The asset manager Sygnia is listing on the JSE on 14 October 2015. Here are some quick thoughts on the matter.

Who? That’s what I also wanted to know… While the company is well-known to institutional investors, the average person in the street has never heard of it. Sygnia wants to bring low-cost index-tracking funds and retirement products to the masses, which is commendable and well worth investigating.

In this space it has similar aspirations to 10x. Both companies are coincidentally headquartered in Green Point, Cape Town, about 1270 km away from the nexus of Sandton.

Why? To reach the masses, Sygnia needs to raise its profile and boost its brand, and listing on the JSE certainly helps with that. It also helps to make the founders even richer than they already are. At least the company is not in dire need of funding to pay off debt.

Why now? The fortunes of asset management firms are tied to the markets themselves. In good times they tend to outperform, and the past few years have been no exception. This extra zing makes any listing more palatable.

In addition, there is the “Anchor effect”. Fellow mid-size asset manager Anchor Capital also had a private placement in September 2014 for R2 per share, then listed at R3 per share and raced past R14 within a year.  You can therefore expect quite a number of joyriders to pitch up for this listing.

Risks? A prolonged downturn in the markets will drag Sygnia along with it. The company could also be shut out by bigger players offering similar products in the near future, but the slow adaptation of our financial industry and its love of fees make this less problematic than the former.

Only 5% of Sygnia’s assets under management (R7.3 billion on 30 June 2015) are currently of the cheap passive flavour and this is set to increase dramatically if their strategy pans out, putting pressure on future profit margins and demanding extra growth in AUM to make up for it. It’s like trying to turn Melissa’s into Shoprite within five years without scaring your investors.

The numbers: The bulky pre-listing statement (PLS) only arrived on 1 October, leaving little time for in-depth analysis before the listing. In addition, the numbers are hard to figure out due to the convoluted history of the company.

There are really two distinct questions:

1. Is Sygnia worth buying at all?
2. Is the price right?

The earnings for the financial year ended 30 September 2015 will be about R58 million [PLS, p. 14]. This number is the sum total of 6 months of reviewed (not audited) interim results, 4 months of Profit Estimate and 2 months of Profit Forecast, in decreasing order of certainty, so definitely not set in stone.

If we sample the equity halfway through the 2015 financial year we get a value of R144 million from the 31 March 2015 interim results [PLS, p. 169]. This suggests a very decent return on equity (ROE) of 40% over the past year.

Another positive is cash flow, with an estimated R66 million in the bank on 31 March 2015 [PLS, p. 169]. That’s more than a year’s worth of earnings and also R25 million more than on 30 September 2014 [PLS, p. 146].

Now for the not so good. It is tricky to obtain comparable results from before 2014 because the main subsidiaries of Sygnia only merged in that year. It is unfortunate that the common control accounting used to handle the merge was not applied retroactively all the way to 2012 and even 2010 for the PLS. As a proxy, it will have to do to look at the main subsidiary: Sygnia Investment Holdings No 2 (yes, 2).

While its revenue was R281 million in 2012, this dropped to R134 million in 2013 before recovering to R154 million in 2014 [PLS, p. 73]. The operating profit steadily decreased from R48 million to R27 million over the same period. The subsidiary even made a net loss in 2013, but a BEE transaction was largely to blame. This was during a bull market with steadily increasing assets under management, which is not fantastic.

The price: Some analysts like to focus on the listing price per share but it is basically irrelevant; what matters is the price of the company. Sygnia will have a market capitalisation (or price tag) of R1.15 billion based on the offer price of R8.40 per share and a total of 137 million shares upon listing [PLS front page]. Combined with last year’s earnings this gives a price/earnings (P/E) ratio of around 20, which is not cheap.

At least the founders of Sygnia will not have the mild dilemma of Anchor Capital where it undervalued itself upon listing and then went back to investors for more dough within a year (admittedly with great success).

Fun fact: Sygnia’s artwork is worth more than its data centre [PLS, p. 84]. Those who haven’t been to their lovely Green Point office (myself included) can get a sneak peek here. As far as the CEO is indulging in her passion, she is at least mindful of the fact that artwork depreciates far slower than computers on paper (up to 25 years versus three!). In reality it even appreciates if worthwhile.

Being a novice (and rather poor) art collector myself, this suggests a great scheme: get your company to buy the art you like, wait for it to depreciate and then buy it for yourself at a tidy discount. It seems that Magda Wierzycka has already figured this out if you look at the entry at the bottom of page 181 of the PLS!

Verdict: It’s hard to say. The numbers are simultaneously great and so-so, while the price makes one cough. There is a buzz around the listing as evidenced by packed roadshows. Some analysts are shouting Sygnia’s praises from the rooftops, while others are decidedly cold about it.

Worth a gamble?

At least re-establish contact with your arty friends in need of a patron, as there is bound to be a celebratory purchase or two.

Disclaimer: I am not a financial advisor and this post does not purport to be financial advice. I obviously do not own Sygnia shares (yet?).