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Edited Transcript of PSG.J earnings conference call or presentation 23-Apr-20 7:00am GMT

Full Year 2020 PSG Group Ltd Earnings Presentation

Stellenbosch May 6, 2020 (Thomson StreetEvents) -- Edited Transcript of PSG Group Ltd earnings conference call or presentation Thursday, April 23, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Petrus Johannes Mouton

PSG Group Limited - CEO & Executive Director

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Presentation

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [1]

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Hi. Good morning, ladies and gentlemen, shareholders and other stakeholders. I remind everybody that the results were released this morning on SENS, and the presentation which I will be giving to you is on the website, if you want to download it and follow it by yourselves.

I do remind everybody, we will have questions afterwards. On the SENS that was released earlier in the week, there is a link which you can send the questions. We will address them afterwards. Please note that in the SENS announcement, it does say we are currently trading under cautionary. So some of your questions, I might not be in a position at the moment to answer.

I'm going to talk about the following subjects. I'll talk about COVID-19. At the end of my presentation, I will also read an abstract of how we feel about COVID-19. I'll then go through the normal group overview. I will talk about our own results. I'll give some small highlights of the investees' financial results. And in appendices, which I won't go through, is some more detail on the Alpha portfolio.

So firstly, in terms of our own COVID-19 response, all of the PSG Group employees are working remotely. We are in a fortunate position that we are in financial services, and we can act accordingly. I do, at this stage, have to congratulate the financial team specifically for completing the audit, and also the auditors. It is not easy in a remote environment.

We have collaborated extensively with our 20-odd investee companies to ensure that they have plans in place to prepare for the COVID-19 virus. Part of this is doing scenario analyses and stress testing. I might add at this stage that we do not -- not any of us know the true effect of it, but the running of scenarios gives one some idea about how the future would look like.

We constantly, as part of the stress testing, assess the capital requirements of all of the investee companies to know which one would need some assistance. We've also looked at our own liquidity position to be able to be in a position to support the investee companies who might need liquidity. As PSG group, we've continued to pay all our employees and suppliers. Our Board and our senior executives have all elected to take 0 salary increases for the year.

The major negative effect on COVID-19 on the economy, and I'll get back to that later. Unfortunately, the negative impact on the economy is correlated to the duration of the lockdown, especially worried about the socioeconomic impact on low-income households. Phase 2, post-national lockdown, we see a severe increase in unemployment, collapse of the SMEs, economic stimuli would be needed for business and there would be an increase in social welfare spend. Phase 3, the medium to long term, severe contraction of GDP, significant erosion of SA's tax base. And there are different businesses that will suffer more as a result of social distancing.

And if I get to the group, you all know it very well. Our market cap currently is ZAR 31 billion given the volatility changes significantly almost every day. But most of you know the group, our major investments: Capitec, Curro, Konsult, Zeder and PSG Alpha, and our BEE investment company, Dipeo Capital.

Our investment philosophy hasn't changed over the years. It's been like that for a very long time. We invest in early-stage investments. We try and make sure that these companies make use of very little debt at the early stages. It keeps management focused on the business and chasing revenue rather than being constrained and servicing debt.

So the investment philosophy has got 4 -- 3 elements to it. The first part is the market in which we invest should be large markets. We've learned that in the past where we had big shareholdings in successful companies, but the niche was simply too small and we couldn't grow the business. So we tend to go after big markets. Banking, energy, education is some of them. The retirement industry where we've recently entered with Evergreen is another example.

Then these markets need to exhibit 2 very distinct characteristics. They're either going to be -- have large inefficient incumbents. We especially look here were free services are being delivered, that's not adequately serviced at the moment where we can come in and play a role. We have various education companies within our group that have taken part in that gap in the market: Curro, STADIO and Optimi. Energy Partners is another one. I think as we go along, the deregulation of the energy market in South Africa will happen and it will create more opportunities for us. 20 years ago, Capitec did the same in the banking industry.

We also like to go after fragmented industries. Konsult has done a great job bringing many IFAs under the umbrella. And Evergreen tries to become the first national retirement player. But ultimately, what sets these businesses apart and their ability to be successful over the long-term is you have to have the best management teams.

I'd like to say that when we look at a new investment that we found the ability to have meetings with management and know at the outset whether they have the necessary skills. Unfortunately, only time tells you whether you attracted the best management teams: people who think differently about age-old problem, changing the operating models through giving a better service, lower pricing or giving the clients a better experience.

