PSG Group rights issue – “We really need to come to the market to shore up our capital base”

When a company’s share price has run hard, as PSG’s has, and that company comes to the market to raise capital, it’s very natural to wonder whether they’re raising money because they think the share price is at the top end of where it should be. However, according to this interview with PSG chief Piet Mouton, the company’s recently announced bookbuilding exercise, which is set to raise R1bn and will involve the sale of new shares worth about 5% of total share capital, is not an indication that the company’s share price is topping out.

Instead, says Mouton, it’s a simple necessity. After spending a lot – particularly on the recent Curro rights issue – the company is down to just R300m-odd in ready capital, too little for a company of PSG’s size and clout. Mouton makes a good case for the bookbuilding exercise, and PSG remains one of the JSE’s best-performing financial services companies. – FD 

ALEC HOGG: PSG Group launched a bookbuild this morning, offering new shares constituting approximately five percent of its issued share capital. It’s likely to raise up to R1bn for the group. PSG’s Executive Piet Mouton joins us on the phone now for more. Piet, forgive me for being the sceptic here, but when smart people raise money from the markets, it’s usually a warning that share prices are overheated. In your case, I pulled out your share price going back to 1994 – my goodness, you’ve had a fantastic run – even in the last five years, you’re up five times. Up 66 percent in the last year. Are you ringing a bell?

PIET MOUTON: Good afternoon, Alec. I thought you’d like that. The issue is that at this stage we do need the capital. Following the Curro rights offer, which will be completed by the end of June, we’ll only have about R330m of capital available, so we really need to come to the market to shore up our capital base. Just out of interest, if I follow your logic you’re saying we will only raise money if we think the market is too high. We went through a similar process about three years ago (almost three years to the day) where we raised cash at R47.00 per share. The shareholders who invested at that stage made 35 percent per year on their money, so it’s just a case of us needing the capital and that’s why we’re coming to the market at this stage.

ALEC HOGG: I didn’t necessarily say that you think it’s high, but you don’t think that your shares are cheap and you can’t surely, with a 67 percent increase in the price in the last year. After you’ve done – you supported the rights issues – after you supported Curro, how much cash would you have available? You talk about private equity. Do you have any homes for it in mind in that area?

PIET MOUTON: Look Alec, we always have a number of transactions we’re potentially working on at PSG and just by their nature, some of them take six months. Some of them take a year, so you’re always working on certain ideas and some of them never come off, but I’ll reiterate. After the Curro rights issue, we’ll only have about R330m in cash available for transactions and if you think that our asset base is currently about R24bn, I think it’s just too little for a company of our size at this stage. We need a little bit of firepower.

GUGULETHU MFUPHI:  Piet, it’s Gugu here with Alec. I see your share price…the immediate reaction today is that it’s down by just under two-and-a-half percent. Does that rattle you a bit?

PIET MOUTON: I don’t think so. Obviously, since the bookbuild is open for two days, it does perhaps create a little opportunity for the market to play around with the share price. I think it’s always going to happen, considering that the bookbuild might offer investors the opportunity to get into a slightly lower price than what we’re currently trading at, so it doesn’t really bother us at this stage. You can try to be smart, sell now, and try to participate at the bookbuild at a lower level, but it might clear at a higher price. All you’ve then done is accepted a quality share, from our perspective.

ALEC HOGG: One-hundred-Rand per share: I know you’re probably going to say that doesn’t really mean much, but for many people that’s a benchmark – R100.00. Was that the trigger in your minds – that perhaps we should be at this level, raising more capital? It wasn’t long ago that you were at R90.00. In fact, not even a year ago, you were at R80.00.

PIET MOUTON: No, we sit down every two weeks with our executive committee and we look at the cash flows that we need going forward for about a year/year-and-a-half ahead, and we decided that we needed to bolster our capital reserve. As I explained, we went through a similar process to this one three years ago, when the share price was trading in the high 40’s, so the R100.00… I can make a nice story about it, that we planned to raise capital once we go through the R100.00, but there’s no such romantic story.

ALEC HOGG: But Piet, with R24bn asset base: if you need to raise capital there are many banks who would open their vaults to you, so you don’t necessarily have to raise equity.

PIET MOUTON: Yes, that is true. We’ve imposed limits and it’s been clear to the market what our strategy is in terms of debt, so we had about R2bn of debt at PSG level, and we have a limit where we need interest cover of at least two times, and our interest cover level is currently at about two-point-one times. From how we tend to run the company…we feel comfortable at this stage that we shouldn’t be raising substantial additional debt to bolster our coffers/capital base.

ALEC HOGG: That was Piet Mouton, the Chief Executive of the PSG Group. Remember, you can email us on [email protected].

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