At the announcement of its annual results to the end of March on Wednesday, financial services group Peregrine Holdings revealed that it plans to transfer all of its ‘surplus balance sheet investments’ into a separate listed entity. Subject to regulatory approval, the group hopes to finalise this by the end of the year.
“We’ve considered an unbundling for a long time,” Peregrine Group CEO Jonathan Hertz told Moneyweb. “What’s changed is that these investments have become worth well over R1 billion and that allows us to put them into a vehicle where shareholders can access them separately. We were unable to do it before because until we had north of R1 billion the costs would have been too high.”
These balance sheet assets include Peregrine’s investments into its own hedge funds, as well as the group’s proprietary interests in Consolidated Infrastructure Group and UK property company Stenprop.
“This vehicle is going to have to show its value to shareholders and how it can grow its NAV,” Hertz notes. “But we own quite a lot of offshore assets – about half of our balance sheet is offshore – and we think this vehicle will be faster growing.”
The compelling motivation for the unbundling is however what it will mean for the Peregrine business that remains. Separated from these more volatile investments, Hertz argues that the operational assets will become more attractive.
For the 12 months to March 31 2017 Peregrine reported a 15% decline in headline earnings from R561 million to R476 million. Headline earnings per share were 17% lower at 230 cents from 275.8 cents in 2016.
Peregrine however kept its dividend unchanged at 155 cents per share.
“A couple of things have hurt us this year,” Hertz explained. “We have an appreciable portion of our business offshore, so a strong rand didn’t help us.”
This is particularly the case because Peregrine’s offshore subsidiaries are UK-based, and the rand strengthened 20% against the pound over this period.
Peregrine also saw a significant decrease in the value of its proprietary investments in Consolidated Infrastructure Group and Stenprop. Together, their value fell by R127 million.
“If you take that number, the fact that our performance fees were down R28 million, and that the currency cost us about R25 million, we could have been down R180 million,” Hertz notes. “We were down only half of that because operationally our business has performed very well.”
Peregrine reported that annuity earnings for the year made up more than 90% of group revenue and 75% of group earnings.
“On the one hand there is no doubt that this is what happens when performance fees and proprietary returns get decimated, but we still grew annuity earnings in rand terms by 5%,” Hertz noted. “And the result of that is that we can maintain a dividend.
“We certainly look at those annuity earnings as being a massive strategy of the group,” he added. “We know we have businesses that can earn large performance fees, but in some years we earn none. So we want to make sure that the business is strong and can deliver returns to shareholders even in a year like this.”
This robustness is also evident in the group’s cash flow. Peregrine’s normalised total profit before tax, capital items and non-cash amortisations, adjusted for total minorities, amounted to R556 million, while normalised cash generated from operating activities amounted to R629 million.
“Our cash generation is very strong and that is what has led to us building up a big balance sheet,” Hertz noted. “We’re gaining more capital and we have to invest that capital.”
The group believes that the nature of this year’s performance makes a clear case for an unbundling. Separated from the balance sheet assets, Hertz believes Peregrine will be able to pay a higher dividend to shareholders, at a yield around 6%, and should receive a higher valuation without the ‘noose around its neck’ of the volatility of the proprietary investments as it will be able to deliver steadier and more sustainable earnings.
It will however still have access to the capital in the new vehicle, which Hertz believes will give investors ‘the best of both worlds’.
“We built the Peregrine Capital business using our own capital to invest in funds that they manage,” Hertz pointed out. “Being able to seed funds and create things when others won’t is a big advantage for us. We like to have some money to invest.”
If, however, shareholders don’t want to hold the new vehicle they can also sell their shares to realise a special dividend.