PBT Group: Very Much Worth Looking At…

Extracted from AlphaWealth Prime Small & Mid Cap Fund’s Q1:17 factsheet (download full factsheet here):

“Following Stellar Capital’s acquisition of the Prescient Financial Services cluster from Prescient Ltd, the remaining listed company renamed to PBT Group Ltd.

What is PBT Group (code: PBG)?

Run by its co-founder and large shareholder, Pierre de Wet, PBT Group offers business intelligence consulting, application development and medical aid administration services. We can collectively call this “business intelligence” (or “BI”) with layered technology and ICT skills attached.

The exponential proliferation of ‘big data’ in businesses has driven and should keep driving a growing demand for BI. BI predominantly works with databases that become more critical the more data you have, generate and store.

Thus, a specialist BI provider with a long track record and great client references is uniquely positioned to capture this fast-growing, global market. You cannot overnight build a skilled, motivated labour force and, especially, establish a 19-year track record with client references in the BI field!

PBT Group runs a capital light, variable cost business that generates steady cash flows and can be nimble in its deployment into markets and geographies. One of its key assets is its 300-odd staff contingent that also makes its process of globalising the business much easier than capital hungry, fixed cost business models.

On this point of steadily globalising PBT Group, almost half of the Group’s revenues come from USD revenues (in Africa) and AUD (in Australia). This while the services-based business model means that the business is actually technology agnostic and can adapt to any and all technologies as and when they change.

There are some risks involved in the business. For example, MTN (or, more correctly, many of MTN’s pan-African subsidiaries and various businesses) are clients of PBT Group. Also, in the Australian business, MediBank is a dominant client. Losing these key accounts, bad debts on these accounts or even significantly extended payment terms can have a material impact on the Group.

Yet, the Group is keenly focussed on adding new clients and slowly diversify away from these client concentrations (at last count, MTN was only 23% of Group revenue and MediBank was only 15%). Furthermore, such major clients serve as a great reference point for the Group selling its offering into other blue chip clients all over the world.

Thus, we believe that this is a manageable risk and one that PBT management is very cognisant of.

While Prescient’s transaction with Stellar Capital has created a lot of noise in PBT Group’s recent results, our best estimate of the historic and forward (clean/normalized) earnings numbers are:

  • PBT Group earned c.1.4cps FY 16 HEPS putting its current share price on a 14.2x Price Earnings (PE).
  • PBT Group is likely to report FY 17E HEPS of c.2.0cps putting the share on a Forward PE of 10.1x.
  • The Group is expected to have a generous dividend policy (due to its good cash generation) and we see a Forward Dividend Yield (DY) of 7.5%.
  • Our fair value for the stock is in a range from c.23cps (Forward PE: 10.9x) to c.30cps (Forward PE: 15.0x).
  • Even on the low-end of this fair value range, the stock (trading at 20cps) is almost 20% undervalued while on the high-end of this the stock implies a 12m return of over 70%.

Finally, it is worth noting that in the nearly two-decades since PBT Group was founded, it has only had one year of reported profit that did not grow year-on-year. That single year was FY 16 and the major negative impact here was a discretionary hedge that was taken out by the management over the Rand (i.e. non-operational). This hedge is no longer in place, and management readily admits their error in this decision.

Hence, we see PBT Group as a comfortable-to-cheaply valued, niche, high growth play with great non-South African exposure and a dedicated, proven and invested management team driving its global expansion.”

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