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Leaner Peregrine set to emerge

After unbundling of surplus balance sheet assets.

Diversified financial services group Peregrine on Thursday reported a 6% growth in headline earnings for the six months to the end September 2017. Headline earnings per share grew to 122 cents, from 118.5 cents in the comparable period last year.

Operating revenue was effectively flat for the period, but the group reduced operating expenses by 6% from R909 million to R852 million.

The main operating businesses in the group – wealth manager Citadel, asset manager Peregrine Capital, corporate advisory firm Java Capital, UK asset management and trust business Stenham and broking firm Peregrine Securities – delivered an 11% increase in earnings to R207 million for the year.

This will be the last year in which Peregrine’s results will include the balance sheet assets it currently holds outside of these operating businesses, as these are set to be unbundled into a new listed company called Sandown Capital at the end of this month.

Newly-appointed company CEO, Robert Katz, explains that Peregrine has always been a mixture of the operating businesses and private equity assets, but this has made it very difficult for the market to value the company and understand future cash flows. This is what primarily informed the decision to unbundle the balance sheet assets into a different vehicle.

“What we will be left with is the Peregrine rump of operating businesses that have no significant cash requirements whatsoever,” says Katz. “In the past we paid out around 50% of earnings as dividends, but now there will be nothing stopping us paying 80% or even 90% depending on capital requirements. That will enable the market to look at us in a different light.”

In the unbundling, a net amount of around R1.15 billion will be transferred into Sandown, with shareholders receiving one Sandown share for every Peregrine share they currently own.

In theory, this means that the Peregrine share price will reduce by the net asset value of the unbundled assets. However, Katz believes that without the surplus balance sheet the remaining operating businesses are likely to benefit from a rerating, which will be positive for Peregrine shareholders

Going forward, the company will also continue to look for growth through buying businesses that fit into its portfolio.

“We will hopefully continue to see steady organic growth, but if we really want to move the needle we will have to do acquisitions,” says Katz. “That has always been our strategy.”

He believes that this will also be easier without the surplus balance sheet assets that are being transferred into Sandown Capital.

“Our stated intention is to do acquisitions in businesses allied to our industries,” Katz says. “We bought Java Capital about two years ago, we bought Consolidated Financial Planners and other businesses that we could bolt-on into Citadel, and we are continually looking to do that. That is most certainly our strategy going forward.”

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