So if I get to PSG Group and our results for the period. The first part is the sum of the parts. And here, I'm going to have a look at a 10-year view how the sum-of-the-parts has evolved. 10 years ago, the sum-of-the-parts value was ZAR 4.5 billion. At the end of February, it was ZAR 60 billion. That's sum-of-the-parts compounded average growth rate of 26% per year, which we're extremely proud, and we are extremely proud of all the management teams who have delivered this for us over the years.

On the right-hand side of the graph, you can see how well Capitec has done. Its share of our portfolio has increased from about 42% to just over 73%. Unfortunately, and this is the big part with delivering results, our year-end is February and the world has changed drastically from March. So although we will reflect on some of the historic returns, the true challenge lies in the year ahead.

Just on the sum-of-the-parts, I will show -- I'm showing you what has happened since the financial year in 1.5 months to 17th of April this year. You can see that almost every single one of our companies has taken a considerable hit to their valuations. Our own sum-of-the-parts value is down almost 24%.

We are very fortunate, and we congratulate all the teams that have worked on the transaction, that we have concluded the sale of Pioneer to Pepsi, which brings in a lot of liquidity in the group. On the 28th of April, we will receive approximately ZAR 1.7 billion from the special dividend that Zeder has paid, and that will increase our cash reserves to approximately ZAR 2 billion. I continue to drink, Ramon, Ceres water. This is a Pioneer product.

On the next slide is where I show how our share price tracks against the sum-of-the-parts. You can see that historically, the correlation was actually very good. And then about 2 years ago, the doors opened up quite a bit. The current discount sits at 32% and the 12-month average discount was over 20%. Our liquidity has increased significantly over the last 4 years since the Steinhoff placing of their shares. So from management, obviously, the large discount does trouble us. It means that we would be unable to access the equity markets if we need to, which is one of the primary reasons that companies want to be listed.

So here are some of the reasons for the discount. The first one, I would say, is the significant success of Capitec. It does not matter how many times I try and explain it, that the one big advantage of a holding company is that you can hold on to your winners and you are not forced to sell down, simply does not hold with them. Capitec, as I showed on those initial pie graphs increased from about 40% of our portfolio to over 70%.

Generally, across the globe, investment holding companies have fallen out of favor. We have not been spared.

The one part that we do get complaints about from investors is that we have too many listed entry points into PSG. We acknowledge this. 95% of our assets are listed at this stage. Historically, we always believe that being listed gives your company -- or gives the company an advantage since most people operate better under pressure. Unfortunately, the amount of red tape surrounding listed entities going forward, and the JSE might take -- want to take note here, would mean that many more companies would opt to operate in an unlisted environment to get back to doing the work that needs to be done and not fill their days with unnecessary red tape.

PSG has struggled to get traction with its early stage PSG Alpha investments. I'm very proud on what we've done to date, but the unfortunate reality is the low economic growth in the past decade has made it very difficult for these companies to get true traction. We've also scored some own goals which I will address later on. But hopefully, we learn from them and we move forward, and we become a better company.

We have stated in our results that it is our intention to unlock the discount as far as reasonably possible and when it is opportune. I would also like to make the statement that share buybacks is unlikely to form part of the strategy. It simply takes away our liquidity and makes very small difference ultimately on the sum-of-the-parts.

We've had many questions from it, is PSG Group just a Capitec proxy? I would like to add at this stage that we are extremely proud to be involved with Capitec. It is certainly, in our mind, the most successful business created in South Africa the last 20 years. Shareholders must remember that we unbundled Capitec in 2003, and the various management teams over the years have gone about reacquiring the shares in the market. And this has been a significant benefit to PSG shareholders over the last 20 years.

The 10-year performance to the end of 2020. When we analyzed the sum-of-the-parts performance, you simply cannot allocate the discount and the debt to the other non-Capitec investments and say they have delivered negative returns over the last 20 years. So we've tried to allocate the capital that we raised over the past 10 years. And on a per share PSG basis, Capitec delivered a compound average growth of 34%. The other assets, which do include the cash which always yields a lower return, yielded 16%, giving the overall group its 26% return. Over the same period, the JSE delivered only 7%. We can all agree that the Capitec contributed significantly to our success. However, the other assets have also materially outperformed the JSE over the last 10 years.

