Chairman's Report


It is my great pleasure to report back to you on a year of record annuity earnings for the Peregrine Group notwithstanding the headwinds introduced by a series of political jolts both locally and abroad, a muted performance from the broader local equity market and further constrained by a surprisingly strong local currency.

I cannot recall a year in which heightened political uncertainty in South Africa was accompanied by a materially stronger local currency and yet this was the environment in which we found ourselves operating in the year under review. This paradox serves to highlight the extent to which emerging market currencies have moved in tandem with each other over the past year, with positive international sentiment toward these markets as a whole appearing to have a greater influence on local currencies than local political shocks.

Whilst investment performance was satisfactory across the spectrum of the Group’s wealth and asset management businesses on a relative basis, it did not produce the same level of performance fees for the Group as the previous year. In addition, a lower overall return on proprietary assets resulted in Group earnings for the year being down for the period.

Since the Group’s listing on the JSE in 1998, its financial results have consisted of a base of annuity earnings supplemented by transactional income and performance fees with proprietary profits providing an additional kicker in most years. In some years, extraordinary proprietary profits have led to record earnings, as was the case in the 2008 and 2016 financial years. In other years, positive absolute investment performance, but lower in relative terms, as happened in 2017, resulted in lower earnings than the previous year despite an increase in annuity earnings. Naturally proprietary losses would have had a negative impact on earnings, as happened in the 2009 financial year at the commencement of the global financial crisis. For many years, investors have questioned the level of volatility introduced into the Group’s income statement by the variability in proprietary returns.

In light of this volatility detracting from the quality of the Group’s operating earnings, the Peregrine Board has, periodically, debated the merits of unbundling the Group’s surplus assets. In previous years, the decision has been taken to leave the surplus assets in place, given the business-build nature of a large portion of these assets.

Over the past year, discussions around the upcoming transition to a new Group CEO, provided the Board with a fresh lens through which to examine the Group’s capabilities and its desired positioning going forward under a new CEO, re-raising the nature of the surplus assets. In the course of this examination the Board concluded that the business-build nature of the surplus assets is no longer a primary driver. The underlying businesses are all soundly individually capitalised, any additional working capital requirements can be funded out of future earnings or a moderate level of gearing where required and internal mechanisms exist to seed funds within the prime broking business.

It was therefore felt that the unbundling of in excess of R1 billion of surplus assets would be beneficial in reducing the Group’s earnings volatility without impairing its ability to pursue new business initiatives. As such the unbundling will take place into a separately listed entity before the end of the calendar year. This will leave a core of well capitalised operating subsidiaries, all of which are highly cash generative. It is envisaged that the Group will pay out all free cashflow in the form of dividends going forward, subject only to retentions for augmenting working capital and debt retirement where required.

During the course of the past financial year, it was announced that Jonathan Hertz will be stepping down as Group CEO with effect from 31 July 2017. Robert Katz, the Group’s CFO will take over from Jonathan as acting CEO. The Board would like to thank Rob for stepping into the role until such time as the unbundling is complete, at which time a decision will be made of a more permanent nature.

Over the 4 year period of Jonathan’s tenure as CEO Peregrine shareholders have benefitted from a material increase in Group earnings as well as dividends. These increases have been reflected in a materially higher share price. I would like to acknowledge, in particular, Jonathan’s uncompromising focus on strengthening the Group’s annuity earnings base, a focus which he has communicated consistently to the market and internally. Jonathan has worked relentlessly over the period to bolster the Group’s marketing, distribution and asset gathering efforts, apply Group synergies where appropriate and reduce costs at both a Group and subsidiary level. The resulting higher level of assets under management coupled with enhanced operating efficiencies noticeably contributed to Group annuity earnings climbing over the period and reaching their record levels this year.

I would like to thank Jonathan for the contribution he has made to the Group during his tenure and for making my job as Chairman just that much easier over the period. The Board and staff would like to wish Jonathan success in his future endeavours, particularly those in which the Group will continue to have a shared interest.

To my fellow Directors I offer my thanks for your collective input into the decisions we have taken during the course of the past year. To our clients, we extend our appreciation for your ongoing trust and support. Finally, I would like to once again acknowledge the ongoing contribution of our dedicated employees, the management teams within each of our businesses and the Executives at the Holdings level. It is only as a result of your entrepreneurial efforts that our clients and shareholders continue to invest their trust in us.

Looking forward, we are confident that the bolstering of the Group’s annuity earnings base over the past number of years coupled with the decision to lower the Group’s earnings volatility by unbundling the surplus assets will provide shareholders with an enhanced earnings profile over time, evidenced by a healthy dividend stream.


Sean Melnick

Non-Executive Chairman

Date: 07 August 2017