Piet Mouton, how did you build the South African PSG Group?

Here you can enjoy the transcript of a conversation between Piet Mouton (CEO of PSG Group) and Rob Vinall. It is a lesson about doing business in South Africa and building a great business.

This transcript is part of a series of transcripts of the talks at the RV Capital Meeting 2020. Before the RV Capital meeting takes place again in March 2022 we want to make these great and relevant conversations also available in form of a transcript.

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Both covered these topics:

Introduction

Welcome

[00:04:24] Robert Vinall: Welcome everyone. Welcome to the show. It’s wonderful to see so many people here, so many enthusiastic investors. It really flatters me to see so many people. Many of you made a really long journey to get here, thank you so much for doing that. As you can see I’ve got Piet, to the right of me. I’m going to introduce him in a few moments. But first let me start with just a quick overview of the agenda and what we’re going to be up to this weekend. So we’re going to kick off with the fireside chat with Piet. Then there’ll be a short coffee break, and then around about quarter past 10, we’re going to go into Q&A with me for probably about an hour and a half or so. Ask any questions you want; everything is welcome. And then, at around about midday, we’re going to stop. And as you’ve probably all seen, it’s a beautiful day. We had a ton of snow over the night and the sun is supposed to come out a bit later. So I’d really encourage everyone to get up the mountain and discover the resort here.

Don’t worry if you’re not a skier. I would say from past experience, about two thirds of the group here don’t ski. So if you don’t ski, you’re not in the minority. And there’s tons of stuff to do up in the mountain. There’s a suspension bridge, there’s an ice cave, there’s some crazy rubber rings you can bond down the mountain on so everyone can have fun. If you do ski, there’s an investor of ski lift company, I’d also encourage. Different groups are going to be going up the mountain, depending on your ability. As in previous years, the powder hounds are encouraged to go with Nate. Nate’s a super enthusiastic skier, so I’m sure he’ll be leaving pretty punctually at 12 o’clock. So if you want to ski with Nate, I would be on your toes when the meeting finishes. Then there’s a kind of a medium level group. Piet, maybe I can ask you to be the sort of center point for that?

[00:06:35] Piet Mouton: I’d much rather go with the powder hounds.

[00:06:38] Robert Vinall: Piet’s going with the powder hounds as well. So I have to think of someone else for the medium-sized skills. Maybe all of the medium guys think they’re the powder hound as well, so they can go with Nate.

[00:06:51] Piet Mouton: All South Africans think they’re powder hounds.

[00:06:55] Robert Vinall: And then for the beginners, we’ve got Nick. He’s the back there. Nick was a non-skier last year and felt he was missing out so he’s done the honorable thing and learned to ski over the last year and he told me a funny story yesterday about how he’s perfected the art of going down the slope headfirst, with one ski sort of trailing behind his back. So, I hope we get to see that demonstration at some point over the weekend. Then we’re going to come back to this room after 6pm. There’s a buffet dinner, you can see here, with cocktail tables so I encourage people just to mill around. Talk to everyone, it’s a super friendly groups and nobody should feel kind of that they’re on their own, just go up and introduce yourself to people and I’m sure they’ll be absolutely delighted to speak to you.

Before we get going then, I just wanted to very quickly say thank you to one or two people. My sister Alex, Alex, do you want to give us a wave? Alex runs a social media company in Guildford. A little plug for your company, Air Social, so she’s used to doing these kinds of events and it’s great that she helps me organize this one. Then we’ve got Tilman just there, who is doing the audio and visual this year. Then I wanted to also call out Andrew and James. So these are the two guys who showed me their macadamia nut farm in South Africa. So if that part of my last letter caught your attention then you should seek those guys out for a talk. And I’m also going to thank my family at some point but I know they’re not here yet, so maybe I’ll do that before the next course.

Introduction of PSG Group’s CEO, Piet Mouton

[00:08:40] Robert Vinall: Piet’s Okay so, without further ado, let’s get into the fireside chat with Piet. Piet, thank you so much for coming here. Piet is the CEO of PSG Holding Company. It’s a South African holding company with various businesses, which I’m sure we’ll be talking about soon. For me it’s an enormous privilege to have Piet here, because I really do think Piet, in combination with his holding company, is one of the world’s best capital allocators. What makes Piet great capital allocator? I think he picks some of the best aspects of value investing and the way Warren Buffett invests. He has a very concentrated portfolio of companies which he understands well, where he has a close relationship with the managers, but it’s not a carbon copy of Berkshire Hathaway either. There’s very much its own individual imprint on it. So there’s no insurance in there and in particular, there’s always been a very strong focus on very early-stage businesses. In fact, a lot of the largest positions that PSG holds, possibly all of them were actually started or seeded very early by PSG Group. So without further ado, let’s get into it.