Another question that has arisen is that we are highly dependent on the Capitec dividend. To some degree, it's true. I will remind everybody that our stated dividend policy is to pay out 100% of our free cash flow. Now in 2015, the dividends we received from our 4 major investments constituted 100% of the dividend we paid from PSG. But in '16, '17, '18 and '19, the dividends we received from these 4 major underlying investment only constituted between 80% and 90% of our dividend. The rest of the cash flow was derived from the success of PSG Capital delivering fee income and the likes of ProVest and CA Sales also contributing to dividends.

I would like to make the note now at this stage that in the last financial year or for the final dividend, Capitec did not pay a dividend. And we are still in a position according to our dividend policy to pay a dividend of ZAR 0.75 to shareholders. Capitec did not pay the dividend because of liquidity or capital issues, but because of the SA Reserve Bank guidance note for 2020, which it requested banks not to pay any dividends and/or pay executive bonuses to retain capital within the system.

From PSG, so own gearing and interest cover. I think it is a very healthy position. You will notice from previous presentation that the interest cover has come down significantly from higher levels in the past, and that is directly correlated to the fact that Capitec did not pay a final dividend. But we are still well in control of the interest rate position and our self-imposed interest cover of 2x.

If I get to the next slide, our recurring earnings, this is how we measure the businesses. For many of you, this means very little because you look at the individual companies and then calculate your own sum-of-the-parts. But for management, this is important because we track the overall health of the company.

We've seen fantastic performance by Capitec once again, increasing the earnings by 18%. Konsult increased the stake by 8%. The reason why we don't include the percentages there is simply because intra-year, the percentage shareholding in these companies might differ and the percentage then won't correlate to their own earnings. Alpha had a great year, I think, so did Zeder under very challenging conditions. The only company whose earnings retracted was Curro, and I'll get back to that later, there are specific reasons for it.

If we then go to the bottom end of the income statement, we ourselves are very happy with our 18% increase in recurring earnings per share. We see that as a key metric. On the dividend per share, you will see that's down 48%. But I think I've explained it adequately in terms of the Capitec not being able to pay the final dividend. Through the audit committees on the various companies, we've impaired and written off assets on a gross level of ZAR 1.2 billion, making the balance sheet as we see them at the moment at the best position that we think they should be left at.

From a total return index, just to remind everybody, this is based on the date you receive a dividend, you reinvested into the share. We think it's the best way to track your performance against other people, the likes of Berkshire Hathaway who don't pay dividends. It is flawed in a sense, but it is calculated nonetheless. You can see the phenomenal performance by Capitec has outperformed the JSE All Share significantly since the inception at a phenomenal 49% compounded average growth. We're proud about PSG's 25-year growth of 40% compounded.

Both Konsult and Curro have also outperformed the market significantly. Zeder is the only company that lags the market. But if you do a simple calculation and do the return on some of the parts and not share price, they also outperformed the market.

I will now go into the investees' financial results. In the past, I've given a lot more details, but many of these companies have recently released their results. You can go and click on the links over here and study at your own time the full results. Many of their CEOs have also given similar presentation, and they're a lot more qualified to talk about their results. So I will briefly discuss some of the highlights of each of the companies.

So on Capitec, they increased their headline earnings per share by 19%. The net retail loans and advances increased by 17% to ZAR 52 billion. The retail gross credit card book was up 61% to ZAR 5.8 billion. It shows we're getting good traction in that market it's still a very big growth area for Capitec. The most comforting thing was the net retail credit impairment charge actually came down 2%. And that is directly correlated to the fact that Capitec have a good system to track which industries are in trouble.

They're also focused on higher income earners. And they have a metric, they call it CO loans. This is based on the principle if a person doesn't take up maximum credit or maximum duration, it means he's less desperate and they're offering a lower interest rate. And this results in lower impairments at the end of the day they are constantly working on new products. We are -- we've launched some forms of purpose lending. We've now got an unsecured vehicle lending facility, and we also launched our access facility.

On the banking side, our number of active clients is up 22% to 13.9 million. That is a phenomenal result. Also very gratifying on it is we're slowly getting more and more traction on the higher income side. The other thing that gives me a lot of comfort is many of our clients are young and will stay with us with years to come. And as they climb the corporate ladder, they will start using our banking functions a lot more and we will be earning more fees.

The retail net transaction fee income was up 14% to ZAR 7.4 billion. That is on the back of Capitec not giving any increases on many digital products. So it's a fantastic result.

