sector and geographic exposure.
This sets a good base for future
organic growth. They also enhanced
the group’s risk profile as more
than half of its income is now
annuity type with about a quarter
being generated from outside
South Africa.
income is not too dependent on
market conditions. Annuity-type
income constitutes 51% of total
income while the relatively stable
proprietary investments unit
contributes about 18%. Only about
34% of earnings come from variable
performance fees. Also, because of
Peregrine Capital, the group’s
flagship hedge manager, is another
division that is able to flourish even
in a bear market as it can take both
long and short positions.
While we think it’s wise to be
nervous given the recent volatility
We remain confident in the group’s
ability to deliver earnings growth to
support its share price rating. What
also comforts us is that while past
growth has been largely acquisitive,
the company also recorded fairly
good organic growth.
PEREGRINE
With key operations in hedge
funds, prime broking and wealth
management, financial services
group Peregrine is enjoying a purple
patch and the quality of its earnings
has improved significantly.
Its share price has been flying too
but despite the strong rally, its
value metrics are still compelling.
Peregrine sports a 12-month
forward price:earnings ratio of 10,
considerably lower than the rest of
the market. The shares also come
packaged with a strong dividend
yield of 4.5%.
(See: Figure 3)
The difficulty is that its performance
is leveraged to the general market.
Nonetheless, we are comforted by
its diverse business model which
seems to have good insulators.
The first source of comfort is
that a high proportion of its
Figure 4
its diverse operations within various
niche segments, a bear market is
not entirely a disaster for the group.
Peregrine Securities, which has
become one of the industry’s top
hedge fund prime brokers and
a major contributor to group
earnings, thrives in volatile markets.
Volatility supports earnings for this
division, which serves to partially
offset lost performances fees from
the wealth management division
in case of a market downturn.
on the equities markets and
uncertainties on the global
economic growth, Peregrine
warrants inspection from investors
looking for an inexpensive entry
into the asset management space.
ITALTILE
With the South African economy
stuck in a slow growth trap and the
equities markets looking pricy, stock
picking is a challenge. We naturally
prefer cheap, quality stocks.
This means low price: earnings
multiples, a dividend paying
history, strong balance sheet and,
importantly, a resilient business
model which can grow earnings
within a stagnant economy. We find
these qualities in Italtile.
Despite its exposure to highly
cyclical consumer and construction
spending, Italtile has been a
consistent performer through good
and bad times. It has delivered a
compound annual growth rate of
about 18% on its earnings over
the past five years and is likely to
maintain the momentum.
Figure 3
8
ISSUE 6 – SEPTEMBER 2015
(See: Figure 4)