Much like it previously did with Capitec, EasyEquities has just signed a distribution agreement with Discovery.
This news sent Purple Group’s share price rallying some 11% last week.*
But is this too much excitement for the share?
Previously, we surmised a fair value for Purple Group’s EasyEquities by using the unlisted Robinhood numbers out of the US.
It is not to say that this previous fair value was wrong, but rather that we used the data available at the time.
Time progresses, data changes, and since our previous calculation, several events have occurred:
- Both EasyEquities and Robinhood have continued to grow;
- Peak-lockdown day trading has calmed down and operations have ‘normalised’; and
- Robinhood has listed on the Nasdaq.
The last fact is probably the most important as it gives us a current, arms-length market price for Robinhood and allows us to update our relative valuation of EasyEquities.
The following table takes our previously-used methodology and rolls it forward with present-day metrics:
|Reported accounts||Annualised half-year revenue||Revenue per account||Valuation||Value per account|
|Robinhood (RH)||22 500 000||$2 175 014 000||$97||$36 180 000 000||$1 608|
|EasyEquities (EE)||519 816||R170 056 000||R327|
|EE (dollarised at R15.13/$1)||519 816||$11 239 656||$22||$186 964 666||$360|
|Arpu of EE vs RH||22.7%|
|EE (ZAR)||R2 828 775 392|
|Minorities (30%)||-R848 632 618|
|Purple Capital (70%)||R1 980 142 774|
|Number of Purple Group shares||1 181 004 638|
|Fair value of EE/Purple share||168cps|
Explaining the above table is quite simple: If Robinhood’s 22.5 million accounts generate $97 revenue per year and the market values this at a market cap of $36.2 billion, then EasyEquities’ 0.5 million accounts that generate a quarter of this revenue should be worth about a quarter of this ‘fair value’.
Using this logic, EasyEquities’ 519 816 accounts should be worth $187 million or R2.8 billion when converted to local currency.
If we chop Sanlam’s 30% stake out of this implied fair value, the value accruing to Purple Capital would be around R1.98 billion or around 168 cents per share (cps).
It is worth noting that Purple Group’s shares are now trading at 174cps.
Could the Discovery partnership boost its forward growth? Probably, but Discovery’s bank is far smaller than Capitec’s, and Capitec’s partnership is already factored somewhat into these numbers.
What is interesting, though, is that EasyEquities’ average revenue per user (Arpu) has basically doubled in US dollars (from $11 to $22) while Robinhood’s has tripled (from $34 to $94).
So both businesses are managing to extract rising revenues from their accounts, though Robinhood’s valuation has not been commensurately rewarded (it only rose from $20 billion to $36 billion, almost doubling), thus this growth has already been somewhat priced into its fair value (and thus, our implied fair value of EasyEquities and Purple Group).
In conclusion, we can have lots of discussions both in favour of and against this relative valuation of EasyEquities, but one thing is quite clear: Purple Group shares are nowhere near as cheap as they used to be. The easy money has probably already been made in this share.
Listen to Simon Brown’s interview with Purple Group CEO Charles Savage (or read the transcript here):
Keith McLachlan is investment officer at Integral Asset Management.
*This article was initially incorrectly edited to state Discovery’s share price rose 11%, and has since been corrected.