They continue to drive the clients towards digital platforms. And we now have 6.7 million clients that access through these channels. It is important to keep on pushing and driving this as cash has got numerous negative aspects on it. The movement of cash is dangerous. We constantly see it. And this might be one of the biggest positive outcomes of this lockdown, is, I think, a lot more people will be open to using digital channels. We've launched the new app, which allows for more personalization and customization. We now have 3.3 million users.

On the other initiatives, the funeral product remains a big success. We've completed the Mercantile acquisition. Our core ratio for the group remains at a very healthy 31%. We've got significant surplus liquidity of ZAR 51 billion, and I've already discussed the final dividend and the guidance note from SARB.

Curro. The headline earnings decreased by 15% for the year ending December. If we look at the new year, they increased their schools by 9 to 175. That's a phenomenal compound average growth of -- increase in the number of schools of 25%. Again, the learners were up just over 5,000, and that increased 35% per year over the last 9 years.

On the financials, December financials, our revenue was up 18%, 12% of that was a result of learner growth plus the fee inflation. But we saw a significant increase in finance cost. And that really has to do that over the last 3 years, we've essentially built and acquired new schools using debt. Also, all these new schools, the greenfield operations, go through a J-curve effect, and many of them contribute negatively to EBITDA for the initial years. For more detail, please go and view the full Curro results.

Unfortunately, the economy wasn't in a great state already going into COVID-19. And for the year ending 2019, we saw the bad debt as a percentage of the revenue increasing from 0.8% to 1.7%.

On COVID-19 and business continuity, there's very little talk about the opening up of schools. But Curro long ago embraced technology as part of their service offering. They now, through remote and online channels, have deployed to all the learners from -- up to Grade 12 a full program where they can study from home. We've also developed specific material for high -- primary and high school learners.

On the sport, obviously all activities are canceled, but we continue to provide home-based training programs. On the culture side, anybody who's had the opportunity to see Curro Create, we have some phenomenal children within our group. And it's one of the great things that you can continue doing remotely, and they send in their pieces towards their teachers and the other people involved.

On Konsult, the business is actually very simple. It's driven by assets under management, which, again, is driven by inflows and market movements. Essentially, the market has been flat for the last 6 years, and we've seen a dip since March. But the company has continued to do very well as far as we can see.

Assets under management in the Wealth Management division was up 10%, with net inflows constituting ZAR 12 billion. They managed to increase their advisers by 2%, and this follows our bigger strategy of trying to get more and quality IFAs to join our group because of the unique model that we have for them to operate under. The recurring earnings for the Wealth Management division was up 11% to ZAR 376 million.

The Asset Management had a tough year. It had net outflows of ZAR 4.6 billion, and the assets under management were down 22%. This resulted in a 12% drop in headline earnings.

The one division that is proving to be quite a bit of a shining light is Insure. The gross written premiums are up 22% for the period to ZAR 6.7 billion. The advisers decreased 3%, but we will have normal churn. And remember, 1.5 years ago, we had a significant increase with the 130-odd advisers joining us from Absa.

The underwriting margin increased from 8.9% to 13.6%, which is a phenomenal result. Unfortunately, due to the market performance the last year, the shareholder investment income was down 7%. This is now at lower levels than 3 years ago. But all in all, the divisions increased its headline earnings by 43% to ZAR 122 million.

On Zeder, I'm not going to speak a lot. My colleague, Norman, spoke at the end of last week extensively about this portfolio. I think the biggest part of the year, if we look at it now on this page, is you will see that in February 2020 and leading up to today, Pioneer does not form part of the group. But you will see a material increase in the cash and equivalents, and there's no debt in the business anymore.

The application of proceeds is as follows. Zeder declared a special dividend of ZAR 2.30, which means -- and we've discussed it earlier in the presentation, PSG will receive approximately ZAR 1.7 billion. Zeder retains about ZAR 1 billion for liquidity purposes for its underlying investments and would consider paying additional special dividends once we fully understand the extent of COVID-19.

The operating environment, although they are seen as essential services, remains tough. Saw an article 2 days ago that the Land Bank ran into problems. The consumer remains constrained. And though people are buying food, they're buying less so. The abnormal weather patterns continue. International trade wars which leads to dumping, in many instances, if you're on the wrong side of it, leads to extreme commodity cycles, where you're set to lose hundreds of millions of rands. Also the lockdowns of the ports recently in terms of COVID-19, many of the exporters of fruit had their produce stuck in the harvest.

