Purple Group: Buy/Hold/Sell?

Analysis of Purple Group after recent earnings release.

About

Purple Group Ltd is a financial services company listed on the Financials sector of the JSE. It has subsidiaries that operate in trading, investing and asset management. Companies within Purple Group include Easy Equities, Easy Properties, Easy Crypto, Emperor, Rise and GT247.com.

EasyEquities
EasyEquities was built with the purpose to democratise investing by making it easy and educational for retailers to personally invest their money. Previously, investing was seen as an elite activity, and was, to a great extent, an intimidating (and often unaffordable) option for everyone. Industry trends and global best practices have seen the move towards the global democratisation of financial services through digitisation. EasyEquities has partnered with many industry leaders, including Satrix, Capitec Bank, Discovery Bank, Telkom, and Bidvest Bank.

EasyProperties
Launched in July 2020, EasyProperties, a 51/49 joint venture between EasyEquities and Narrative, a residential property development company. EasyProperties serves as a platform to crowd fund access to large scale residential and commercial property developments.

EasyCrypto
EasyCrypto was built to deliver the safest, easiest, and most trusted platform to invest in and store all ones crypto assets. Built on blockchain rails, the platform enables the digitisation of any asset class, giving the business the capability to capitalise on this booming industry into the future.

Rise
Rise is a joint venture (50/50) with NBC Fund Administration Services, which brings with them the retirement industry experience. Rise aims to have a client engagement approach that makes saving for retirement an easy, rewarding, and educational client activity. 

GT247.com
GT247 is the trading platform of the purple group. It provides its users with access to the trading platform, tools, and research. They aim to deliver these services via fast, secure, and low-cost access to local and global markets. GT247.com pioneered Spread and CFD trading in South Africa over 20 years ago and continues to lead the way in the South African market, having won SAs Top Online stockbroker twice in the last five years.

Emperor Asset management
Emperor Asset Management offers products that are uniquely constructed to meet its clients individual risk profiles, investment interests, objectives, preferences, and time horizons. The Emperor IP Balanced Fund was awarded the 2021 Raging Bull Certificate for the Best South African Multi-Asset High Equity Fund.

Basic Financials

Consolidated results for the six months ended 28 February 2022:

Easy Equities is the driving force for Purple Group, accounting for roughly 70% of the groups revenue. 
Group revenue increased by 36.0% to R137 million.
Group EPS increased by 91.8% to 1.63 cents per share
Low Debt: Equity
Sufficient reserves to cover liabilities and/or fund future projects.

Technical Analysis:

Current trend: The share price is currently bouncing between short-term support and resistance levels. The best entry price is around the 240c support level, or around the 150c level should we fail to hold support.

RSI: The RSI is trending downward, currently ranging around the mid 50 levels. These levels do not indicate whether we are bullish or bearish in the immediate short-term. We will have to wait for clearer indications, but my best guess is that the price continues to trend downwards.

Analyst viewpoint:

Purple Group is one of SAs darling small-cap stocks. They are truly making a significant social impact which enables the average Joes to invest and educate themselves on all things finance. 
EasyEquities has been on a tear for the better part of two years. The tailwind was Covid-19, where an influx of retail investors ploughed into the market. The platform boasts over 1.2 million clients and is growing by roughly 60,000 customers per month.

The Purple group has an excellent management team. Charles Savage (CEO and executive director), Gary van Dyk (CFO and executive director), and the rest of the team have steered the ship better than anyone could have anticipated.

Everything looks good. Its time to invest, right? Right? Although I wholeheartedly support the companys mission and the direction in which things are headed, I do have a few concerns regarding the current valuation.

Concerns:

P/E: 
Purple Group currently trades at a P/E of 58.8. If we consider the industry P/E of 11.5, this valuation is worrisome. It means that the market expects the earnings of the company to exponentially increase for many years to come, before becoming a mature company with slower and steadier growth. These growth expectations are already priced into the market price, which means the only way it keeps increasing is by Purple Group either delivering on expectations (which in itself will be very hard to do) or exceeding expectations (which at a 58 P/E is almost impossible). From the P/E metric alone, I will not invest in Purple Group as it stands today.

Total addressable market:
The market is betting big on a very rosy future. But due to covid19, many individuals have already joined the space. Of course, many can still join, but there is a cap on how many people actually want to manage their own money.

Overseas expansion is of course another option. How much international market share can Purple Group gain? Scaling the EasyEquities platform to other jurisdictions poses an opportunity however, the online brokerage industry is a very competitive landscape.

Revenue model:

Purple Groups platforms arent making money when people join, they only make money when people trade. Basically, investors must keep buying and selling for the company to generate commissions. Long-term holders dont really generate income, as they buy once and rarely engage with their investments thereafter. 

Covid presented a massive opportunity in two regards: 1. People traded a lot, which boosted commission income significantly. 2. It was very easy to make money after markets worldwide saw a massive correction to the downside. Basically, people traded frequently and almost everyone made money. Post covid, things are kind of back to normal. Fewer people trade and fewer people are making money - and those who do make money arent generating the kind of returns that they used to in the post covid dump.

Partnerships:
Current partnerships include Satrix, Capitec Bank, Discovery Bank, Telkom and Bidvest Bank. Via these platforms, individuals can be linked to Purple Groups various platforms. Having these kinds of partnerships is extremely bullish. But there is a catch: Maybe Im playing devils advocate, but trading/investing is not something that everyday people really know about or care about. Of course, for us as an investment community, its second nature. But if I think about my friends, acquaintances, and extended family, very few of them understand shares, crypto and general investments. 

This, in turn, leads to another opportunity in the form of education (Aka FinMeUp). But its not going to be easy. Even if the company makes progress, it will have to be substantial for an extended period of time before earnings will catch up to what the market currently values the firm at.

Final thoughts:
 

Purple Group is an amazing company, but from an investors point of view, I believe the company is overvalued. Firstly, it has to generate massive revenues to justify its current share price. Secondly, I believe the pace of growth is unsustainable. Its not impossible for the share price to keep climbing, its just unlikely. 

Of course, they can surprise us.
If management executes well and EasyEquities become successful in other countries and other products, it can grow exponentially. 
So, for now, its a wait and see for us.

We are waiting for:
Share price action
International expansion updates
New products expansion
Userbase Expansion
Partnership expansion

We will update you when and if we add Purple Group to the FinMeUp JSE Portfolio, for now, its on our watchlist.

Disclaimer: This is not financial advice. Always do your own due diligence when managing finances. This is for educational, informational and entertainment purposes only.
 

Written by Paul Roux, Content Writer at FinMeUp