[00:09:52] Piet Mouton: Thank you very much, Rob.

PSG’s founding story and the history of the company

[00:09:55] Robert Vinall: I’m sure some of the people here aren’t familiar with PSG, so maybe you want to quickly talk about the history of the company and how Jannie, your dad started it?

[00:10:05] Piet Mouton: Thank you very much all for coming to listen to me. I do tend to speak a little bit slower than most people so bear with me. My father used to be a stockbroker. He headed up his own firm; it was before stock broking firms were corporatized. So it was a partnership and he came in one day, as head partner, and his colleagues had fired him. He actually wrote a book, it’s, “And Then They Fired Me”. This was ’95. He sat at home for about six months and he had a vision and that’s where the split with his other partners came. He wanted to make the stock broking firm bigger, he thought it was going in the direction of deregulation, and they should expand to be more than just a stock broking firm. And he had a vision of being listed. Anyway, he sat at home for six months and he came across a very small listed company that was mal managed. It was called PAG.

It stood for Professional Assignments Group so obviously a labor broking type business. And he bought control of it, and this is where the figures are fairly important. The market cap was R7 million at that stage. So it cost him R3.5 million to buy control. It was mal managed; he got rid of the bad board of directors. And ‘95 was still a strange time in South Africa. Remember, ‘94 was our first free elections so people still thought South Africa was going in the wrong direction, not that we’re going in the right direction at the moment, but then there was a different set of reasons. So he bought it, changed it a little bit, and the market got excited. And there was a general boom in small cap stocks. A year later, they actually got an offer to buy the personnel agency from them, for R107 million so it was a good R100 million profit, I sold it.

It was before CGT in South Africa so they could reinvest it. In the meantime, my dad wanted to use the listing to build a financial services business. So, by that stage, some of his old colleagues had joined him in February ‘96 and, as Rob explained, those five brokers were the start of one of our big businesses within the group. It’s the biggest IFA business in South Africa, called PSG Consultant and with literally started with these five stock brokers that joined us and built the business over the past 24 years. Part of selling it, we had to change our name from PAG because obviously we sold the business with the brand and businesses were listed alphabetically in many newspapers and we thought we don’t want to move it too much so we changed the A to S. That’s where PSG comes from. Some people want to say, but doesn’t it stand for securities or something like that? No. You can’t have Professional Securities Group Group because that doesn’t make sense.

The Afrikaans people might enjoy it. I always say it stands for Piet se geld, which means Piet’s money. But that’s also not true. With the stockbrokers joining him, the 100 million of cash and as the share price rose they issued more shares and got more capital in and started various businesses. There was an insurance company they started that didn’t work out so well. But the next big move came in about ’98. We went and bought 300 micro-lending branches. These were proper, ugly things. They were charging 30% interest per month, and they would collect on a system called the card and pin. And how it would work is, somebody would come and lend money and you take his card and his pin and then at the end of the month you’d send your bravest guy out, with all the cards and all the pin numbers, and he’d go to the ATM and draw the money and then obviously the guy who loaned the money can get his card back.

And we were fortunate enough that a guy called Michiel Le Roux got a fight with Christo Wiese and he was sitting at home and we brought him in. He was previously with a bank called will and bank and BOE took over Boland Bank and the entire management team became available. And with the help of the management team and Michiel Le Roux and especially a guy called Riaan Stassen, they converted this very, very ugly micro-lending business into what is today Capitec Bank, which is one of the fastest-growing banks in the world and truly revolutionized the banking industry in South Africa. It was ripe for the picking. But they did everything right and they still act flawlessly. So on we went. Everything went very well till about the end of ‘98, I think. It was the Russian crisis which put the first break on, it when long-term capital management blew up and things became a little bit more tricky. And then in 2001 and 2002 you sort of had the dot-com bubble, and in South Africa specifically, we had what we call the A2 banking crisis.

We had about 50 banks. Within PSG we actually had two banks. It was Capitec Bank and a business called PSG Investment Bank. And that was going tough. They were folding one after the other; especially the guys who made use of wholesale funding and Absa, one of the big banks actually did a hostile takeover on PSG Group. We did various tactics to get rid of it; including unbundling Capitec, and they ended up with PSG Investment Bank. And after that, we sort of changed the tact of PSG Group from having the financial services dream into a little bit more what it is today – the investment holding company. So, by far our largest stake at that stage was the stake in PSG Consult but we had quite a bit of capital left from selling the investment bank so we started looking at what is interesting.