Our counterparties in many of these companies are the African economies, and they are also struggling. The land expropriation issue that's still laying -- hanging over our heads, it's gone a bit quiet at the moment, but it's a reality. The farming community is simply not investing at the same scale back into their farms. Here is some detail on some of the underlying investments. I am not going to go through them. Please go and review Zeder's results on their website to get more detail.

On PSG Alpha, as I said, they had a commendable period. Recurring earnings grew by 25%. And on a per share basis, it grew 20%. We've seen a significant decline in the sum-of-the-parts. That essentially has to do with the market pulling back. We revalued all of the businesses, and I've spoken about they've taken the necessary impairments where necessary, and the biggest downward valuation was on Energy Partners. I'll talk slowly -- or shortly on each of these companies.

Evergreen, the business model is vertical integrated developer and operator of retirement villages. We operate on a life-right model. I think it has many advantages for the client. It gets them peace of mind. In all times, it is ensured that the villages remain in a good position, and that people take responsibility for it. Evergreen already went into full lockdown weeks before the official lockdown. We are extremely proud of the people working at Evergreen. Some of the nurses have elected to remain in lockdown with the elderly. So we are extremely proud of that.

If we get to CA Sales, this has been a shining light in the portfolio. It's a pan-African business. It operates in almost all of the Southern African countries. In South Africa and Botswana, we have our main operations. In South Africa, we are an agency business to these FMCG companies. Whereas in the rest of the African countries, we act more as a distributor of their products. We're very proud of what management has achieved and you can see in the significant earnings growth they have achieved over the last couple of years. I think in the last year, the increase was approximately 27%. The figure was in there, but it's somehow disappeared.

On Energy Partners, we've scored some own goals here in the past. Remember this is trying to build the company in a new industry. We've tried numerous things. Some of them have worked, some of them have not worked so well. I'll give you 2 instances where we've spent a lot of time and effort, but we've retracted totally out of the market. One is Home Solutions. It was physically too much engineering time to get it right. We've completely withdrawn from that market. There's still some overhang where we need to service the clients we have.

The other was where we actively went out and tried to assist the Western Cape government during the water crisis. I think we can thank our bottom stars or whatever the right expression is -- I'm sure I didn't get that right, that we haven't hit COVID-19 and the severe drought at the same time because I'm sure we wouldn't be able to wash our hands 20 times a day. So we've decided to focus going forward on solar, refrigeration, steam and energy solutions. We've got a very strong pipeline going forward, and I'm excited about this business projects in the year -- prospects in the years to come.

Then go to STADIO, our tertiary business. All the public universities are under pressure. We get the feedback from government that it's highly unlikely that they will be building new universities and there's massive scope for a credible alternative. This is not new. If you look at the global tertiary sector, 35% of the global tertiary is provided by the private sector, where South Africa just sits on 15%.

We wish to create the first country-wide credible brand. So we're in a process. We've got about 6, 7 businesses to put them all under the STADIO brand. It's a fairly complex process. We have to merge them all, working closely with regulators to have a One Stadio by August 2020.

We're also in the process of building 2 big greenfield multi-faculty campuses, 1 in Centurion and 1 in Durbanville. We've got 93 accredited qualifications, and we are the first company to have a SAICA-accredited PGDA. We've also started with engineering, and the big hope one day is to have a fully-fledged medical degree.

Chris van der Merwe, one of the best entrepreneurs who I have ever met, the founder of Curro, who is also the founder of STADIO has decided to step down effectively 1 April. He's being followed up by the very capable Chris Vorster, who runs the biggest business within STADIO portfolio, namely Southern Business School, which he was the founder of. So we are effectively changing from an investment holding company in the tertiary space to be operational business with the associated benefits.

If we then look at Optimi, this is our distance learning operation. They've done very well over the last couple of years to improve the technology, and everything is based on centralized support. There are 4 legs to the business. They've got a full home education and after-school tutoring. It is the biggest business of that kind in South Africa. And maybe in lockdown, this is the company to turn to. We've got over 22,000 learners. We do provide products directly to schools. Some of the products include the ITSI, which is the e-learning platform that we've built.

We also provide fantastic services to the corporate and public sectors. We have more than 200 businesses and over 100,000 learners. And this is essentially adult metrics. I think the average age, and I might have this figure wrong, is about 35. It's improving the lives of people who did not get an opportunity to finish school at the younger age.

Then we've also got Optimi College, which is based on short courses. Over there, we've got 5,300 students.

