An almost exclusively South African company has become a rarity on the JSE following the chase for offshore exposure by local companies and inward listings of foreign companies over the past few years.
But among the star performers of the JSE over those years is the very much local PSG Group, whose contrary performance reflects its contrary strategy.
The investment group’s success has hinged on it finding and exploiting the gaps in the South African economy. It reflects its opportunism particularly in areas like banking, financial services and education, where there is either dominance and complacency, or lack of affordable options or new initiatives; and it has developed fast-growing, disruptive companies in both sectors.
This was again made clear in its results for the year to February, which show that its “sum-of-the-parts” value a share, at R240.87 on 28 February, was 29% higher than end-February 2016, underpinned by the continued strong growth of upstarts Capitec Bank, private education group Curro and PSG Konsult.
The group increased headline earnings by 50% in an environment where there was no economic growth.
PSG’s exceptional success has been accompanied by an 18% increase in the share price over the past year (and almost 350% over the last five), against the All Share’s pedestrian performance.
“We like to hold on to great assets and if they are potentially better than competitors, we will hold them forever,” says CEO Piet Mouton. “What differentiates us is that we like building businesses from the early stage. There aren’t really companies that do that and the returns when you do get it right are significantly better than buying into mature businesses.”
Capitec, which increased earnings by 18%, continues to expand and added a record 1.3m new clients in the past financial year to bring its client base to 8.6m, 46% of which bank their salaries at Capitec.
It has recently made its first offshore acquisition – paying R300m for 40% of Cyprus-based Cream Finance, a global online lending group providing loan products to people in Poland, Latvia, Georgia, the Czech Republic, Mexico and Denmark.
This does not reflect a divergence from its locally-focused strategy. “This is a R300m investment – it is just a baby step, which is, in my mind, the right way to approach it. We are bringing capital and know-how to the business and we will watch what happens over time,” Mouton says. He quotes Capitec founder Michiel le Roux, who once said that Capitec “is either going to be a small failure or a big success”.
This, says Mouton, “is our exact approach to new businesses”.
“It is not big, so we can do this in a sensible, controlled environment trying to build a bigger technological business. In SA we have invested in and gained expertise in our branches and network and online offering. We have a sensible approach to new business and new ideas, and if it does grow and the model proves successful, we can continue to grow it.”
This is exactly what has happened with Curro, which started off in a church in Durbanville, Cape Town in 1998 with 28 children. It now has close to 50 000 learners across 54 campuses.
At its December year-end, Curro’s headline earnings grew 69% and it is “not nearly reaching a growth plateau”, Mouton says. There are about 12m school-going children in SA. Given the price points where Curro is wanting to play, about 2.5m of these should be able to afford to go to Curro schools, he says. “The total private school number is 600 000 learners and we have just 50 000. Even if we double in size to 100 000, we have not even scratched the potential market.”
Curro does have competition – from companies like ADvTECH or Reddam schools – but it would take competitors a fairly big jump to get where Curro is today. “The barriers to entry are important in any business sector, and in schooling it is so much more prevalent – you have to build a school, kids join and the school fills over a 10-year period, so for the first 10 years you make quite big losses.
“If you want to compete with us, your losses will be bigger because we have skills in construction and development, so it is going to take you longer and cost you more. There are also high operational expenses, and a lot of those costs we drag to head office at Curro and spread over our schools. All of these things make it difficult for competitors.”
The growth projection also includes tertiary education, but Mouton says it is “a more complicated space between physical on-site and distance education and incumbents which include state universities, which are quality institutions. At the moment, Curro is mainly involved in teacher training, and its ultimate goal is a private university.”
While investments like Curro and Capitec have flown, the path of others has been slower.
Agribusiness investor Zeder, for example, only marginally increased headline earnings and is at the mercy of economic and weather conditions. The company, whose largest investment is Pioneer Foods, should recover this year with recent rains and a good maize crop.
Top of PSG investors’ minds is whether it is sitting on another gem like Capitec or Curro. These could come in the form of its investments in energy company Energy Partners or FutureLearn, which provides educational products and services to tutors, which Mouton says have growth prospects and the potential for listing. However, it is difficult, at least from an outside perspective, to see them reaching the scale of Capitec or Curro.
While it is taking small steps offshore, it will remain largely South African in the near future. “The core skills of the PSG management team are South African-based and we have significant advantages in South Africa – we understand how the market moves, we have good access to banks and other corporates and we know the lay of the land. We can deliver in SA and we continue to give an above-average return – we have a 21-year history of massive JSE outperformance. We believe you shouldn’t diversify out of ignorance. If you do buy a business abroad simply because you want to diversify, you haven’t done anyone any favours, I cannot buy into that philosophy.”
Yet, PSG’s predominant exposure to SA comes with its own risks, especially considering the downgrade of the country and its banks.
“I think everything will be tougher in SA, everything has a ripple effect – debt becomes expensive, the currency goes and there will be uncertainty in the investor community, who will play wait-and-see rather than invest. But there is a flip side to everything, and as the country becomes more uncompetitive, there will be opportunities.”
Mouton is reluctant to speak out, however, saying he is part of the CEO Initiative, which is largely driven by the big companies, and he would back anything positive they would do.
He does say, however, that PSG did not start with the luxury of significant wealth accumulated in the old South Africa. It is well-documented that it was started with a R7m capital base by his father, Jannie Mouton.
It cannot be easy for Mouton to carry on his father’s legacy of street-smart opportunism to exploit opportunities in potentially big business sectors where there is mispricing, deregulation and the potential for disruption.
His father still comes into the office each day and continues to grab headlines. Recently, the older Mouton, dubbed the “Boere Buffett”, entered the elite dollar billionaire club, according to Forbes.
“Jannie still comes into the office every day – he doesn’t have any other hobbies – but he does take life a little easier. He is more involved in the bigger picture,” says Mouton.
There are certainly visible elements of PSG being a family business. Mouton’s brother was part of the asset management business but recently left, while his sister’s husband works for the group and it has invested in the business of his half-sister’s husband. This may or may not sit well with investors.
Another visible challenge is PSG’s slowness to transform, with its predominantly white male board and top management. Mouton agrees and says while there is improvement, “we are not where we should be”, adding that it is a priority on the group’s agenda.
Mouton is aware of his challenges. His overriding challenge is to keep up the growth momentum, given the rapid growth achieved to date and SA’s increasingly poor growth prospects.
“All I can tell you is that I want to continue making PSG into the same successful business as what my father has done. But the company has grown rapidly in the past 21 years – we will be hard-pressed to achieve that level.”
This is a shortened version of an article that originally appeared in the 4 May edition of finweek. Buy and download the magazine here.