Financial results and a look at the company's heavy exposure in Capitec.
ALEC HOGG: It’s Monday April 18 2011 and in this special podcast, we speak with the founder and chairman of the PSG Group, Jannie Mouton. Financial results out today for the year to end February 2011, Jannie and it’s interesting to look back, this is a company that was established in 1995, your sum of the parts valuation is about R8bn. But something that I picked up that was interesting to say, if you took all the underlying companies within the PSG Group, they’ve got a combined market capitalisation of R71bn. At any time did you regret actually selling off shares in these companies that you established or invested in?
JANNIE MOUTON: Alec, we built up investment, for instance, in the JSE, we had reason to sell that. For instance, Capitec, we unbundled to our shareholders and no shareholder is worse off. It’s an ongoing process, we’re an investment holding company and we must always look in the circumstances what’s the best for the shareholder.
ALEC HOGG: So, it is, it’s an investment company, it’s not an operating company and you will then find when certain of your assets are overvalued would you then put them on the block?
JANNIE MOUTON: Alec, I gave you [UNCLEAR1:22] my life, PSG is an investment holding company, not an operational company. Yes, the different companies that we invest in are operating companies but if you’re an investment holding company, you must make the right investment decisions over a lifetime.
ALEC HOGG: It’s very interesting then to, maybe, start unpacking some of them in a moment, as we will but the financial results are highlighted by an improvement of 76% in what you call, “The sum of the parts.” So, if one adds up all the values of the investments that you’ve made that’s an incredible increase. Where did it come from?
JANNIE MOUTON: Mostly Capitec. Capitec had a fantastic run the last year. You could see that over five years, they were the best performing company on total return index in South Africa . Yes, it helped us a fantastic lot but the other companies also did fairly well.
ALEC HOGG: It’s now nearly two thirds of your total asset base in Capitec, is that not a concern that it’s too heavily exposed?
JANNIE MOUTON: We will always have to think about that. It’s a matter of fact; we are glad that it’s two thirds – why – because it has grown, it’s grown fantastically. Something we have started ten, 12 yeas ago, first we had struggled and then we find the right management in the form of Riaan Stassen and his team. They really took it and built up a fantastic company.
ALEC HOGG: So, no concerns that it might be getting to an over-exposed position or even going ex-growth?
JANNIE MOUTON: You would always look at each and every investment, discuss it, think about it, scheme about it but at the current moment, our opinion is it’s a great company, we have followed our rights and there is still growth to come.
ALEC HOGG: That was also a very smart decision to follow your rights. Not that you would not have but just the investment that you made in Capitec in this financial year, by my calculations, you’ve already made a profit of R160m on it.
JANNIE MOUTON: Yes, your calculation is roughly right, yes.
ALEC HOGG: [Laughing] Those are big numbers, Jannie and it’s a big bet still, even though Capitec has run this hard. There are a lot of shareholders in Capitec who might be thinking, is it time to take profits? You said you’re obviously not.
JANNIE MOUTON: To talk about the future plans of Capitec, yes, they are ambitious, it’s a well managed company, there are opportunities and I think Capitec would be a winner in months and, maybe, years to come. But it could happen one day that the pace of growth could be a little bit softer but we will constantly think about…at the current moment we are happy with Capitec.
ALEC HOGG: The other thing that sticks out in the financial results this year, is your increase in your dividend. Now, you’ve got a policy of paying between three quarters and 100% of your free cash flow to shareholders. Last year it was 75%, this year you’re paying out a 100% of free cash flow. What changed that decision?
JANNIE MOUTON: Alec, you are the only man sharp enough to pick it up. Yes, you’re right, we increased the dividend payout ratio. We had a good look at the portfolio and what cash we needed in the next year or two and we are absolutely 100% satisfied that our resources funding is in place, so we can afford to lift it to 100% of free cash flow.
ALEC HOGG: Are you likely to keep it there?
JANNIE MOUTON: It would be fantastic, yes. I’m a shareholder and I’m a big shareholder and I also like the dividends.
ALEC HOGG: [Laughing] And the dividends that come out of this, I see your good friend and fellow shareholder, Markus Jooste was buying a lot of horses at the National Yearling Sale, maybe he knew that there was a big dividend coming.
JANNIE MOUTON: I think it would help him, as well but rather have an interview with him, I don’t want to discuss his personal…He’s big in horses but he sold also on the Yearling Sale, he also sold a number of horses.
ALEC HOGG: Yes, sure, it really was tongue in cheek. One of the things that you and Markus have both done extremely successfully is funded the businesses through perpetual prefs. It was interesting looking in the detail to your account, now you’re sitting on R1bn worth of funding at, fixed, around 8.5%. Jannie, that’s almost unbelievable that you can…and it’s long-term money, up to 2016 or 2020 that you could achieve that.