Then on the other investments, SNC, a nanofiber company. They've got some great traction with the Japanese company, Taiki, who produce cosmetic facial masks and related products in the U.S. The JV should start within the next financial year. We're building the machine at the moment.

Carter is an online platform essentially to sell cars. We've had some good traction. We're already the #1 Renault dealership in the country.

ProVest is a mining services business. It's 51% Black-owned. And if -- as the mining opens up again, we should see ProVest returning to its cash positive nature.

Spirit Capital is the LBO specialist for smaller companies. They continue to look for acquisition. During the year, we sold our 25% interest in Alaris.

Just excuse me for a second before we get to the questions, I'll put up the slide, but maybe if you can put up the holdings slide for a moment. We'll get -- now if you can focus back on me that may be the best.

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Unidentified Company Representative, [2]

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Okay. You're on.

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [3]

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I'm going to read a piece that we've written over the last couple of days. Please bear with me. I'm going to read it slowly. I hope I don't become too emotional whilst reading it.

We would like to make the following points on COVID-19. Firstly, please note that these are the current thoughts of the PSG Group Board. Even though we have read numerous articles, have listened to experts from both sides, are constantly thinking about the consequences of the pandemic and obtain input from all those around us, none of us have a medical background.

We are also aware of the fact that the president may address certain or all of our concerns this evening.

PSG Group is a company that employs more than 20,000 people throughout various industries within our group. We pay salaries. We pay taxes. And we have contributed positively to our economy for the past 25 years. We as PSG Group lie awake at night as we have a major responsibility to all our employees and their families, to our clients, our suppliers, our bankers, our government and ultimately, to the people of our country. To remain quiet during this crisis is unfortunately no longer an option for us and silence will certainly not be a benefit to anyone.

We must start by congratulating President Ramaphosa and his cabinet on the quick and decisive way which they acted to address the pandemic. It is great to see that our leadership and the country can act swiftly and with purpose, that we can stand together to achieve a common goal. We understand from various medical opinions published in the media that we have potentially bought enough time to be as ready as one can be to face what might come.

Mr. President, whatever we say hereafter is not to criticize your administration or question your actions. You are between a rock and hard place, and we do not envy your position. It is not an easy task to balance different concerns.

But here is the issue as we see it. The lockdown and especially the potential extension or failure to adequately relax restrictions are causing severe damage to what is left of our fragile economy. The longer it takes to come out of the lockdown, the worse it will be going forward for every citizen of South Africa.

Alternatively, if we have a system whereby we move in and out of lockdown depending on the number of infections, this too, will have a similar disaster recipe. The only option is a continued lockdown of the elderly and frail until the virus is contained or a vaccine becomes available while the economy operates as close to normal as possible.

Please understand this correctly. We are not arguing economy over lives. But the truth is that lives are inextricably linked to the economy. Our survival and wellbeing depend on whether and how quickly our economy recovers.

Our economy is struggling and we are running on a significant budget deficit with already worrying levels of debt, higher unemployment and struggling parastatals. We do not have the means to provide meaningful relief packages on a sustainable basis without further loading the debt burden to such an extent that we may never be able to repay it or struggle to do so. South Africa has recently been downgraded to junk status and has been assigned a negative outlook. So any new debt will become ever more expensive.

We entered this COVID-19 war already wounded. Government's primary source of income to address the pandemic, drive relief and provide stimuli for economic growth is one of the things that is under attack, namely tax collection. More than 80% of tax revenue is derived from personal tax, corporate tax and VAT. Many businesses earn no revenue at the moment, while others do very little. As a result, significant less VAT and corporate tax will be collected. Businesses have stopped paying their rent and other suppliers as they simply cannot afford to, resulting in a very negative economic spiral, an ever-decreasing VAT and income tax revenue.

As far as individuals are concerned, they too have stopped paying rent, servicing debt and consumer spending is down significantly as a result of the lockdown. Again, less economic activity means less VAT. We can expect most companies that survive the lockdown to make significant lower profits, if any, for the year. So very little corporate tax will be collected. Similarly, tax losses will also have a negative impact on future year tax revenue for government.

According to Stats SA, 42% of formal sector businesses surveyed fear they will not have the financial resources to survive, and 85% have already seen a decline in revenue. There will be significant job losses, which translates to the loss of personal tax revenue, loss of spending power for the individual and an increase in government grants to be paid.

