Investors dumping Purple Group shares

Purple Group’s share price has plummeted by 70% over the past fifteen months, and there does not seem to be an end in sight as investors continue to dump the shares.

During the lockdown, Purple Group was a darling on the JSE, with many investors pumping money into the stock on the back of EasyEquities’ success.

EasyEquities was created in 2014, making it easy to invest in equities and giving many South Africans access to the financial markets. 

EasyEquities’ biggest selling point is its patented fractional share rights (FSR) model, which allows investors to buy and sell small portions of equities traded on stock exchanges.

FSR means everyone can invest cheaply and easily, allowing a R100 investor to create the same portfolio as a R1 million investor.

EasyEquities founder and Purple Group CEO Charles Savage said fractional share rights helped them to become ten times larger than the second biggest stockbroker in South Africa.

“We have more than tripled the size of the retail investors base in South Africa. Without FSRs, this could never have happened,” he said.

EasyEquities also partnered with prominent companies, including Sanlam, Satrix, Capitec, Discovery Bank, Telkom, and Bidvest, to grow its customer base.

The company showed exceptional growth and increased its customer base from 150,000 in H1 2020 to 671,000 in H1 2022. Half-yearly revenue grew from R29 million to R109 million.

Net income was also on a great trajectory. It swung from a half-yearly loss of R3.4 million before the lockdown to a R36 million profit in H2 2021.

It was easy to see why Purple Group was a popular stock among South African investors who liked the fintech industry.

However, EasyEquities’ financial performance over the past eighteen months was disappointing. Costs escalated, and earnings growth reversed.

Over the past year, operating costs increased from R69 million to R124 million. In turn, net income declined from a R18 million profit to a R11 million loss.

Put another way, the revenue per active account decreased by 6% over the past twelve months while the cost per active account grew by 47%.

It is currently unclear how EasyEquities plans to increase revenue per active account or cut costs to bolster its finances.

It substantiates the concern expressed by 36ONE Asset Management CEO Cy Jacobs that the cost of administration of so many clients is not trivial.

The chart below shows the revenue and operating cost per EasyEquities account.

Capital raise and share price decline

Purple Group has announced its plans to raise R150 million to grow EasyEquities and the products it offers clients.

R105 will be raised via a rights offer to its existing Purple Group shareholders, while Sanlam will subscribe for the remaining R45 million.

Purple Group will issue 129.63 million new shares – 10.20567 rights per 100 Purple Group shares.

The rights offer shares will be issued for 81 cents per share, and rights can be exercised from 24 May to 6 June 2023.

Purple Group said this price is at a 32% discount to the volume weighted-average share price of the past 7 days.

Purple Group has agreed with an underwriter to acquire up to R76.52 million of the rights offer shares if not all rights are exercised by shareholders.

Rights not exercised by shareholders will be available to other shareholders who wish to apply for more rights than were issued to them.

Daily Investor calculated the ex-rights price on the day that the announcement was made, which would leave an investor in a neutral position, as R1.10.

This means that, at R1.10 per share after the rights offer, Purple Group shareholders who exercise their rights would not have made any gain or loss.

This is based on the share price on the day the rights offer was first announced.

Many investors preferred to dump their Purple Group shares ahead of the rights offer, which started on Wednesday.

The Purple Group share price has declined by 19% since the rights offer was announced in April, which has continued the downward trend since January 2022.

Daily Investor asked Purple Group what it thinks is behind the share price decline, but the company did not respond.

The graph below shows the Purple Group share price over the last year.