The colour of cash
Not policy to raise money to sit idle
MARK BARNES’s mini-investment bank Purple Capital has certainly stepped up its deal flow since I last wrote about it on 30 November last year – bearing out his assertion then that there was an active pipeline. Barnes says that if Purple seemed to be slow in announcing deals, it wasn’t for lack of proposals. He just found them over-priced – as indeed he considers the Edcon buy-in to be.
The interim report to February spells out some of the group’s latest deals (see table). Since February, a R35m loan facility has been signed with Investec and a general issue of 29m shares at 127c/share – placed entirely with the first two institutions Barnes approached – brought in R35,6m. Now a one-forfive rights issue is proposed, at 120c/share, to raise another R47,7m.
Barnes emphasises that virtually all that cash is either already spent or firmly committed, saying it isn’t Purple’s policy to raise money for it to sit idly in the balance sheet.
While reported earnings are still largely derived from appreciation in the mark-to-market value of investments (mainly Cape Empowerment Trust: CET), Barnes has always accepted the need to develop cash earnings. In the next few years, he’d like to see cash earnings up to around 45% of reported total earnings, from only around 20% now. So reported six-month headline earnings of 6,5c/share (up from 4,6c a year ago) must be treated with caution.
This is one company where it’s even more essential than usual to look at cash flow. And that tells a different story: a net outflow from operations of R3,2m, as against R3m a year ago and R5,4m in the full year to August 2006.
The best gauge of progress is net asset value. At 42c last February, that rose to 45c in August and 57c in February. If that seems pedestrian, Barnes points out that it’s calculated conservatively. Unlisted investments and associates have generally not been revalued, while CET is in at 120c as against this week’s market price of 180c, and the post-February share issues for cash should add another 15c to 20c.
That’s unlikely to be the last issue of shares to finance expansion, though each issue becomes harder for existing shareholders (including Barnes) to follow. Ideally, Purple should reach a stage of development where it can finance new deals from
cash flow and loans. However, like the build-up of cash earnings – indeed, the two are closely related – that’s not likely to happen for two or three years. And until then there obviously won’t be any dividends.
However, Barnes is confident that cash earnings will pick up. Black empowerment deals that Purple is structuring should bring healthy recurring income, with excellent returns on the mezzanine finance it provides. Associates Bridge and acsis are doing well and he believes the new treasury operation, which currently services the National Roads Agency, can also sell its product to other public sector operations.
Then there’s the 33% interest in Blackstar’s performance fees. Blackstar has been active – most recently in the latest York Timber acquisition – and though no cash has yet accrued, Barnes is confident that this holding is in the money.
Eastern Cape-based microlender Real People has established 150 branches in less than a decade and if it can in any way emulate the success of Capitec, it offers plenty of blue sky potential for Purple.
And there’ll continue to be merchant banking deals. Those with long memories will remember the instant, but ultimately illusory, creations of wealth through mutual share swaps seen at the top of previous bull markets. But Barnes is adamant that the CET link-up brings real benefits, helping Purple to become an empowered financial services group and raising the deal-handling capacity of both parties.
Barnes sees much potential in Spanjaard, which, obscure as it may be, is one of only three listed chemical groups – a sector he believes has great promise. He first approached it personally a few years ago but met with a frosty response. This time round – when he decided to try again and experienced a more positive reaction – he felt obliged to do it through Purple.
A company with turnover of R70m should be able to earn a margin of at least 3% to 4%, he feels. Spanjaard, despite owning some brands that are well regarded, not only in SA but internationally, manages only a fraction of that.
The Purple share price had a nice little spurt, for which I claim no credit, from 115c when I last wrote to 160c in late January. It has since traded in a channel between that peak and 130c and, at 155c/share, is now at the upper end of the range.
That’s an even bigger premium to NAV, however understated that may be, though the build-up of the deal flow justifies some up-rating. Barnes stresses that Purple can’t afford to be seen indefinitely as a one-man show and he’s strengthening the management team. But the fact is the share is still largely a bet on his rainmaking skill.
Confident that cash earnings will pick up. Mark Barnes