REVIEW OF THE FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2018
The 12 months ended 31 March 2018 proved to be a reasonable year for markets, despite the significant political uncertainty during the period, both locally and internationally. Over the period the S&P 500 finished up 11.8% and the MSCI Emerging Market Index gained 22.2%. Locally the South African All Share index delivered 9.6% with the JSE Resources index up 6.3%, the Financials index up 11.4% and the South African Listed Property index down 7.1% after the poor January and February performances.
The lack of volatility across risk assets in US markets in particular, was remarkable with realised volatility the lowest it has been since 1964. International markets commenced 2018 with most indices strongly up. This quickly reversed in February with a huge spike in volatility and indiscriminate selling, mainly in equities. The S&P 500 moved by more than 1% in a day on 22 occasions in the final quarter of our financial year, already three times the total for the whole of calendar year ended 31 December 2017. What became evident after the February correction was that the previous low levels of uncertainty and low volatility were being wiped out aggressively as concerns mounted over inflation and the impact thereof on interest rates rising in the future. At this juncture, the world is experiencing synchronized growth with the US and China at the forefront, with able support coming from Europe and Japan, both growing around 1.5%.
While geopolitical headlines did not seem to dramatically disrupt global equity markets during the period, locally the Peregrine Group felt the impact of volatility in local equity markets and the strengthening of the Rand against the US Dollar and GB Pound Sterling. This was largely on the back of the much-celebrated election of Cyril Ramaphosa as ANC President, and his subsequent appointment as South African President. This leadership shift was followed by the period of, “Ramaphoria”, which has not yet translated into an economic resurgence, as was evident in the contraction in GDP in the first quarter of 2018. Within the context of this environment, the Group performed well and delivered solid results as we look to celebrate 20 years since listing on the JSE.
Almost every business in the Group benefits from a weaker Rand, as 42% of the Group’s operating earnings emanated directly from offshore entities. It is therefore unsurprising that on average the strengthening of the Rand against the GB Pound Sterling in the financial year under review had a meaningfully negative impact on Stenham’s translated Rand earnings. It is also worth noting that on average the strength of the Rand against the US Dollar affected performance fees and assets under management, and, as a consequence, management fees both in the Citadel and Peregrine Capital businesses (which have significant non-Rand exposure in their portfolios) and the Securities business (which has almost a third of its capital denominated in US Dollars in order to facilitate offshore trading). Overall attributable operating headline earnings would have grown by 13% year on year had it not been for these adverse forex impacts.
From a corporate activity perspective, Peregrine Treasury Solutions, a wholly owned subsidiary of Citadel, acquired a 100% shareholding in Impex Treasury Solutions (a treasurer outsourcer in the agricultural sector) in April 2017 for a cash consideration of R20 million, and Peregrine increased its stake in Stenham, the Group’s offshore asset management and fiduciary business, to 100% in July 2017.
Subsequent to year end the Board received, and accepted, a non-binding proposal from Legae Holdings Proprietary Limited, an entity representing certain management of Legae Securities and Peregrine Securities and a B-BBEE consortium, to acquire the Group’s shareholding in the Securities business, the Group’s single capital intensive business, for a consideration which values its stake in the Securities business at R910 million with effect from 1 October 2018. The proposed transaction is subject to the execution of formal written agreements and regulatory approvals.
Segmental headline earnings amounted to R535 million with the main operating businesses in the Group, namely Citadel, Stenham, Peregrine Capital, Peregrine Securities and Java Capital, delivering an increase in earnings of 7% to R470 million. There was strong growth in annuity earnings from Citadel and increased performance fees from Citadel, Peregrine Capital and Stenham Asset Management, countered by a reduction in earnings from Peregrine Securities, where revenues were lower primarily as a result of a reduction in higher margin revenue from retail and hedge fund clients. Similarly, Java Capital produced lower earnings primarily as a result of a weaker environment in both general corporate finance and in capital raising (particularly property markets) during the latter part of the financial year.