Most of our SMEs do not have surplus cash reserves. Many of them will close forever with a consequent loss of jobs and tax and dignity. Relief funds may assist a few, but most will unfortunately not make it. The decrease in interest rates is understandable given the state of the economy, but it will not be enough to assist most SMEs and will do very little for the man in the street, and again, tax collections will suffer.

It is therefore clear to us that government will experience significant decline in tax revenue resulting in the already noteworthy budget deficit widening even further. We must ask ourselves realistically, where is the money going to come from to reinvigorate the economy and pay for an ever-increasing social bill. Less people will be able to contribute to the South African treasury and far more will become utterly dependent on it. Yes, the solidarity fund, to which we also contribute, is a worthy initiative to assist but may not be near enough.

According to a recent study, the economy is losing ZAR 13 billion per day during the lockdown. And we will still lose billions even if we partially open or totally open up the economy. The damage has been done.

On Tuesday evening, President Ramaphosa announced the ZAR 500 billion economic support package, representing 10% of South Africa's GDP. This will compromise (sic) [comprise] various measures and will seemingly be funded by the likes of the World Bank, the IMF and the BRICS Development Bank as well as the reallocation of previously set budgets and the utilization of UIF reserves.

Although an admirable effort, realistically, we need to be clear, it will in the end mainly be a relief intervention directed to preventing a full-blown humanitarian disaster rather than an economic stimulus. Again, a further increase in debt of this magnitude will unfortunately have dire long-term consequences for our economy and our country.

We understand that COVID-19 will be part of our reality for the foreseeable future. In the President's announcement on Tuesday, he hinted at phased relaxation of the lockdown restrictions, of which the details will only be announced later today. We don't want to deter from the President's message, but we are trying to convey a reality as we see it and to emphasize that South Africa cannot afford too long or too slowly to revert to normal activities.

My father, a person who I greatly admire, taught me that you cannot just sit back and complain if you don't have a better solution. Furthermore, it is of no use that I nod my head for everything proposed by government, but behind closed doors differ as so many people in the business community do. No one wants to make unpopular statements and become the target on social media for those who will later also be the first to claim what should have been done. This has never been our style.

We, therefore, publicly request government to consider the extent of further restrictions and the urgency return to economic activity. We believe South Africa should act much faster in lifting restrictions to rejuvenate the economy. We agree with scientists that we should protect the elderly and those with compromised immunity with continued isolation protocols in place for them.

We all have elderly loved ones as well as friends who suffer from cancer and other diseases that make them especially vulnerable, and we want them protected. The rest of us, however, need to get back to work. We agree with government that a lot more testing should be done as we move forward.

Further, we need to understand that in the absence of any vaccine for the disease in the short to medium term, we need to obtain a herd immunity sooner rather than later. I will stress this again, we need to obtain a herd immunity sooner rather than later.

We acknowledge that this means more people will be infected and some may become very ill. There will undoubtedly be a cost of lives, but we are afraid that we are bluntly honest with one another, we are heading for immense cost of lives in any event if not from COVID-19, from starvation, social unrest, crime and a myriad of other chronic diseases which will follow.

The fabric of our society will also be severely affected and damaged. Polarization of people will be driven to extreme. Just one example where it is very evident is the closing of schools. Those at the medium, at the high end of the scales with digital means can homeschool to some extent, while the poor are again left behind and exposed. An educated youth is our future, Mr. President.

The consequences are severe no matter which way we argue it. Please do not consider our abbreviate opinion as being heartless. It is exactly because we care about the well-being and the future of our citizens, our children, your children and our country, which we love, that we are speaking up.

It will not help if we sugarcoat our message today to appease a specific group or endear ourselves to the popular view. We need to be honest about what lies ahead if we want to win the war, not just against COVID-19 but against the hardship that will follow. We are a South African company heavily invested in South Africa. We continue to invest our shareholders' money to support government's efforts to create jobs and to insist in growing the economy for the benefit of all stakeholders.

In theory and on paper, one can therefore plan a release of restrictions over several months. But in practice, given the state of our economy, we unfortunately do not have the luxury or time to do so. We need to open the economy now.

South Africans are resilient, entrepreneurial and hardworking human beings. Together with government, we can overcome COVID-19. We can get our economy going again. We can lessen the impact of future hardship and future cost of lives. But we need to act faster to relax restrictions and reignite our economy on which all our lives ultimately depend.

Thank you very much. I will take questions now.

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Questions and Answers

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Unidentified Company Representative, [1]

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Good morning, ladies and gentlemen. We have received several questions from interested parties. Unfortunately, as a result of the cautionary announcement released this morning, we cannot answer all of it and some questions are similar in nature. But we will go through a couple of the questions with Piet Mouton.

