The colour of cash

Not pol­icy to raise money to sit idle

Finweek English Edition - - Companies & markets - MICHAEL COUL­SON

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

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