AN­THONY CLARK

Why Syg­nia (ex)changed its mind

Financial Mail - Investors Monthly - - Front Page -

Iron Lady Mar­garet Thatcher once said of her­self, “the lady’s not for turning,” in re­sponse to an appeal for her to make a U-turn on her eco­nomic pol­icy.

Syg­nia founder and CEO Magda Wierzy­cka, a feisty mar­ket dis­rupter in the SA as­set man­age­ment space, was at one time known for her lack of in­ter­est in ex­change traded funds, or ETFs. (Though this had more to do with the costs and lay­ers of fees as­so­ci­ated with these funds than the ETFs them­selves).

The lady, it seemed, was not for turning on this mat­ter.

How­ever, Wierzy­cka made her own U-turn when the chance pre­sented it­self to ac­quire SA’s lead­ing and highly prof­itable DBX ETF plat­form, sold off by Deutsche Bank as part of its global re­align­ment.

SA’s Pol­ish, blonde Iron Lady had pulled off a coup. In one swoop, Syg­nia gained a lead­ing plat­form, a new prod­uct line, R11.3bn of new as­sets, 6,000 re­tail clients and a busi­ness that made R38m in af­ter-tax profit to add to the R72m Syg­nia made in 2016. At a cost of R325m, a p:e of un­der 10x was paid for the as­set.

In gain­ing the DBX busi­ness, Syg­nia plans to re­duce the ac­cess cost of the ETFs, strip away much of the ex­ter­nal costs as­so­ci­ated with the prod­uct and take the ad­min­is­tra­tion in-house. This will have min­i­mal im­pact on DBX’s rev­enue or prof­itabil­ity.

The busi­ness was listed in Oc­to­ber 2014 at 840c and the stock was at 2,230c at one stage. The cur­rent share price of 1,460c still gives the busi­ness a mar­ket cap­i­tal­i­sa­tion of R2bn.

The DBX ac­qui­si­tion will be set­tled via the an­nounce­ment of a rights is­sue af­ter the re­lease of Syg­nia’s in­terim re­sults to the six months ended March. The rights is­sue, aside from pay­ing for the DBX deal, will be used to bring in ad­di­tional BEE share­hold­ers.

Syg­nia’s share price, even given the po­lit­i­cal blows to the do­mes­tic stock mar­ket, has re­mained fairly sta­ble. A tight share­hold­ing struc­ture and low liq­uid­ity has kept the stock go­ing pretty well in the junkrat­ings back­wash.

With slow growth in the do­mes­tic as­set man­age­ment sec­tor, Syg­nia and Wierzy­cka have looked for new chances to dis­rupt the lo­cal mar­ket and to grow the busi­ness. DBX will aug­ment Syg­nia’s push into um­brella funds and the re­tail seg­ment and will be a solid plat­form for growth within Syg­nia for 2018 and on­wards.

Syg­nia has con­tin­ued to in­vest in­ter­nally to po­si­tion it­self for growth

I’m not ex­pect­ing great shakes for Syg­nia’s H1 2017 re­sults pe­riod. It ended its Septem­ber 2016 year-end with as­sets un­der man­age­ment of R158.4bn, growth of 8.2% y/y in a chal­leng­ing mar­ket.

Even given tough mar­ket con­di­tions in 2016 and 2017, Syg­nia has con­tin­ued to in­vest in­ter­nally to po­si­tion it­self for growth. It has in­vested in new sys­tems, plat­forms, peo­ple and prod­ucts. Its um­brella busi­ness, gal­vanised via the Gal­let ac­qui­si­tion in Fe­bru­ary 2016, con­tin­ues to gain trac­tion but has yet to make a mean­ing­ful con­tri­bu­tion to prof­itabil­ity.

All this self-in­vest­ment will have a cost im­pact on H1 2017 earn­ings. Even though as­sets have grown, mar­ket per­for­mance has made much of this ac­cre­tion eke away and I am not ex­pect­ing the type of earn­ings growth seen in 2016.

In H1 2016 Syg­nia re­ported head­line earn­ings per share of 25.8c/share (with FY16 Heps of 53.1c/share). I don’t ex­pect Syg­nia to show any ma­te­rial like-on-like earn­ings growth; in fact, there may be a mod­est re­duc­tion in H1 2017 Heps. These re­sults will be tem­pered.

Ahead of any even­tual vol­un­tary up­date, I am pos­i­tive on the DBX deal — it adds a mean­ing­ful new earn­ings stream to Syg­nia at a com­pelling trans­ac­tional value and has scope to grow.

At R14.60, I main­tain my hold on Syg­nia and I would cer­tainly fol­low the rights is­sue when it is an­nounced.

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