The first question is, are you still committed to invest money in South Africa? Are you going to use the Zeder dividend for acquisitions, investments? Or is the risk too high?

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [2]

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Thank you. We will continue to look at investments in South Africa. Obviously, for the moment, everybody needs to understand the effects of COVID-19, of which I had a long discussion, until normality somehow has returned and we see the actual hurt the economy has received.

But we are committed over the long term to South Africa. Almost 99% of our investment is in South Africa, and we will continue making investments where we see opportunities.

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Unidentified Company Representative, [3]

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Thank you. The next question is the cut in dividend was expected, but the money received from the Zeder distribution amounting to more than ZAR 1 billion, will that be distributed as a special dividend or added to the next interim dividend?

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [4]

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Thank you for that question. No, it will not be distributed as a special dividend. We retain it as a liquidity buffer at PSG. As I've stated, we have got 20 businesses within the wider group. We've got a responsibility to them, where they might need capital in the short-term to assist them as such.

So again, I get back to the question of COVID-19. We are running the scenarios to see how the economy plays out. And I believe to have a conservative liquidity approach at the moment is the best way for it. Thank you.

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Unidentified Company Representative, [5]

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Thank you. The next question is what steps are the Board taking to reduce the 34% discount of PSG share price to sum-of-the-parts?

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [6]

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We are trading under cautionary, and I would not like to address that question at the moment.

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Unidentified Company Representative, [7]

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Thank you. I think we've got several questions in this regard. So I think that is the answer to all of them.

The next question is, thank you for the informative presentation. Is it appropriate to have a dividend policy, namely 100% distribution of free cash flow? Dividends are somewhat tax inefficient. Is this the most rational choice for management and shareholders given all the opportunities within the group's controlled entities to employ capital at higher rates of return?

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [8]

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That is a very good question. Again, the COVID-19 means that we're all going to look differently going forward. One of the subjects will be discussed in the next couple of Board meetings would be our own dividend policy at PSG Group. The person who asked that question, it's a very good question. There are a number of shareholders who actually like a dividend. But we will take all of the factors into consideration and, ultimately, attempt to do the best for all shareholders.

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Unidentified Company Representative, [9]

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Thank you. The next question is has PSG identified any potential acquisition opportunities? And how will PSG unlock further value from Zeder?

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [10]

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I think we have looked at numerous opportunities outside the group over the last couple of months. It forms a small part at this stage of our investment propositions that we look at. As most firms, we are going to look slightly more internally at this stage to see whether there are opportunities within our own group and pursue them accordingly. So in many of our companies, we see opportunities at the moment.

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Unidentified Company Representative, [11]

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Thank you. And the next question is, we understand the investee companies are well capitalized, but in the next 3 years under your scenario and stress testing, which potential investee companies potentially require capital support? And how do you see this being met?

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [12]

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We have not completed the stress testing at this stage. Again, speaking to all management on the stress testing. They run scenarios, but the scenarios are so wide at this stage in terms of where it ends up being because nobody truly knows what the effect is going to be once we come out of lockdown. It is a preparation for the future. Unfortunately, we would not be able to disclose the information, but this information on each of the specific boards would hopefully make -- ensure that they're early in the window if they believe that their balance sheets might come under constrain in the next couple of months or years.

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Unidentified Company Representative, [13]

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Thank you. The next question is, to what extent does a post COVID-19 impact Curro and STADIO to fill its campuses? We know it is difficult to estimate. I think it's a similar vein to the question...

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [14]

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It is a similar question. I mean we went into COVID-19 with already struggling economy. Again, people pay fees out of -- school fees or tertiary fees out of salaries. If there are severe layoffs or cuts in salaries, then obviously the affordability would become more of an issue at a Curro or a STADIO level. But again, it's the same vein with the previous question. At this stage, we simply do not know. We will monitor the situation, which will mean that the stress test scenario that we build will become more and more accurate. Because at this stage, nobody knows. Thank you.

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Unidentified Company Representative, [15]

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Thank you. We've received several questions pertaining to the cautionary or -- and as a result of what Piet Mouton stated earlier, unfortunately, we cannot answer those questions.

So that concludes our questions for this morning. Thank you, Piet.

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Petrus Johannes Mouton, PSG Group Limited - CEO & Executive Director [16]

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Thank you very much.