And the first part of the strategy was a little bit different. With my father’s historic experience as a stock broker, they saw that the international stock exchanges were going from broker owned, to being listed investments. And we went about and bought up 15% of the JSC, that’s the Johannesburg Stock Exchange, the broker rights in it. So we effectively own 15% that cost us all of R15 million. And lo and behold, two years later, the JSE listed. We went to the JSE and said we wanted to increase our stake from 15%. They told us it’s a national asset, you cannot own more than 15%, which we thought was quite strange, because if you want to have the restrictions like that on your own shareholding, they simply say no. So there’s a different rule for the regulator than for the rest of the companies. So we sold it; bought for 50 million, sold for 800 million. So a great deal in a space of two years.

[00:18:52] Robert Vinall: I’m just ratcheting my expectations up of PSG as you speak.

[00:18:56] Piet Mouton: As things get bigger, it gets a little bit more tricky. We went about and looked at what exhibits similar industries. So we looked at the farming industry in South Africa. They were the old cooperatives, were going through the same process of deregulation. You can buy these companies at 2, 3 Ps, at 20 to 30% price to book. And we started building up stakes, we ran out of capital eventually, raised capital from the market and that’s one of our legs. There’s a company called Zeder, it owns likes in the agriculture industry. Unfortunately, I must add. I think in retrospect, even though it’s been a good investment and over time I think we’ve made 15% or maybe even more because we charged fees on it, it’s not been as good. We went into businesses that were 100 years old. The management was entrenched; it was very difficult to change their mind.

I mean, at that stage I was a 33 year old person. I got to explain some of these boardrooms to you because it was phenomenal. You’d go there and they don’t like a 33 year old telling them what he thinks should be done. So the board sits at the bottom over a here and then there’s a podium at the top might be about this high where the chairman and the CEO and maybe the vice chairman, if he’s lucky enough, and they sit there and they speak down to the rest of the people. That’s just how it was. So it was very difficult to change their mind to do things differently over time. I think we’ve done well with what we had and how it went but the last four or five years have been fairly dry in South Africa. The same sort of scenarios as playing out in Australia with the fires, it’s just a case of being dry is difficult to build agriculture business in that sense, but different to the rest of our strategy.

Also where we went into BEE, we built a BEE investment company. That’s how I got involved with the group. It’s a business I started with some other people, and we actually bought up 20% of Capitec back in the market. Eventually we merged that business with PSG and that’s how PSG ended up back with a stake in Capitec. And we’ve sort of tried one or two things on the investment side. The first was this thing about building into family businesses. But we soon realize that you’re in a control deficit once you do that because they’re the manager and they’re a big shareholder.

So the first time you hit a clash on strategy, it’s very difficult to change it, so, quite a number of things. And so I’ll get to the investment philosophy. But the next big thing we got right was in middle 2009, bumped into a guy called Chris van der Merwe. He built three schools at that stage, private schools. Like the idea, we were actually looking at the education space now. It’s no doubt that South Africa has got serious education issues, and we decided to follow him. I think he’s one of the best entrepreneurs I’ve ever met. In the past 11 years we’ve gone from three schools to 180 schools.

Curro schools and Piet Mouton’s visions

[00:23:05] Robert Vinall: I think you bought the original Curro stake, was it from Naspers or it came via Naspers?

[00:23:10] Piet Mouton: Naspers was involved and they actually sold out to three or four advocates, so lawyers. We just invested money; we didn’t buy a stake from them, we wanted new capital to go into, but they were involved previously.

[00:23:30] Robert Vinall: It’s fair to say that there wasn’t really a business there when you started there were three schools and maybe a vision.

[00:23:36] Piet Mouton: It was marginal business making no money. So actually, as we invested money, and just how school works, you open up the school and you’re not lucky enough that it fills up in year one. You sort of get the people in in Grade One and Grade Two and then it takes about three, four years before you hit EBITDA break even. And then five years, you bottom line break even and then it’s the biggest cash-generating unit that you’ve got. The expansion actually pushed the business into the red for a number of years. So the investment philosophy at this stage, because following the Curro investment, is centered around the following: firstly, we like to early-stage investing. Double gearing, they’re in a bit of VC but that’s difficult.

Building a big company is almost just as difficult as building a small company

[00:24:39] Robert Vinall: When you say early stages, typically very traditional type of businesses, easy to understand, not kind of high tech or biotech or anything like that.

