competitiveness in the underlying operating segments, we expect AUA and AUM to continue to grow at a steady pace, ensuring earnings stability over the next 12-18 months.
A rating upgrade could stem from material growth in AUA and AUM, supportive of higher EBITDA margins while preserving very strong leverage and liquidity. Conversely, a material reduction in AUA and/or AUM could pressure EBIDTA margins while also weakening PSGK’s competitive position which will be negatively viewed.
|Primary analyst||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Asset Managers, November 2019* appendix to the Criteria for Financial Services Companies, May 2019|
|GCR Rating Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, July 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
|GCR Insurance Sector Risk Score, April 2021|
PSG Konsult Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||BBB(ZA)||Stable||September 2011|
|Short Term issuer||Initial||National||A2(ZA)||n.a||September 2011|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||6.00|
|Management and governance||0.00|
|Cash flow and Leverage||3.00|
|Earnings vs. Risk||(1.00)|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|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.|
|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.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings were 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 rating has been disclosed to PSG Konsult 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 Konsult Limited participated in the ratings process via telephonic management meetings, 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 Konsult Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 29th February 2021; and
- Other publicly available information.