Is Purple Group Overvalued?

In this post well explore the current valuation of Purple Group

Is Purple Group Limited overvalued? 

Lets take a closer look at this financial services company and dive into the numbers to see if the hype matches the reality. In this post, well explore the current valuation of Purple Group and ultimately decide if this stock is worth investing in. 

Parent company of Easy Equities, Purple Group, has seen there share price come under significant pressure in the past 12 months. This share a favourite of many a retail investor and based on what Ive seen on my Twitter timeline many investors have bought shares in the past year at much higher prices and are now seeing large unrealised losses in their investment portfolio.

I constantly see commentary on social media about the share price of Purple Group (JSE:PPE) but almost never see any commentary about the fundamentals of the company or a well thought out discussion of what the fair value of the share is. 

One of my favourite investing quotes from none other than the Oracle of Omaha himself (Warren Buffet) is price is what you pay, value is what we get. So, what do I think Purple Group is worth and how can we go about calculating this? It is important to note that any valuation is subjective and is only as good as the assumptions and data that has gone into the valuation. It is thus important to take all valuation estimates with a pinch of salt and not to be anchored to a fair value estimate.

So, lets take a look at Purple Group itself and the valuation multiples the company is currently trading at. Based on market data from Morningstar, Purple Group is currently trading at the following valuation multiples:

Price to Sales: 5.44

Price to Earnings: 33.89

Price to Free Cash Flow: 63.96

Price to Book: 3.18

EV / EBIT: 14.82

EV / EBITDA: 11.37

Looking at these metrics we can that the company is by no means cheap on an absolute basis, but investors are paying a hefty premium for anticipated future growth. But will the company be able to deliver that growth to justify the multiples? The company has managed to grow revenue from 2020 to 2022 from R162.67m to R274.00m. In the same period net income has growth from R14.44m to R43.97m. This equates to a revenue CAGR (compounded annually growth rate) of 18.98% and a net income CAGR of 44.94%.

So now that we see how Purple Group has performed and what valuation multiples the company is trading at lets find some competitors that can be used as a basis of comparison. 

The three companies I have chosen for my comparative valuation are as follows:

1. Robinhood (NASDAQ: HOOD): Robinhood is a US-based financial services company that offers commission-free trading for stocks, options, ETFs, and cryptocurrencies.
2. IG Group Holdings PLC (LSE: IGG): IG Group is a UK-based online trading and investment firm that provides access to a range of financial markets, including stocks, forex, commodities, and cryptocurrencies. It offers both leverage and non-leveraged trading options.
3. China Securities Co Ltd (SHA:601066): China Securities is a Chinese financial services company that provides brokerage, investment banking, and asset management services to individuals and institutions. It offers access to a range of financial market and products and is one of the largest securities companies in China. 

Let us now take a closer look at how the valuation multiples for these chosen companies compare. For the purpose of this valuation, I will be focusing on Price to Sales and Price to Earnings. I will also be cognisant of how the revenue and profit growth rates of these companies compare to Purple Group.

Comparable Company 1: Robinhood

Price to Sales: 5.62

Price to Earnings: N/A as company is not profitable 

EV / EBITDA: 90.87

Revenue CAGR (3-yr): 12.30%

Net Income CAGR (3-yr): N/A

Comparable Company 2: IG Group Holdings 

Price to Sales: 3.00

Price to Earnings: 7.76

EV / EBITDA: 3.97

Revenue CAGR (3-yr): 14.30%

Net Income CAGR (3-yr): 27.98%

Comparable Company 3: China Securities Co Ltd

Price to Sales: 7.02

Price to Earnings: 23.73

EV / EBITDA: N/A 

Revenue CAGR (3-yr): 29.67%

Net Income CAGR (3-yr): 23.11%

Valuation 1: Price to Sales

Based on the comparable companies we can derive to a range of price to sales value of 3.00 to 7.02 with an average of 5.21. I have assumed a reasonable price to sales ratio for Purple Group be 5.00 given that Purple Group operates in a less developed economy and thus should trade below the average however given their higher revenue growth over 2 out 3 peer companies I think a P/S of just below the peer group average is justifiable. Purple Group earned revenue of R274m for the most recent financial period and thus when using a price to sales of 5 this gives you a market cap of R1.37 billion and a share price of R1.08.

Valuation 2: Price to Earnings

Given that only two of the three companies in the peer group are profitable the range of PE ratios is 7.02 to 23.73 with an average of 15.375. Purple group has exhibited a significantly higher net income growth than peers and I believe therefore justifies a higher price to earning ratio than the average. For the purpose of this valuation, I have applied a PE ratio of 18 which would assume a PEG ratio of below 1 of the if the net income CAGR had too half. In the long term however when earnings growth begins to slow a think a PE of 10-15 would be more justifiable. Based on an assumed PE of 18 and EPS for the 2022 financial year of 3.71 cents I get to a share price of R0.67.

Average Value per Share: R0.875

Current Share Price: R1.22

Overvalued By: 28.27%

In light of full transparency, I am a shareholder of Purple Group. I have an average buy in price of R0.82 and took some profits at the end of last year when I thought the share was overvalued. I believe in the long-term vision of the company and the ability of management to execute on this through key partnerships, introducing new products and expanding to new markets. As always this is not financial advice and is purely my opinion and for entertainment / informational purposes.