[00:24:49] Piet Mouton: I think that is the core of it. We looked at a lot of IT and tech things but it’s so difficult to assess which one’s gonna make it at the end of the day. I mean they come through the office and every now and then the guy says, this is going to change the world. In my early days, I actually had somebody come to my office who said he wanted to replace the internet. In his bag, he already had the package for the jet and everything there but I’m glad I didn’t invest in that one. But it’s difficult. The tech stuff is really, really difficult and I think you got to take a different approach to it. So it’s surrounded about the following: the first part is the industry must be big.

Building a big company is almost just as difficult as building a small company. So we realized once we invested in a business, that was by far the number-one holder of tankers. So these distribute petrol and liquids on the roads. And when we invested, they had about a 30% market share and within the next two years, we got to about 55% market share. And then our clients just said you’re by far the best, your price is the best but we’re not going to allow you to get more than 55% because then ultimately you can squeeze them for price. So I realized very quickly, the niche which you decide to play in, it’s got to be bigger, So you’ve got to go after banking, financial services, energy, health, big, big industries because you’re not always going to get it right, but when you do get it right, you want it to work.

The second part I think is the industry has got to exhibit some form of characteristic. It’s either gotta have lazy or inefficient incumbents. I go back to the story about Capitec. In South Africa, banks were only open, I think, 10 am – 3 pm, and only weekdays. I don’t know what they did before 10 and I don’t know what they did after three. And all these bank branches were in the center of town or cities, in the good places. So if you’re a blue-collar worker, effectively it means you have to take a day off to go to the bank. So it was really not centered around it and that was one of the big parts that Capitec did. By the way, if you do go in between 10 and three, it was a very unfriendly place to go to. I mean, they really did your service for you coming to them.

So this was one of the big things that Riaan Stassen did, he was at Boland Bank but previously to that, he was at a beverage company called Distell. And he basically said, let’s change this around and bring a retail experience to banking. Why should it be different? You know when you walk into a retail shop, somebody walks to you and asks you, can I help you sir? What would you like to do? So we changed it. Our branches went closer to where the customers were, at the taxi outlet, at the train station. We open them from seven till seven; we opened up on Friday, Saturday, and Sunday.

Investment philosophy in South Africa

[00:28:48] Robert Vinall: And I think the manager or the deputy manager is the one at the front who greets the client.

[00:28:52] Piet Mouton: Yes, that’s a very important point. So instead of the big man, the manager, sitting in the back in the office and doing, I don’t know what, the bigger bags. We said our key guy, the branch manager, must be the first guy at the entrance of the branch greeting the people because he’s the most knowledgeable guy and he can help the person, the quickest. So they’ve really revolutionized it. We had one or two benefits. We got a new age banking system, which costs us a lot cheaper. We can make changes a lot quicker. But maybe we’ll get back to Capitec in a little while.

The other incumbents, we like to compete against are the government. They don’t seem to be that efficient in South Africa. So you think about our investments in energy, education, etc. The other ones may be where the industry is fragmented. And PSG Consult, our IFA business has done really well from the five regional stockbrokers that we got. We now have 950 advisors and they are independent in a sense. We don’t push products, they give best-of-class advice. And then one of our newer investments, Evergreen. It’s a retirement village business. Rob suggested I look at business and we were already looking at it. Ryman Healthcare I think it’s one of your holdings, so it’s a similar principle. And again, in South Africa, there are no retirement villages with people more than three villages so we’re going to go out and build the first national brand retirement village business.

And then the last part to the investment philosophy is the management. And that is by far the most difficult part to all of it. You cannot build a great management if you don’t have the very best of management. And the only thing that you can ascertain when you speak to them initially before you invest is; are they thinking differently about the product? Because no good Capitec came and said, we’re going to go in banking and we’re going to do it similarly, just better but the same. It’s got to be fundamentally different in the thinking of how you approach an industry that’s already in existence. And then this is where it gets, only once you’ve invested then you work with the person for a year or two, you actually see whether he is as good as he is. That’s sometimes difficult to see because is it the market, or is it the individual? It’s not always that easy. That we what we always believe is, especially when building the businesses, the companies should be well-capitalized, especially in the early stage you want the management team to be focused on building the business. It’s not so important, the earnings in their initial years, you’ve got to get the revenue, but at some stage, you got to break through. That’s basically it.

