Review of the Final results for the year ended
31 March 2017
The financial year to 31 March 2017 was characterised by strong returns in both global developed and emerging markets, which did not translate into equivalently robust performance on the Johannesburg Stock Exchange. The S&P 500 finished the period up 14.7%, which was marginally ahead of the 14.5% return of the MSCI Emerging Market Index. Locally the South African JSE All Share Index delivered a negative return of 0.4% excluding dividends and a total return of just 2.5% for the year, as it struggled to overcome political uncertainty and a stronger Rand.
Resource price increases drove much of the growth in emerging markets as the Chinese economy performed better than many had feared and the JSE Resource Index finished the period almost 13% stronger than a year previously. This result was, however, unable to bolster the weak performance in financial and industrial shares with the financial index finishing 8.1% weaker, in a fiscal year which culminated with President Zuma replacing the finance and deputy finance ministers at the end of March 2017.
The Rand, which began the financial year at R14.69 to the US Dollar, strengthened throughout the 12 months and ended 8.7% stronger, with one US Dollar costing R13.41. In fact, the currency spent much of March 2017 almost 10% stronger than this level and only weakened due to the political volatility at the end of the month. The Rand finished the year 14.5% stronger against the Euro and 20.4% firmer than the British Pound, where Brexit-related events resulted in UK currency weakening considerably against all of its major counterparts. The Rand strength served as a hindrance to local currency earnings on the JSE and exacerbated the poor local market returns.
Politically, the 12 months under review heralded several important worldwide events, including the Brexit referendum and the ascendancy of Donald Trump as President of the United States, an acceleration of the international humanitarian refugee crisis spurred on by the Syrian conflict and a global increase in terrorist attacks. The Peregrine Group has been strategically positioned to take advantage of volatility and the political uncertainly that currently exists both within South Africa and globally, which should create beneficial opportunities throughout the Group. Historically the Group’s Securities and alternative asset management businesses have capitalised on extreme market movements and the wealth management operations performed well during the inevitable local currency weakness that resulted from global risk aversion. Expectations that exceptionally low economic growth rates coupled with the multiple downgrades that South Africa has received from global ratings agencies would lead to extreme volatility have proved, to date, to be largely unfounded, but the Group believes that this is unsustainable and that Peregrine remains well positioned to benefit from future volatility.
The environment during the financial year was disadvantageous for businesses within the Peregrine Group. The strong Rand was particularly negative for our wealth management subsidiaries as well as our international asset management and fiduciary entities. Our broking and structuring operations have an increasing number of clients who trade internationally and the strong currency together with the reduced volatility and declining trading volumes affected this segment’s earnings especially in the latter half of the year. The negative view on UK assets following Brexit, including property, had a meaningfully negative effect on several of Peregrine’s proprietary assets, particularly on Stenprop. Although the weaker local markets made it difficult for the hedge funds to deliver exceptional returns, they performed well under the circumstances. Finally, increased regulation required an ever-greater non-revenue generating spend on resources, which in turn negatively affected the profits within several subsidiaries, including the fiduciary businesses. The reduced volatility did however help our corporate finance business, Java Capital, as clients accelerated corporate transactions in what was a relatively benign environment.
From a corporate activity perspective, Peregrine increased its shareholding in Stenham, the Group’s offshore asset management and fiduciary business, by 3.7% to 88.8% at year-end and, with effect from 1 April 2016, Stenham Trustees concluded a fiduciary joint venture initiative with the Bellerive Group. In addition, Stenham Asset Management founded a wealth management business in the Channel Islands, branded Stenham Wealth Management (CI) Limited, which commenced operations with over $300 million in assets under advice. International expansion remains a core strategy within Peregrine, and the Group has, post year-end, increased its shareholding in Stenham, resulting in the entity becoming a wholly owned subsidiary during July 2017. In April 2016 Peregrine disposed of its 49.99% shareholding in Caveo Fund Solutions, a South African fund of hedge fund business, generating a capital gain of R19 million from the transaction.
