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It is always interesting when two businesses in the same sector release results close together. It gives investors a good chance to assess their relative positions.
This was the case this week with Coronation releasing full year results on Tuesday and Peregrine putting out its half year numbers on Wednesday. Both companies fall into the financial services sub-sector on the JSE, however, as their respective results showed, there are some very important differences.
Coronation is a much larger business with a market capitalisation of R26.7 billion and annual revenues of R4.4 billion. That compares to Peregrine at R6.8 billion and revenues last year of R2.4 billion.
The more important distinction however is that Coronation is a pure long only asset manager, while Peregrine is diversified across asset management, alternative asset management, wealth management, broking and advisory. This makes Coronation a far more cyclical business as its fortunes are tied quite closely to the performance of the market, and this was evident in the numbers.
While Coronation’s revenue was down 7% for the year to September and headline earnings per share were 10% lower, Peregrine grew its six-month revenue by 3% and its diluted headline earnings per share were 2% higher at 111.7 cents per share. While its asset management business did feel the effects of the weaker market conditions, it was able to secure growth in other areas.
Headline earnings from its asset management division were down more than 30% for the six months, dropping to R23 million from R33 million in the comparable period. The largest contribution came from hedge fund business Peregrine Capital, which was still able to produce positive, if reduced, returns despite markets being negative.
Peregrine Capital also grew assets under management to R5.9 billion from R4.8 billion at the end of March.
Market conditions had a negative impact on Peregrine’s Wealth Management business, Citadel, as well. Headline earnings fell from R89 million to R82 million due to lower performance fees, although the company noted that annuity earnings were up.
While these asset management and wealth management businesses saw lower profits, Peregrine’s other operations delivered strong performances.
The company’s 84.9% holding in UK asset management and trust business Stenham delivered headline earnings of R44 million, which is more than double the figure from 2014. While a large part of this can be attributed to exchange rate movements, Stenham also saw growth in assets under management and advice from $3.18 billion in March to $3.45 billion at the end of September.
Broking and structuring business Peregrine Securities benefited from increased trading volumes in its specialist areas of prime broking and derivative broking and structuring. Headline earnings were 56% higher at R51 million for the half year.
Peregrine’s recently acquired corporate advisory business, Java Capital, also made a positive contribution. Headline earnings jumped 100% to R12 million for the period.
“The group continued to build on its strategy of delivering higher quality, diversified earnings during the six month period ended 30 September 2015,” Peregrine said in a statement. “Significant growth in earnings from the trading and structuring businesses housed within Peregrine Securities offset slightly weaker returns within the hedge fund and wealth management sectors on the back of global and local market weakness. Annuity earnings grew meaningfully across all business segments and now account for the majority of group earnings with the contribution from offshore playing a more meaningful role in diversifying group income in the context of a weaker rand.”
It is important for investors to be able to make a distinction between these annuity earnings and the more cyclical income that comes in from performance fees. As annuity earnings are more reliable, they give a better picture of the state of the company.
“Peregrine has done well over the past few years to not only diversify its revenue streams both geographically and across the various financial services offerings, but also to communicate the nature of the revenue,” said analyst at Anchor Capital Liam Hechter. “This makes it easier for investors to distinguish between the higher quality annuity earnings and the proportion of earnings made up of performance fees.”
Hechter pointed out that in valuing the company Anchor looks for a normalised earnings figure by reducing the cyclical performance fees and applying a rating to the higher quality annuity earnings. On this basis, the results were very positive.
“In the current set of results management have communicated that 60% of earnings are annuity based, so about 70 cents per share of earnings for the first half,” he said. “This is an increase of 30% from about 54c per share of annuity earnings delivered in the first half of the 2014 financial year.”
Anchor believes that Peregrine will continue to shift towards a higher percentage of annuity earnings, which is good news for the business.
“These earnings should ultimately command a higher rating driving the overall rating of Peregrine higher,” Hechter said. “It also has the added benefit of giving management the ability to efficiently utilise their equity in concluding acquisitions.”
Peregrine did not declare an interim dividend as the company only pays a dividend at year end.
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