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Having picked Purple Capital [JSE:PPE] as one of my shares for the Finweek stock-picking challenge, I was pleasantly surprised with the way it’s run up over first quarter 2011. Kicking off the year at 26c and rising to 45c/share, it’s one of the few green counters in my portfolio. While Purple is making all the right noises about growth prospects and has managed to attract a new strategic investor and while it should be a natural beneficiary of an improved economic outlook, its interim numbers to 28 February 2011 are a bit of a mixed bag.
On paper there’s a profit, but that’s helped by a generous fair value adjustment rather than coming through on its revenue or cash flow lines. Revenue is off from R32m to R23m and the company went from being cash flow positive at an operating level last year to a negative number. Overall cash in the bank is up, but that courtesy of fund-raising rather than operational performance.
A key line is the performance by derivative trading subsidiary Global Trader. Earnings fell from R8m in the previous year to R1,8m over the corresponding period. Trading revenue was off R9m to R19m and the group has had to spend a lot to drum up new business. Encouragingly, assets under management are up 16% – but work still needs to be done to grow that.
The recent bouts of stockmarket volatility are probably good for trading volumes, but remember Purple still needs to make some significant investments over the coming year. Those include some upgrades to its Powerbet/Voltbet offering to accommodate both its existing offering as well as moves into Africa. Whether it’s its sports betting, derivatives trading or financial planning and asset management sectors, Purple’s businesses operate in industries with relatively high acquisition costs. Once there’s scale and volumes generated by clients then it can throw off cash.
The trade-off for Purple shareholders is that for now it’s a case of investing to win those clients and that’s not going to come easy. We call it a hold at 40c.
Ashton holds shares in Purple Capital
On paper there’s a profit, but that’s helped by a generous fair value adjustment rather than coming through on its revenue or cash flow lines. Revenue is off from R32m to R23m and the company went from being cash flow positive at an operating level last year to a negative number. Overall cash in the bank is up, but that courtesy of fund-raising rather than operational performance.
A key line is the performance by derivative trading subsidiary Global Trader. Earnings fell from R8m in the previous year to R1,8m over the corresponding period. Trading revenue was off R9m to R19m and the group has had to spend a lot to drum up new business. Encouragingly, assets under management are up 16% – but work still needs to be done to grow that.
The recent bouts of stockmarket volatility are probably good for trading volumes, but remember Purple still needs to make some significant investments over the coming year. Those include some upgrades to its Powerbet/Voltbet offering to accommodate both its existing offering as well as moves into Africa. Whether it’s its sports betting, derivatives trading or financial planning and asset management sectors, Purple’s businesses operate in industries with relatively high acquisition costs. Once there’s scale and volumes generated by clients then it can throw off cash.
The trade-off for Purple shareholders is that for now it’s a case of investing to win those clients and that’s not going to come easy. We call it a hold at 40c.
Ashton holds shares in Purple Capital