Building new companies: It’s easier to make R25 than it is to make £1

[00:32:32] Robert Vinall: Capital is an interesting point because obviously, the type of industries, you’ve talked about investing in, I would say in developed markets like the US or Europe, it’s very tough to build a new bank or new schools group or whatever. Of course, there are certain disadvantages in South Africa which your countrymen love to talk about. But I think one of the advantages is a country where there’s a capital shortage. Capital is probably leaving the country rather than coming in and for a strong company like PSG Group that creates a lot of opportunity to put capital to work.

[00:33:06] Piet Mouton: Rob, I think you’re 100% right. So we’ve been fairly privileged in the sense that we’ve always had quite a bit of capital, especially the last 10 or so years. So when there is an opportunity, you can go after it, fairly quickly and fairly aggressively. The other part to your question is – it’s no doubt, the last 10 years in South Africa have been very tough. They talk about the lost decade in South Africa; it seems to be the new word, with Zuma having all but tried to destroy the country. But as a lot of our compatriots have also looked externally to go and do things in other parts of the country and feel other countries. South Africa is slightly less competitive. So if you willing to work hard and smart, I sometimes think it’s significantly easier to make money in South Africa than it is to make it in other parts of the world. I worked for four years in London. And I looked at it and I said if you want to start a business over here, there’s going to be 50 guys with the same idea, willing to work harder, gonna have better access to capital. It’s going to be very tough. So, the consult CEO actually lives in the UK and he always says it’s easier to make R25 than it is to make £1.

[00:34:50] Robert Vinall: That’s amazing. So you mentioned management, which is a topic which is dear to my heart, and you’re of course, for the investors in PSG, you’re our manager. Maybe you can tell us a little bit about kind of how you came to be involved in PSG Group and especially how that transition from father to son worked which is oftentimes a difficult one for companies.

[00:35:12] Piet Mouton: As I’ve already explained, I work for a business, I did investment banking in London for the French, Société Générale, then went back to South Africa started, my own investment company and then a year later teamed up with black guy and we started a BEE investment firm called Arch Equity.

Black Economic Empowerment (BEE) companies in South Africa

[00:35:38] Robert Vinall: Maybe quickly expand on BEE for those who don’t know.

[00:35:40] Piet Mouton: BEE stands for Black Economic Empowerment. Obviously, after ‘94 and the new South Africa, all the capital sat in white hands. It’s still a problem today. And it’s a process of trying to redress the wrongs of the past. So companies are encouraged to do BEE deals, which means you assist black people to become invested in your business. It’s a highly flawed nature. We’ve created some very rich individuals, instead of it being given to the masses. I think the process is massively flawed, but I got taught by my father that you should never complain unless you got a better idea. I’ve looked at this, it is so complex and I don’t know how to solve it. So, unfortunately, the problem is you can give it to an individual but that’s then unrightfully enriching or you can say you give it to a million people but now you’ve got R100 million that you made, which is a lot of money and a million people; then everybody gets 100 rent, so your distributing costs to get it to the million people is going to cost you more than 100 million.

[00:37:16] Robert Vinall: Let’s stick with your story though. They’re not gonna solve BEE here, I don’t think.

Piet Mouton’s investing story and how he ended up at PSG Group

[00:37:20] Piet Mouton: Okay, so we went with the set of rules on how BEE companies should be structured. They came in with a new set of rules, our company didn’t work anymore and we merged it with PSG as I explained. That’s how they ended up back with the Capitec stake. And there was a baby born from merger, which was a new BEE company called Thembeka. I went and worked there for a number of years. Then we tried to start up another financial services, niche lending business. It was called Quinn’s Capital. I left it, this was 2007. I worked exactly a year at this firm. So PSG was a partner, Michiel Le Roux was a partner and Reunert, one of the other big listed companies.

And 2007, sort of midway through the year, it was the start of the financial crisis that imploded eventually in 2008. So the company only lasted a year. I came back from that, went back to the BEE company. And then my father’s partner who started the business with him, he was a lawyer, he said he wanted to retire, and there wasn’t natural succession in the company. Because they started the business fairly late in their life, there was a big gap by the time they got to sort of 60-65, which was more the retirement age. There was a massive gap to the next level of people and because they distributed everybody, to the underlying businesses, the guys of quality, there was a space open. And I said to my father one day, I would like to have the job. And I had the support of the rest of the management team and I’ve been there for the last 11 years. It’s been a long time.

Was Piet Mouton the right person for PSG Group?

[00:39:29] Robert Vinall: Looking back to 11 years ago, would you still think you were the right person, given what you knew then?