Across the Group’s operating businesses, annuity earnings grew by 6% to R362 million and accounted for 77% (2017: 78%) of the aggregate earnings of the operating businesses. Variable and performance fee earnings increased by 9% to R108 million. This was, in the main, due to higher performance fees earned across the Group, and was partially offset by lower variable earnings in Peregrine Securities.
Included in the results for the last time are earnings from proprietary investments, which increased by 11% to R65 million. In order to remove the unpredictable and volatile returns associated with these investments, the Board resolved to restructure the Group by transferring all surplus non-operating net assets held by the Group (i.e. excess cash, investments in hedge funds and other proprietary investments), to Sandown Capital, a wholly owned subsidiary of Peregrine with effect from 2 October 2017. Having obtained the necessary regulatory approvals, the restructure and subsequent unbundling resulted in Sandown Capital being separately listed on the JSE on Wednesday, 29 November 2017 with the shares in Sandown Capital being unbundled to Peregrine shareholders on Monday,4 December 2017.
Peregrine is committed to transformation, which it views as a critical business imperative, not only for the Group’s sustainability but also as a means of making a meaningful contribution within the broader South African society in which the Group operates. In accordance with Peregrine’s commitment to transformation, the Group has, with the advice of external consultants, embarked on the implementation of a three-year plan which will see it seek to comply with the elements of the Financial Sector Code, particularly the priority elements.
Peregrine’s governance framework in based on accountability, transparency and integrity. The Board aims to integrate the creation of sustainable value into the Group’s strategy and to embed the principles of King IV into its daily operations. It further recognises that good governance, achieved through focusing on the four outcomes under King IV, can enhance the long-term performance of the Group. In line with international developments, remuneration has received prominence in King IV and Peregrine has spent considerable time formalising its approach to Executive remuneration over the past three years as is more fully outlined in the Group Remuneration Committee Report.
The Board has resolved to declare an ordinary cash dividend of 170 cents per share for the year ended 31 March 2018, which is 10% higher than that of last year's ordinary dividend of 155 cents per share and equates to almost 80% of our operating earnings for the year.
Jonathan Hertz, the previous Group CEO, stepped down on 31 July 2017. With effect from 1 August 2017, Robert Katz was appointed as the interim CEO, with this appointment being made permanent from 15 November 2017. Claire Coward has been appointed as the CFO of the Group and as an Executive Director of Peregrine with effect from 1 June 2018.
In accordance with the intention stated in the results announcement dated 12 June 2018 to propose Board changes before the upcoming Annual General Meeting (“AGM”), Boitumelo (“Tumi”) Tlhabanelo has been appointed as an Independent Non-Executive Director with effect from 1 August 2018. As part of the ongoing desire to optimise the composition of the Board and its subcommittees, a decision will be taken in due course regarding the subcommittees on which Tumi will serve.
The Group continues to execute its strategy of building the businesses internally, driving cross-business revenue synergies and seeking acquisitions which add incremental benefits to the Group as a whole. We remain committed to actively seeking out such opportunities as we forge our way into the future.
With the unpredictable nature of the returns from the Group’s proprietary investments no longer introducing volatility into the Group’s earnings (this years’ results being the last to include returns on proprietary investments for the first six months) and with the proposed sale of Peregrine Securities, the Group’s return on equity should increase substantially, as we will be left with businesses that have very little need for capital, other than regulatory working capital requirements. As a consequence, the Group’s dividend payout ratio going forward should increase and with the Group now streamlined, shareholder value should be maximised over time.
I would like to thank my fellow Board members and the Holdings team for their support and guidance as I transitioned from my role as CFO to CEO. I would also like to commend our people and our various management teams in our underlying businesses for their hard work, dedication and focus, and for the diligence with which they continuously look after the interests of our clients and shareholders. To our clients and shareholders, I would like to offer a special thank you for entrusting us with your confidence and allowing our various businesses to take care of your assets.
It would be remiss of me not to make mention of the significant contribution that our former CEO, Jonathan Hertz, made during his tenure in the Group and we wish Jonathan the very best in his future endeavors.
As we mark 20 years since Peregrine first listed on the JSE, we remain confident in our ability to create ongoing value for all our stakeholders for the next 20 years and beyond.
Chief Executive Officer
31 July 2018