Purple Group surprises shareholders

Purple Group’s trading statement on Thursday revealed that basic earnings per share for the year ended 31 August 2022 would decrease by between 10% and 20%.

The trading statement was released after the market closed on Thursday, and by Friday morning 10:00, the share price plummeted by 8%.

To understand why investors were unpleasantly surprised by what they saw, it is instructional to look at the company’s operations.

Mark Barnes founded Purple Group in 1998 as a technology group focused on the financial services industry.

It has many retail brands offering clients investing services, managed portfolios, and goal-based robo-advice. These brands include:

• EasyEquities, which aims to disrupt and remove the barriers to entry in local and international stock markets.
• EasyProperties, which simplifies investing in property through fractional property investments.
• GT247.com, which was South Africa’s first CFD provider and is one of the country’s leading trading platforms.
• EasyCrypto, which offers a platform to invest in and store crypto assets.
• RISE, a retirement fund administration and asset management business.
• Emperor Asset Management, which offers a range of portfolios to investors.

Between 2003 and 2018, Purple Group’s revenue had many ups and downs, resulting in a flat share price over this period.

However, since 2019, the company has shown a strong performance with average annual revenue growth of 44%.

The star performer in the Purple Group stable is EasyEquities, which is used by most investors in South Africa.

EasyEquities accounted for 84% of Purple group’s revenue for its 2021 financial year.

The platform has shown exponential growth in its investment accounts. It reached 738,000 accounts at the end of the 2021 financial year and 966,300 accounts for its 2022 interim results.

Thanks to EasyEquities’ exceptional performance, investors piled money into Purple Group as a local version of Robinhood.

The share price tracked the growth in EasyEquities, increasing 945% between May 2020 and January 2022.

However, Purple Group, which traded at a very high price-to-earnings ratio, was a victim of the downturn in the global economy.

The company’s share price fell by 50% this year, and its latest trading statement showed why.

Purple Group’s preliminary full-year results for the year ended 31 August 2022 revealed that things did not look good for its main revenue generator, EasyEquities.

It announced that EasyEquities is expected to generate profit before tax between R78.7 million and R81.9 million, a year-on-year decrease of between 16.5% and 19.8%.

It includes a R48.9 million upward fair value adjustment – an unrealised profit – on its investment in RISE.

The realised profits from operations are actually between R29.8 million and R33 million compared to 2021’s R46.6 million.

It translates to a decrease in realised profit from operations of between 29.2% and 36.1% for EasyEquities.

It is significant as EasyEquities has all the characteristics of a growth stock – it is technology orientated, saw incredible growth, and is in the fintech sector.

Because of EasyEquities’ growth, Purple Group traded at a high price-to-earnings (P/E) ratio, suggesting investors assumed continued high growth in its valuation.

Although Purple Group has not yet reported on EasyEquities’ revenue for the period, the low-profit result may suggest a slowdown in revenue growth.

Once the assumed growth is not met, the share price can plummet, as was seen with numerous tech stocks during this year.

Purple Group CEO Charles Savage congratulated his team on Twitter despite the poor results, saying they “achieved great results given the economic condition”.

He added that he is looking forward to unpacking the group’s results on Monday.

Shareholders hope Savage will ease concerns about the 67% and 77% lower headline earnings per share.

Purple Group will release more detailed results on Monday, 14 November.