[00:39:38] Piet Mouton: What would be the right answer, so people don’t think I’m arrogant? I think it’s a tough question. I think we’ve done most things right. As always, we could have done one or two things differently, but as a whole, I think the approaches we’ve taken to the business and here and there, focusing on what we’ve got to not be totally deal-frenzy and stabilize the philosophy that was actually entrenched in the business. I think we’ve done well from that.

The most important learnings from the past 10 years

[00:40:20] Robert Vinall: Your track record definitely bears that out. What do you think the most important thing you’ve learned though over those sort of 10 years? If you could turn the clock, back what would be the one thing you would potentially tell your younger self or would change?

[00:40:34] Piet Mouton: That’s a difficult question; I’m going to get back to you on that on. I mean there’s so many lessons that you get to learn. The first one is most probably; you got to surround yourself with people who are smarter than you. And maybe we were lucky in that sense. I got a phenomenal dealmaker that works with me. You’ve met him, Juan; he’s got his own corporate finance team that does work for us externally. But it means that from an investment company we can actually move very quickly, and he stays close to all the companies. We don’t have to be involved in the deal making. We can outsource it to a team that sits on the same floor as us. I’ve got a phenomenal FD and he is a FD that wants to be a FD and I think that’s important in life.

A lot of the times, the FDs want to get too involved in the operations and you start seeing flaws coming at the back end of the business. So he gets involved solidly with all the business and makes sure that financials are up to standard and checks that there are no gaps. And the other part that he looks after is the financing side. So long before we have any calls on rolling of financing, he’s already engaged and comes up to terms. So, it means having this. And later on we got lucky as well, a tax team joined us. So to package your team correctly helps a lot. So the three or four professional guys who look after the investment, actually sounds like a small team looking after R60 billion of assets, where you get involved with management. But it means everything else is taken care of. So you can basically only engage with the management teams on strategy and what really matters.

The crucial aspect of attracting good people

[00:42:54] Robert Vinall: It sounds like people, is the crucial thing. It’s what you hear every time you speak to a successful entrepreneur. It’s always about the people they managed to attract to them. I’ve met a lot of your colleagues and especially also at the individual companies and they’re great managers. But they’re also people you enjoy hanging out with. And I think it’s a credit to you and your dad that you’ve managed to draw these types of people towards you.

Capitec’s phenomenal success story

[00:32:18] Robert Vinall: Maybe switching gears; obviously PSG is a holding company so the main value or almost all of the values in the holding. So let’s maybe talk about some of the larger ones, starting with Capitec which you really described is a bank. It’s obviously been a phenomenal success story for the last 20 years; probably the question a lot of investors ask is you know how much runway is left for this business? I have very strong share in certain segments of the South African unsecured lending market. What do you see as the kind of the big opportunities for Capitec going forward?

[00:43:52] Piet Mouton: So firstly, maybe to explain, for the moment it’s only a retail-focused bank. We’ve changed slightly, but this changes from this year. So we started out with no clients. We now have 11, 12 million banking clients and we still get about 200000 new banking clients joining every month.

[00:44:26] Robert Vinall: That’s an incredible number.

[00:44:28] Piet Mouton: Given that there are only 55 million people in South Africa, it is a phenomenal number. Remember people are multibank as well so you’ve got to take the figure in that course. So even just on that, we see it as out of the 12 million clients, only three and a half, we see as core clients. These are people who pay their salaries into the bank account and use it as a primary bank account. So if you look at the base and the service that we give, the trick is to convert the other 8.5, 9 million clients into fully fledged banking clients. It’s got a massive growth potential. The next part of it is, we did start at the bottom end of the cycle but we’re slowly moving up higher on the channel; so more and more middle to high end people are starting to bank with Capitec. I promise you, if you look at my wallet there, my main credit card is a Capitec credit card, it has to be.

And then there’s a significant opportunity, now it’s been slower in the past and we’ve really tried to do it. But there’s a massive opportunity if South Africans can shift away from using cash to using cards. So I think without before these fintechs, we don’t always see them as a threat. I think there’s a lot of opportunity to work with them, to take the cash out of the system. Cash, number one is very expensive to move in South Africa. It’s a horrible part of the board pack. Every now and then we read about car bombings or people trying to take out ATMs. And if you look at it, it’s still phenomenal. 60% of all transactions that we monitor are cash.

Remember, every time you swipe your card, it’s a transaction, you can do three or four, if you’re in a shop and your wife or husband has your credit card and they go shopping a little bit. If you draw it at the cash machine, it’s one transaction. And I still say 60% of all transactions are cash. So even if you look at just that part of the business, we continue taking market share. And there’s a massive evolvement still in the industry maturing. I think we’re by far the lowest provider of unsecured lending. We’ve entered the credit card market, our market share is about 25% on unsecured lending, and it’s about 4% on the credit card market. I think we should be able to get on the lending side to about 20% on credit cards and maybe 35 on the unsecured lending. We started dabbling in other products.

