Purple Group, which owns stockbroking success story EasyEquities (EE), has swung back into the red (a R15.6m loss) after ploughing money over the first half to end-February into growth initiatives. It’s also looking to raise R150m from the market, which has distinctly cooled towards the share. The FM spoke to CEO Charles Savage.
Is this a positive growth story or a bad earnings result?
We’re still growing at a very healthy rate in the context of the economy. You’ve got to look at the other fintechs and the financial institutions we compete against; for the most part they are seeing a reduction in assets and customers, and we’re not — our customers and assets are up.
We’ve made a decision to invest in growth even though the market cycle is against growth. When’s the cycle going to turn? Who knows? But we’re not going to stop investing just because the market is in a poor cycle.
We see the future of digital asset management and investment platforms being 20, 30, 40 times the size they are today, and we’re not going to be dissuaded from investing in that belief just because the cycle is against us.
Why are you so convinced growth is there for EasyEquities?
Our central belief is that everything will run on digital rails. Yet the investment world still looks very similar to what it did 10 or even 20 years ago. And just rewind eight years ago to when we started EE; everyone said it wouldn’t work, and how does that look now?
The year we started EE we lost R19m on a R90m income statement, so we bet more than 20% of our future on it and in the first year it produced R500,000 in revenue. Today we’re talking about 831,082 active customers and R42.6bn in assets and everyone says: “Oh, we believed it could work but now we don’t believe it can work.”
In a global context, we’re taking relatively small bets, but relative to our income statement they’re quite big bets, so they have a big impact on our income statement. One million customers is not the goal — it’s multiples of that. To get to our goals we can’t rest on our laurels and deliver what some shareholders want — that is, profits and dividends at the cost of future growth.
Do shareholders still back you?
In terms of value of shares held, there is 100% support for investing in the future. If you look at the retail crowd, I think they are polarised — those who support us and those who are sceptical of this digital future. There’s lots of good news in the context of the current environment; the bad news is the current environment. You can’t avoid the cyclical nature of markets. The only thing we can do to defend ourselves is to ensure our revenue is not just transactional, that it also has annuity streams to it.
How do you do that? Is that the institutional money you’re after? And how does that create annuity revenue?
In the case of institutional money, it’s chasing pension funds that serve large corporations. In the institutional space, you will also manage the money. So you create annuity streams by managing it so that it’s safe, that custody is secure, that the asset managers are doing what they say they do.
For example, we’ve now got Distell’s admin and assets which for 40 years were handled by Momentum. They’ve come over to us because of EasyEquities — they want their staff to be able to see transparency. They can see the money they have via their pension funds but they can invest in a bunch of other stuff too. Ford is another one, and we now have 8,000 clients at a cost of acquisition of nought.
Not everyone has to believe what we say, but how many banks have Easy inside now? Capitec, Discovery Bank, Telkom, Satrix, Bidvest, MTN … this desire by other institutions to have Easy inside is growing in momentum. And in doing that we are opening up channels of distribution that make it easier for us to access customers in the future.
In total, through all these channels, we have access to about 60% of South Africans. Are we going to get there fast? No, it will be considered and slow, but there’s lots of blue sky. For South African investors, I think this creates a ton of anxiety: investing in growth at the expense of profits today in the hope of super-profits tomorrow.
You speak extensively in your results about cost of service, which is R75.83 per customer. Why is that important?
First, existing customers become more profitable year on year if your cost to serve goes down. Second, if it costs you less to serve, your customers become profitable faster. So it enables our marketing machine to recycle their capital faster, which means we can compete much more effectively. Third, in order for us to launch new products and services, it must cost us less than anyone else.
If you’re at the lowest cost to serve and you have this entrenched distribution base — that is, 60% of South Africans in our sights — you’ve got an extraordinarily low cost to launch a product. That means we don’t have to invest too heavily. Our spend of R30m in the past six months was to deliver new jurisdictions in the Philippines and Southeast Asia, launch EasyCredit and EasyProtect, and implement initiatives that are driving down our cost base.
For cars to drive faster you need to spend money on research and development so that they drive faster but also brake faster. We need to invest so we’re driving the fastest, safest car in the land — and we’re not there yet.
As for the capital raise, why do you need R150m?
Three things: the first is that we think we can grow our South African business faster if we apply more capital to it, so 30% of the money is for that.
Thirty percent will be applied to new products and services that are specifically aimed at increasing revenue per user or reducing cost. Over the next three years we will deliver 10 new products that will help you to grow and protect your wealth. We’ve presented these products to our shareholders — Sanlam at 30% and Purple Group at 70% — and they’ve said: go ahead and build them.
The last 30% is for international expansion: to scale the Southeast Asian operations and to grow into the region. Our experience tells us this: one successful partnership leads to many more. We’ve now got GCash (in the Philippines). This is a company that has, since 2018, scaled to 70-million users (of 120-million people in the Philippines). The success of that — and I’m convinced it will be successful — will give us more opportunities in the region.
And then 10% is opportunistic. One of the things I think may emerge is that if this recessionary environment stays around longer, other fintechs are going to go under. Companies that have built really good products, but are just in the wrong cycle, we will look to buy strategically. The interesting thing is that more businesses are born in a recession than in a bull market. The reason for that is big businesses retrench heavily and those people typically end up in start-ups again, so the start-up cycle gets refuelled through a recession.
How would you price this rights offer? At an aggressive discount? Your shares have already fallen significantly over the past year …
For us, the opportunity must appeal most to existing shareholders, so it must be priced to entice them. So, most likely at a discount. The existing shareholders are the ones who have supported us for the longest period and they deserve the right to invest at a lower cost so they get a bigger return. Sanlam will put their 30%, Purple has to go and raise 70%.
Are you resigned to the negative perceptions of this?
If you’re going to let your share price dictate your strategy, you shouldn’t be listed. You have to filter out the noise. It’s very hard but our vision here is long term.
Did you consider using debt to grow this business?
Yes. There were offers, but in this environment where you have interest rates where they are, to raise debt would just put the business under more pressure. Putting capital on balance sheet allows executives to breathe much better, and breathing better means you make better decisions.
Would you want Sanlam to roll up its stake from EasyEquities to Purple Group through this rights offer?
Not as a result of this. I’m hoping they roll up at some point in the future. I think it’s a racing certainty that they will, but what’s the rush?
* The writer owns shares in Purple Group