Dear fellow shareholders and colleagues
The financial year to 31 March 2016 was characterised by weakness in global markets and continued relative underperformance in emerging market equities and currencies. The MSCI World Index, which tracks the equity markets of developed nations, was 5.3% lower for the period as compared with the 14.1% decline in the MSCI Emerging Market Index. Locally, the JSE All Share Index, excluding dividends, ended the period up 0.1%. Some of the growth came from the Rand hedge stocks, which benefitted from the significant 21% weakening of the local currency against the US Dollar over the period. Notwithstanding a rally in the price of resources in the last weeks of the fiscal year, resource stocks were lower by 30% over the year and financial counters, which had been the mainstay of the local market for several years, disappointed with a negative return of 7.7%.
Politically, many commentators described the year as the most challenging one faced by South Africans since the rebirth of the rainbow nation more than 20 years ago. The Nenegate incident in December 2015 together with the Gupta saga and Nkandla court ruling all contributed to exceptionally volatile conditions in the local equity and currency markets.
The environment was beneficial for certain Group businesses as the trading operations housed within Peregrine Securities profited from the increased market volatility both within the Equities and Derivative franchises. Rand weakness also helped Stenham and Citadel to some extent. Weaker equity markets, however, had a negative impact as performance fees earned declined across the Group as did the proprietary returns the Group were able to generate on its hedge fund investments. This effect was particularly noticeable when compared to the record returns that were generated in the 2015 financial year. Volatility was also detrimental for the Advisory segment, as certain planned corporate finance activity and capital raisings were put on hold until macro conditions became more certain. Notwithstanding these headwinds, the diversity that exists with the Group businesses enabled Peregrine to materially increase its annuity revenue and improve on the record headline earnings which were delivered in the previous financial year. Annuity earnings now account for in excess of 60% of Group earnings and ensure that overall Group profitability is not solely dependent on equity market strength.
From a corporate activity perspective, Peregrine increased its shareholding in Stenham, the Group’s offshore asset management and fiduciary business, by 5% to 85.1% and, with effect from 1 January 2016, Citadel acquired 100% of Consolidated Financial Planning (Pty) Ltd, an authorised financial planning and advisory business, that provides professional and independent advice to both private clients and corporates.
Regulation and compliance continue to play a significant role within all financial services businesses demanding appreciable time and resources. This does, however, result in raising the barriers to entry that exist within many of Peregrine’s subsidiaries. The long awaited implementation of the regulations that govern the local alternative asset management industry in which a number of the Group’s core entities operate, has enabled Peregrine to begin exploiting various growth opportunities in the sector.
The Peregrine Group continued to build on its strategy of delivering higher quality, diversified earnings during the twelve months ended 31 March 2016, with normalised headline earnings growing, off a very high base in the previous year, by 6% to R591 million. All operating subsidiaries performed well in conditions that were not universally beneficial, with the trading and structuring businesses housed within Peregrine Securities growing their contribution significantly. The Group benefitted from its deliberate strategy of increasing annuity earnings across the business in the context of weaker global returns and fees related to performance. Group annuity earnings grew by 24% and annuity revenues accounted for in excess of 80% of Group revenue.
The results were further characterised by a robust contribution from international subsidiaries and associates which accounted directly for 41% of Group profits and more than 50% when profits earned by local Group entities from offshore activities are included. All Group businesses have a meaningful and growing element relating to international investing and transacting.
A good indication of the cash profits of the underlying businesses is that total profit before tax, capital items and non-cash items, adjusted for total minorities, amounted to R661 million. The Group increased its ordinary dividend by 3.3% to 155 cents per share.
The operational review on pages 27-31 of the 2016 Integrated Report contains details of the performance of Peregrine’s various subsidiaries for the financial year.
In pursuit of the Group’s transformation objectives, Peregrine has continued to make progress in the areas of ownership, enterprise development, procurement and corporate social investment. Peregrine’s broad-based empowerment partner, Nala, which owns 20% of the Group’s South African operations, has beneficiaries which include an education trust, a social development trust as well as Peregrine staff, via an employee trust. During the period Nala managed to continue to accrue significant financial benefits as a result of the consistent performance of the Group’s South African subsidiaries and Nala’s other investment holdings. In addition to benefiting existing employees, this has begun to positively impact on the ability of the Group to attract and retain senior skilled empowerment executives with specific skills that are required within the businesses.
During the period under review the Group’s South African holding company was independently rated and received recognition as a level 4 contributing enterprise. Peregrine remains committed to meeting transformation targets throughout the Group’s South African subsidiaries.
Peregrine monitors and reports on compliance as set out in the King III report and continues to remain fully committed to a transparent and disciplined governance process. In addition, the risk management processes remain robust throughout the Group and integrate the functions of risk, internal audit and legal and compliance. Special attention is given to the operational risk areas within the Group and, where appropriate, dedicated subsidiary risk committees exist and procedures are implemented. In line with international developments, remuneration has received far greater prominence in the draft King IV report and Peregrine has spent considerable time further formalising its approach to executive remuneration over the past year as more fully referred to in the Group Remuneration Committee Report on pages 64–67 of the 2016 Integrated Report.
During the year, Peregrine enjoyed the benefits of the diversification that exists across the various entities within the Group and, in particular, the ability of these diverse businesses to profit from different environments. In line with the stated strategy to grow sustainable earnings, the continued improvement in the quantum and quality of Group annuity earnings was once again pleasing.
Despite even more volatile global markets which may lie ahead, Peregrine remains confident regarding the long-term positioning of the business and its ability to generate pleasing returns to its stakeholders. While strong markets provide a tailwind to several of our business segments, increased turmoil helps our trading and derivative operations and presents opportunities for hedge fund asset management investors like ourselves. The Group is also well positioned to capitalise on local currency weakness that inevitably follows market volatility.
Peregrine prides itself in attracting and retaining the best talent across all areas of its business and the Group’s owner managed culture has ensured that it has built industry leading businesses across the Group that only reward performance and strive to keep costs under control in the pursuit of long term sustainable profitability. In addition the Group continues to focus on growing its business organically, seeking strategic acquisitions and driving cross-business synergies.
Peregrine has always recognised that its people and its clients are its most important assets. This becomes further apparent in times of extreme volatility. The Group’s employees are its partners and it is appropriate that they receive specific mention for their exceptional performance in difficult conditions. Our clients have given us continued support and allowed us to work with them to achieve their goals. We value the trust that they have shown in us. My fellow directors have shared their knowledge and experience during the year and provided me with valuable input and guidance.
Date: 12 August 2016