Other products and funeral plans

[00:47:48] Robert Vinall: The funeral plans.

[00:47:50] Piet Mouton: Yes. So a year and a half ago, because we got this distribution network, we launched a funeral plan. Now, just to explain to you guys not from South Africa, a funeral ban is like a mini life insurance product. You pay it and if somebody in your family dies, there’s immediate cash available and you can bury him. It’s a big thing in the black market. In South Africa burials are very important. As I say, we launched it a year and a half ago. The uptake has been so massive, we’re a partner in Sanlam and they couldn’t believe it. They’ve never seen people sell it like this. In a year and a half off we’ve sold a million policies; we’ve retained 70% of it. And the interesting part was, so we do have an app, we have the internet and everything where you can bank on, it’s cheaper to get your insurance through the app, but 85% of it, we still sell through the branch.

So I find it quite interesting where all the other banks are closing down their branch, people’s still have the ambition to speak to somebody if they make an important financial decision. I think in the long run, there’s a massive opportunity for all of you guys, who look like active managers and big talk about robot advisors I’m distracting a bit here. People who have money want to speak to the person on the other side, what they’re doing with their money. And the same thing, you want to make 100% sure, if you are insuring your family with a funeral policy that it is going to pay out like you think it’s going to pay out. The app doesn’t really confirm that although it’s a brilliant app.

Piet Mouton discusses the development of Curro as a business

[00:49:45] Robert Vinall: Time is running out so let’s quickly try and cover a few other topics. Curro, which is your school’s group, for many years it was a runaway success story, the share price was sky high and the last couple of years the share price has come down a lot, the growth has tapered a little bit. How do you view that development? How much of that is the South African economy? To what extent if at all, are you kind of concerned about Curro as a business?

[00:50:24] Piet Mouton: Given the way we invest, it’s never a call on is the share price high is the share price low? Obviously, a low share price does give us an opportunity to increase our stake but we can’t decrease our stake if the share prices drop. I think that share price was simply too high. It was frothing in the market, so went up to about R60, it’s now trading at 70. I think fundamentally, the business is solid. We’ve made one or two areas I’d be the first to say. We expanded slightly too quickly in the last two or three years. The economy has slowed. Many of our clients are under pressure. But long term, it is most probably in the group, one of the businesses I am still the most excited about. Like I say we’ve got 180 schools. If you look at the capacity, the schools are about 50% full. So, we can stop the expansion program, and that is exactly what we are going to do, we’re going to slow down significantly. And then, as these schools fill up, you should see significant growth in earnings. But I don’t think that should be the only benchmark at the moment. So somebody asked me, what is the most misunderstood business within your group? And I think it’s Curro at the moment.

[00:51:53] Robert Vinall: Do you still see the long-term potential though, to continue building Curro schools in South Africa? Because it sounds a little bit like you’re kind of concentrating more on existing ones at least for the next couple of years.

[00:52:04] Piet Mouton: I think so. If you can tell me exactly how South Africa is going to play out, that would give you a significant better idea. I think what we’ve constantly tried to do in a South African context, is look at reducing the cost of education. We’ve developed a new model this year; it’s called the DigiEd model. It’s what people keep on saying that you should try and achieve globally. We’ve had our first intake this year and it’s gone extremely well. It’s a technology-based school so instead of having teachers, you maybe only have a math teacher, but for all the rest of the subjects, it’s technology and video-based and you reduce the costs of education, significantly. If we can crack that model significantly, the scope is indefinite.

[00:53:04] Robert Vinall: So driving costs down to make it an option for a much broader swathe of the South African society.

Capitec’s share price and trading at a 27% discount

[00:53:12] Robert Vinall: Switching back from the company level back to the holding, one of the topics that I came across as I was in South Africa, was around Naspers and how they’d had this huge stake in Tencent and people had agitated for that to be spun out and then that was very positive for Naspers share price and as they do, the capital markets, they switch their focus to the next opportunity and they point to Capitec that makes such a big part of PSGs stake. What do you make of that?

