OPINION: Just how much is the PIC really worth?
The PIC’s 2018 financial results were very disappointing, to say the least. Although revenue was up by more than R111 million on 2017, profit before interest and tax fell by R125m or 17.4 percent, mainly as a result of operating expenses that ballooned by nearly R199m - an increase of nearly a third.
Employee costs jumped by R108m as salaries, wages, bonuses and other benefits increased by a mammoth 29 percent. Impairment on an indirect exposure to VBS through the PIC’s interest in BIG knocked off more than R82m.
Furthermore, capital employed increased by R351m or 15 percent. Worst of all, the return on capital employed in 2018 fell to 21 percent from 31 percent in 2017.
As a company the PIC has been very successful since 2009, with the net asset value of the company as measured by the shareholders’ interest growing from R418m in 2009 to R2.572 billion at the end of March 2018.
While the strong growth rate of more than 22 percent compounded per year can be ascribed to assets under management climbing from R763m in 2009 to more than R2bn in 2018 or 12 percent per year, other important factors contributed to the growth in shareholders’ wealth.
The company became a fully-fledged asset manager in the previous decade and although it professes that they charge fees below market rates, at an average of approximately 3 to 5 basis points, the reality is that the management fees as a percentage of assets under management increased steadily to 6.1 basis points in 2018 from 3.8 basis points in 2010 or 6.9 percent per year, outpacing the CPI inflation rate of 5.3 percent over the same period.
Increases in operating expenses were relatively well contained until 2017, with total operating expenses rising by a compounded rate of around 15 percent from 2010 to 2017, while the operating expenses as a percentage of assets under management increased to 3.2 basis points in 2017 from 2.8 basis points in 2010, or a mere 1.9 percent per year annualised, resulting in the cost to revenue ratio dropping from 74 percent in 2010 to 55 percent in 2017.
Profit before interest and tax grew a whopping 29.5 percent per year from 2010 to 2017 and capital employed increased to R2.353bn in 2017 from R412m in 2010. The PIC’s return on capital employed increased steadily to the 31 percent to 33 percent range in 2015-2017 from 20 percent in 2012.
So, yes, the value of the PIC in the SA government’s books is probably the shareholders’ interest of R2.571bn. The big question is, however, what the actual market value will be should the state decide to value it appropriately.
Even better, what the value of this arm of government could be if the government decide to privatise the PIC and list it on the JSE.
The FTSE/JSE-listed Coronation Fund Managers is perhaps a prime proxy for listed pure asset management companies.
I calculated the return on capital employed (ROCE) by excluding policyholder investment contract liabilities and liabilities to holders of interests in investment partnerships and used the profits made on fund management.
A popular measure to value a fund management company is by placing a value on the company based on assets under management (AUM) and it is normally expressed as a percentage of the AUM.
It is evident that Coronation’s market rating as calculated by Coronation’s equity market capitalisation to the AUM ratio followed the trend of Coronation’s ROCE since 2010.
Coronation’s ROCE was 50 percent in 2010 while the company’s market capitalisation was 2.6 percent of AUM.
The company’s ROCE increased steadily to 114 percent in 2014 which saw Coronation’s market capitalisation increasing to 6.3 percent of AUM.
Since then Coronation’s ROCE declined to 71 percent at the end of the company’s 2018 financial year, while the company was de-rated by the market as the market capitalisation dropped to 3.1percent in 2018 and the de-rating continued to 2.7 percent currently.
If the same relationship between Coronation’s ROCE and the company’s ratio of market capitalisation to AUM is applied to the PIC it is evident that, given the poor 2018 financial results, the market capitalisation of the PIC would be around 1.2 percent of the PIC’s AUM. It means that if the PIC was listed it could attain a market capitalisation of R25bn, given the PIC’s AUM of R2.083 trillion at the end of the 2018 financial year.
The Price-to-Net-Asset-Value (PNAV) is another metric used to value listed companies relative to each other, specifically in the same sector. From my calculations it is evident that Coronation’s market rating as calculated by the Coronation’s PNAV followed the trend of Coronation’s ROCE since 2010 and normally should also serve as an indication as to what PNAV PIC would be given the PIC’s ROCE. Based on 2018’s numbers a PNAV of 5 translates to a market capitalisation of around R13bn.
If listed, it could well happen that the PIC may trade at premium ratings compared to other listed asset managers, due to its unique characteristics.
As a company, PIC is in a growth phase relative to other big market players in South Africa.
The PIC’s AUM grew by more than 8 percent per year since 2013, while the growth in Coronation’s AUM stagnated since 2015. The PIC has a captured market as it is mandated to manage the Government Employees Pension Fund (GEPF), which comprises more than 87 percent of the PIC’s total AUM and the contributions by GEPF members are likely to increase in line with inflation.
Although the aim of the PIC and therefore, the GEPF, is to increase the number of external black fund managers, the overall plan is to reduce the funds managed by external managers. Excluding the offshore funds it could be that the PIC may end up adding around R100bn to AUM at the cost of some of its other major external managers (In its 2018 financials the GEPF listed Sanlam Investments, Coronation and Prudential as external managers of the fund).
Although the fee structure of the PIC is very low, it is evident that an inflation adjustment is built into the fee structure charged on the bulk of the monies managed by the PIC. In comparison, Coronation has seen a decline in fees charged on AUM since 2014.
It is therefore plausible that the PIC’s ROCE will return to the 31 percent to 33 percent range sooner than later, specifically with the impairments in 2018 out of the system soon and keeping employment costs in check. Furthermore, it is possible that the shareholders’ funds of the PIC as a company could currently already exceed the R3bn mark.
There is a more than even chance that the PIC, on listing, may find itself trading on an equal, if not better, rating as Coronation’s current market capitalisation of 2.7 percent of AUM. Yes, the PIC may trade at a market capitalisation of R56bn or more. Such market capitalisation will equate to a PNAV of 18 times - Coronation at its heyday reached similar heights.
What is important though is that the PIC must sweat all its resources. Perhaps the PIC inquiry was the best thing to happen with the company. Those in power should just bear in mind that governance is not all - it is about the company and its finances as well, and more importantly, sustainable growth in earnings. There is no reason why the PIC cannot take on other asset managers to grow its bottom line.
Desperate times require desperate measures. List the PIC.
Ryk de Klerk is an analyst-at-large. Contact: [email protected] His views expressed above are his own. You should consult your broker and/or investment advisor for advice.