Announcements

GCR upgrades PSG Konsult’s long term rating to BBB+(ZA); Outlook .

Johannesburg, 27 Aug 2014 — Global Credit Ratings has today upgraded the long term national scale rating assigned to PSG Konsult to BBB+(ZA) and maintained the short term national scale rating at A2(ZA); with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to PSG Konsult (“PSGK”) based on the following key criteria:

PSGK is South Africa’s largest broker and advisor network, with offices across the country. Following some large acquisitions and business unit rationalisation, the group has been consolidated into 3 divisions, with the new management team implementing a strategy to drive growth, enhance synergies, and profit along several points in the value chain. This had a positive impact on performance, with total income rising 39% to R2.6bn in F14, above expectations. While this was partly driven by the inclusion of Western Insurance for a full 12 month period, core income from fees and commission climbed by a robust 24%. PSGK did report a reduction in business margins in F14 due to a change in the business mix, and the lower inherent margin in the insurance business. However, the Asset Management business reported a higher margin, reflective of its increased scale. Strong earnings growth has continued into F15 and firmer like-for-like margins have been reported across PSGK’s businesses in 1Q F15.

Cash flows are monitored daily to ensure PSGK can meet all its liquidity requirements. In this regard, despite working capital absorptions, PSGK reports improving operating cash flows, which have enabled the group to settle debt facilities prior to maturity, resulting in a lowly geared balance sheet (excluding debt related to script lending or client investments). Liquidity is supported by cash holdings in excess of R600m and short term banking and finance facilities, which are sufficient to meet even unexpected requirements.

PSG Group’s (rated A(ZA) by GCR) 63% shareholding is considered in support of the rating, with the parent having demonstrated support by following its rights in previous share issues and maintaining board representation. The recent JSE listing is also positively considered in terms of raising PSGK’s profile and improving access to capital. Combined with the low debt profile, this provides substantial funding flexibility to undertake acquisitions or similar transactions should opportunities arise.

The rating upgrade reflects the increased strength of PSGK and further upgrades will be dependent on sustained long term growth in income and operating profit across market cycles. Conversely, 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 also lead to negative rating action.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Sep/2011)
Long term: BBB(ZA); Short term: A2(ZA)
Outlook: Stable

Last rating (Oct/2013)
Long term: BBB(ZA); Short term: A2(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate Ratings
(011) 784-1771
Shevel@globalratings.net

Secondary Analyst
Richard Hoffman
Senior Analyst
(011) 784-1771
Hoffman@globalratings.net

Committee Chairperson
Dirk Greeff
Sector Head: Financial Institution Ratings
(011) 784-1771
Dgreeff@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated August 2013
PSG Konsult Rating Report, 2013

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 the 2014 audited annual financial statements (plus four years of comparative numbers), Pre-Listing Statement, management accounts for 1Q F15, latest internal and/or external reports to management, budgeted financial statements for F15, corporate governance and enterprise risk framework, and capital management policy.

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.

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

Balance Sheet

Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

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.

JSE

JSE Limited (previously the JSE Securities Exchange and the Johannesburg Stock Exchange) is a licenced exchange under the Securities Services Act of 2004 (South Africa).

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

Operating Cash Flow

A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.

Operating Profit

Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.

Stock Exchange

A market with a trading-floor or a screen-based system where members buy and sell securities.

Working Capital

Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.

GCR upgrades PSG Konsult’s long term rating to BBB+(ZA); Outlook .

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