[00:53:45] Piet Mouton: I expected that question. So just to explain and for those of you that don’t know the portfolio; for years we traded very close to our sum of the parts. You can actually get it on our website, PSG Group, we’re fairly open so we publish it and it changes as the share prices change. And we used to trade sometimes above the sum of the parts level and at that stage, management was rated. Unfortunately we’ve gone into a discount situation so clearly we’re not as highly rated at the moment. This went on until about January or December 2017 and Steinhoff used to own a 25% stake in PSG. Obviously there was the massive collapse at Steinhoff and the very first thing the paper wrote, the next day was, they’re going to be forced to sell the PSG stake. So there was a bit of a share overhang. We placed the 25% within the next two months, share price recovered a little bit.

And then there was a little hiccup at Capitec where a group called Viceroy went after them and accused them of cooking their books and then Capitec quickly dispelled that. It’s actually a good process to go and look at the history of that and how you should react when people come after your business. And somehow, Capitec’s share price recovered and we stayed behind. Our sum of the parts is about 65 billion but Capitec’s been so good the last couple of years, especially in the last five years where some of the other businesses, who had the wind from the front, that our share in Capitec is now actually larger than our market cap. This means we traded at about a 27% discount, and that’s where Rob’s question comes from.

So, I’ll answer it to you in the following way. The first part of it: one of the big reasons to be listed is to be able to access the equity market, because all the JSE and all the regulations are becoming more tedious by the day. So if you cannot access the capital markets every now and then, there’s really no reason to be listed. You will never access the capital markets with the equity markets, if you’re trading at a 27% discount. From a management perspective, I knew I made the joke about; you’re rated if you trade above and below. It is fairly disappointing. It doesn’t create a warm, fuzzy feeling. And we are incentivized to grow long term wealth for shareholders. So, if the problem is here to stay, and as I can see at the moment, many investment holding companies, not just in South Africa, across the world for some odd reason are trading at major discounts. We will sort it out in some way or another. We actually apply ourselves a lot to, what is the best for shareholders and what is the best for the business going forward? But I cannot accept trading at a 27% discount forever and neither is the rest of the management interested in doing that.

Upcoming plans and strategies for ahead

[00:57:56] Robert Vinall: Can you say what you have in mind or are you going to keep your cards a little bit closer to your chest?

[00:58:00] Piet Mouton: If we can release a census, as I said to you. It’s obviously a combination of plans and like everything; it’s maybe not something that will happen overnight. It’s always interesting when you talk to investors, you can only truly talk about strategy as a whole and what the historic implications of businesses are but as managers we sit there and you’ve obviously got plans how you see the world playing ahead. It’s like a game theory; if this happens, you can do that, if that happens, well then we’ve got to change a little bit and do it. All I can say to you is that I’m not happy with a 27% discount.

Where Piet Mouton plans to work for the rest of his career

[00:58:55] Robert Vinall: I think we’re running out of time. So, a good place I’d like to finish up on is your long-term plans. Do you ever see yourself working anywhere else or is PSG Group going to be your life’s work?

[00:59:10] Piet Mouton: I will not work anywhere else. The family owns about 27% of PSG Group, I’ve been CEO for the best part of 10 years which I think as tenure is fairly long, especially in the South African context. But I think worldwide, it’s become quite long. But I will be involved in the business for a very long time in one way or another. It’s one of those things, you just won’t go and work anywhere else. It’s been too hard and too difficult, and obviously the entire wealth is built the business. Whether I can do another 10 years of having the stress of being a CEO and being engaging, is another question.

[01:00:15] Robert Vinall: We’re fans of Warren Buffett who continues to manage Berkshire Hathaway into his 80s and 90s.

[01:00:20] Piet Mouton: But he’s a phenomenal person.

[01:00:24] Robert Vinall: Piet, so I’m sure everyone has lots of questions, we are out of time unfortunately. But Piet’s very kindly said he’s staying here the whole weekend, so I’d encourage you to either grab him on the slopes, this afternoon, or be at the dinner this evening so there’ll be plenty of opportunity to ask questions.

The Prosperity Paradox

Piet, I do have a small gift for you. It’s a book called “The Prosperity Paradox”, written by Clayton Christensen. Clayton Christensen describes how in emerging markets, the way to build wealth is unfortunately not throwing up hospitals and roads and wells, because if they’re not accompanied by businesses establishing themselves in those countries, the wells just dry out and the roads fall into disrepair. He says the way to build wealth in in emerging markets is by creating great businesses. And I think PSG is a great example of a company that does that and so I think it’s a great book to pass on to you.

[01:01:18] Piet Mouton: Thank you. Obviously, if it is as good as you say, then I’ll give it to Cyril Ramaphosa next time I see him.

[01:01:40] Robert Vinall: So we’ll take a half an hour coffee pause now and maybe get back here at about 10:30ish.

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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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