JANNIE MOUTON: Yes, okay, let’s start, perpetual prefs – we were the first non-banking company in South Africa that issued perpetual prefs. That is a wonderful mechanism to fund you because whenever there’s a crisis or not, it’s there. Right, then we took a decision, we debated should we try to hedge the interest and we did that. We thought South Africa is in a cycle of low interest rates and, maybe, if you take a five or a ten year view, it’s just prudent to fix that or hedge that for the next ten years. Yes, I think that’s the right decision.
ALEC HOGG: But who’s lending the money at those low rates?
JANNIE MOUTON: There’s a big demand amongst people that need income, they can’t actually invest in shares, growth shares, at a 2% dividend yield and things like that. So, they prefer to have a sure yearly income. There is definitely a big, big portion of money available for, I call it the “Old age and the cautious people.”
ALEC HOGG: So, the retirees, as it were, they can invest in these perpetual prefs and get an 8.5% return from your perspective, as the only non-banking company that can take advantage of it, it’s really cheap money.
JANNIE MOUTON: Yes and keep in mind, it’s tax free, as well. If you receive interest, it’s much lower than the 8.5% and you still have to pay tax.
ALEC HOGG: Well, it’s a fantastic vehicle and one that you have used to effect. Another thing that came out to me in these results though, was Zeder, if I were to make an investment of the shares that you own or the investments that you own, to take a tip from you, I’ve go to be looking carefully at Zeder and I’ve got to be looking carefully at Paladin. First of all, Zeder, because it’s about 13% of your sum of the parts, yet it’s contributing already 27% of your headline earnings. So, from that perspective, it looks a little undervalued.
JANNIE MOUTON: Okay, Zeder is an investment company in itself, investing in agri, food, beverages, preferably the unlisted market. Yes, our two big investments were in Kaap Agri and through Kaap Agri, we’re a big shareholder in Pioneer that’s listed. The same happened with KWV, we ended up in a listed share. We have to look at other opportunities the next year or two, interesting, unlisted opportunities in the agri sector, there are many opportunities. My view is, in 20, 30 years to come, food and agri will still be important in South Africa , as in the rest of the world.
ALEC HOGG: You’re not worried about political issues on the land front?
JANNIE MOUTON: There will always be political worries and issues but if you try to change your investment philosophy through worrying about political issues, then you can just as well close the company and distribute the cash. I can’t work, spend my time worrying about political issues.
ALEC HOGG: So, you deal with the facts that are on the table and you bought some more Zeder shares in this past year, R2.40, not as big a profit as Capitec but still R5m to the good already.
JANNIE MOUTON: Yes, we took a decision, whenever one of our underlying investments is trading at a substantial discount to the sum of the parts, then you buy it at a discount.
ALEC HOGG: My apologies, you bought at R1.95, it’s now R2.40. Would you still be buying at R2.40, Zeder shares?
JANNIE MOUTON: Yes, what we will do, we will look at our cash available at PSG Group level and we can buy Zeder, or even Paladin back, if they trade substantially under the sum of the parts valuation.
ALEC HOGG: Well, the Paladin is an interesting one, Jannie. You’ve been investing more in that share, R2.31, you put R20m into it. It’s not much higher at the moment, R2.47. So, it’s pretty much in the same level, where you’ve already been buying the stock. What is your…and you do appear to have made a few changes there because it did have a disappointing year.
JANNIE MOUTON: Yes, there’s no doubt about that, it had a disappointing year, yes. There were three investments, underlying investments, Paladin that was negatively affected by the economy that’s more in the building and construction sectors, Erbacon, GRW, Topfix. But our view is that we’re going to see better results from those investments. So, whenever things in the construction side, what we call cyclical stocks, turn a bit better, it’s there to take advantage.
ALEC HOGG: You’ve also got some unlisted stocks in, or unlisted investments, in Paladin, is that part of the strategy?
JANNIE MOUTON: An interesting one is Curro, we have spoken about that, it’s a long-term investment. Yes, it’s an exciting investment, it’s in private schools, I would say the conservative middle of the market, not the top end very, very, super expensive private schools. I think that in itself is for us a great opportunity for the future.
ALEC HOGG: So, if you had just R100.00 to invest and your options were Capitec, Zeder, Paladin or the underlying investments in Paladin or PSG itself at the current share prices, would I be 100 miles off the mark by saying, you’d probably go with Paladin right now?
JANNIE MOUTON: I would go for PSG.
ALEC HOGG: Why?
JANNIE MOUTON: You have a mixture of excitement, you have a mixture it’s also trading under in some of the parts and you have the benefits of Zeder, you have the benefits of Paladin with cyclical stocks improving and maybe the listing. We’re going to list Curro this year. So, it’s a mixture of opportunities.
ALEC HOGG: Jannie Mouton is the founder and chairman of the PSG Group.
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