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 the Group’s subsidiaries and creates opportunities that an innovative and entrepreneurial business, such as Peregrine, is able to exploit.
The Peregrine Group continued to build on its strategy of delivering higher quality, diversified earnings during the twelve months ended 31 March 2017, which were however more than offset by weakness in variable and proprietary earnings. Notwithstanding the difficult operating environment, the diversity that exists with the Group businesses enabled Peregrine to increase its annuity earnings to the strongest level in the Group’s history, with annuity revenues accounting for in excess of 90% of Group revenues and 75% of Group earnings. Variable and proprietary attributable earnings decreased in the main due to lower performance fees across the Group and reduced listed investment returns.
Normalised Headline Earnings declined by 16% to R499 million. Almost all operating subsidiaries, however, increased their annuity earnings and the advisory business housed within Java Capital grew its overall contribution significantly. Higher returns from proprietary investments, within the hedge funds, were offset by significant decreases in the value of listed investments and a decline in the Rand contribution of international subsidiaries in the context of a stronger local currency. The Group benefitted from its deliberate strategy of building a diversified portfolio of businesses, with each business segment making a meaningful contribution to overall Group earnings.
A good indication of the cash generating capacity of the underlying operating businesses is that normalised total earnings before tax, capital items and non-cash amortisations, adjusted for total minorities, amounted to R556 million. This together with the stronger annuity earnings allowed the Group to maintain its ordinary dividend by at 155 cents per share.
The operational review 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 focus on 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 community development trust as well as Peregrine staff, via an employee trust, which made its first distribution to Peregrine staff during the 2018 financial year. Whilst 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, these were offset by a decline in 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 four contributing enterprise.
Peregrine monitors and reports on compliance as set out in the King III report (and has taken note of the King IV report, all the principles and recommendations of which will become applicable in the year ending 31 March 2018) 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 King IV report and Peregrine has spent considerable time formalising its approach to Executive remuneration over the past two years as is more fully referred to in the Group Remuneration Committee Report.
Several of the Group businesses consolidated their standing as market leaders during the year under review and Peregrine remains confident regarding the long-term positioning of the Group and its ability to generate pleasing returns to its stakeholders. Peregrine continued to execute the Group’s strategy of building these businesses internally, driving cross business revenue synergies and implementing acquisitions, which the Group believes can be franchise-leading businesses of their own accord, as well as being able to add incremental benefits to the Group as a whole.
In an uncertain global and local political environment, with negligible South African GDP growth rates, an internationally diversified business such as Peregrine is well positioned to show resilience. This is particularly true when one considers that increased market turmoil helps the Group’s trading and derivative operations and presents opportunities for Peregrine’s hedge fund asset management businesses. The Group is also well positioned to capitalise on local currency weakness that inevitably follows market volatility.
Peregrine’s view is that shareholder value will be enhanced if ownership of the Group’s attractive, operating businesses can be achieved without the complication and volatility of significant profits or losses arising from the non-operational investments held on the Group’s balance sheet. Peregrine believes that any restructure (more fully dealt with in the Chairman’s report), which achieves this goal, has the potential to unlock significant shareholder value.
This is my fifth report as the Chief Executive of the Peregrine Group and, as my term of office draws to a close, I can reflect on the privilege of leading a business which consists of people who are outstanding leaders in their respective fields. Peregrine has always recognised that its people and its clients are its most important assets. This becomes further apparent in times of uncertainty. The Group’s employees are its partners and it is, once again, appropriate that they receive specific mention for their exceptional performance in difficult conditions. We value the trust and belief that our clients have shown in us as we continue to work with them to achieve their goals. Our shareholders have also played a significant role in supporting our strategy. I would like to thank my fellow Directors for the valuable guidance and wisdom that they have imparted during my tenure and I wish my successor everything of the best in the years ahead.
Chief Executive Officer
Date: 07 August 2017*
* The Chief Executive Officer’s Report, although signed on 7 August 2017, was compiled and finalised by Jonathan Hertz, as being representative of his view, prior to his resignation as CEO on 31 July 2017.