ANTHONY CLARK

Why Sygnia (ex)changed its mind

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.