Sygnia Holdings: Huntress or pray?

In the July Financial Mail Investors Monthly issue, they published an edited version of my note on the financial services counter Sygnia Holdings. The entire article is available exclusively here.

The three-page FM article, though accurate, left out a significant quantity of the nuance and guts of my narrative which I now exclusively publish for FinMeUp.

Share code: SYG

Share price: 1800c

Market cap: R2,710m

52-wk high/low: 1987c / 1450c

Prospects

Sygnia Holdings is a company not often in the media for its own achievements rather the personal utterances of its co-founder and CEO. That changed in January as a revolving door of management departures from Sygnia drew the headlines. Little has been disclosed on the revolving door at Sygnia nor was there an opportunity to question management at interim results as the presentation was suddenly cancelled. Results were sound for the period with HEPS flat at 91.8 cps and another fat dividend paid of 87 cps.

The editor of the Financial Mail Investors Monthly supplement knowing my close coverage of Sygnia asked me to write a company review for the July edition. That edited version is now in the public domain, so today I publish my full article. The domestic asset management industry is seeing no growth and in my mind sector consolidation needs to occur. In this article I speculate could Sygnia be huntress or more likely prey.

Chart

Share Performance

7-day chg +1.8%

30-day chg 0.0%

90-day chg 0.0%

6 months chg -3.9%

1-year chg -2.1%

Year to date chg -3.9%

For this week’s issue of the Financial Mail supplement Investors Monthly, the editor asked me in early-July to write a company review on enigmatic mid-cap asset manager Sygnia Holdings. It made the cover. Sygnia is often in the media for the utterances of its opinionated co-founder Magda Wierzycka rather than its corporate performance.

Latterly, it has been the company itself in media headlines, as a series of management departures post the annual general meeting at the end of January 2023 has drawn column inches and speculation.

With Sygnia releasing interim results to March on SENS on June 5th and cancelling at short notice the results webinar, the intrigue as to “what is going on at Sygnia” heightened. I have covered Sygnia as part of my mid-cap universe since the company listed on the JSE on October 14th, 2015. The listing saw the company offer 31,2 million shares or 22.8% of the issued capital at 840 cents per share. The offer was twenty times oversubscribed and on its first day of listing Sygnia closed at 1356 cents a premium of 61%. Sygnia share price peaked at near 2200 cents in April 2016 and then drifted for years. For the last two years the share has traded in a narrow band between 1600 cents and 1800 cents. I speculate in my article what the direction for Sygnia could be. As this note hits your e-mail, the FM Investors Monthly copy will be electronically available online with the hard copy also on the shelves. I have not seen the final FM published article, though given its original length, it was surely edited. I provide in this morning note the original copy of my Sygnia company review.

JSE-listed asset manager Sygnia Holdings, which is 67% owned by co-founder Magda Wierzycka, is often in the media for reasons unrelated to the actuality of its investment management business. Over the past few months there has been a revolving door of executives leaving Sygnia that has garnered media interest. With no love lost between the asset management sector and Sygnia, the machination’s swirling around the company since the start of 2023 have drawn some sensationalist headlines. Rivals in the asset management sector have revelled in the tittle tattle as to what is happening at Sygnia? Few have considered the real question.

Despite all the media headlines this year on Sygnia few have asked the real question, why is Magda back?

If Magda is back, why is she back and what could be her plans? After all it will be her decision, as major shareholder, which will determine the future direction or visibility of Sygnia. Wierzycka is seen as a polarizing figure with my IM feature in April 2021 on Sygnia commenting that Wierzycka was a Marmite figure and “you either like Marmite or you hate it”. 

Wierzycka flits between homes in the United Kingdom and her office in Mayfair in London and her Cape Town home and head office. Her stance on the mismanagement of the South African economy, its corruption and ongoing woes are well documented. Her civil activist voice is loud sometimes too loud for some. Could this be part of the reason for her sudden Norma Desmond style return to Sygnia?

Having covered Sygnia since its October 2015 IPO and worked within the financial services sector for thirty years, I ponder and speculate in this special feature as to what on earth could be going on at Sygnia? For years Sygnia made few business headlines with the main copy being the personal utterances from Wierzycka, who is known for her forthright views. In late-January 2023 the narrative changed and Sygnia became the byline rather than the actions of the co-founder and CEO. Over the past months a steady stream of senior management has departed Sygnia drawing column inches and even more conjecture.

Despite the revolving door of management, the core asset management and marketing team is unshaken...

Fewer column inches were devoted to the calibre of inbound executives who I see as adding significant gravitas to the overall corporate structure. Nor has the market recognised that the core Sygnia investment management, client services and marketing team - the bedrock of any asset manager - have been unshakable for years.

It is this unchanged core that has guided Sygnia to current assets under management (AUM) of R312,7 billion despite the management shuffling reported by the media. Starting the revolving door was CFO Murad Sirkot who left on the day of the Sygnia Annual General Meeting on January 31st, 2023. Sirkot had been at Sygnia for four years after being recruited from Investec. I believe he is now back in a financial role at Ninety One.

On February 3rd, CEO David Hufton, announced his departure as CEO of Sygnia. Hufton has an illustrious thirty-year career in asset management having been recruited to become the deputy CEO of Sygnia in July 2016 after twenty-five years at sector rival Alexander Forbes.

In April 2020, he became Sygnia joint CEO along Wierzycka. This made him responsible for Sygnia's South African operations, while Wierzycka was responsible for the company's international interests, including those in the UK.

He rose to the rank of Sygnia CEO when Wierzycka stepped down from the joint-CEO role in March 2021. Upon Hufton’s departure announcement in February, Wierzycka resumed her prior role as CEO. Other management headline grabbers saw former Denel CFO Carmen Le Grange appointed as Sygnia CFO in February to replace Sirkot, only to retract her appointment in late-March.

In April Duane Naicker, who had a seven-year stint at Sygnia and was head of Sygnia’s umbrella retirement fund (SURF) departed. He re-joined Alexander Forbes as Head of Retirement Solutions having jumped ship years ago to join the then upstart Sygnia. There is no love lost between the two multi-managers with Sygnia forever nipping at the heels of the larger, but less innovative and lumbering Alexander Forbes. Anyone who knows Wierzycka’s history from her time at Coronation knows she is no shrinking violet nor one to be in second place.

Alexander Forbes's market value of R6,8 billion is 172% greater than Sygnia’s R2,5 billion, but Forbes's AUM of R454 billion is only 43% higher than Sygnia's R317 billion. Forbes has a materially larger revenue of R3,5 billion versus R808 million for Sygnia but Forbes also has a vastly larger, - some would say bloated - cost base, with its profit before tax (PBT) at R790 million on its larger revenue whereas Sygnia’s PBT is R402 million on a much leaner operating base. Alexander Forbes's share price has risen 20% since mid-March to 540 cents with its year-end results also recently published. Something to deliberate on as I discuss sector consolidation later in this note.

Wierzycka herself also ‘left the building’. In a grand announcement in March 2021, she stepped back from her role as co-CEO to become a humble non-executive director anointing Hufton as her heir. This long-standing Sygnia analyst welcomed her decision to step back, but I did ponder “How long would that last”? The answer was not long! After two months in the wilderness, she promptly returned as executive chair. She herself commented “I ruffled feathers” after her unexpected return. For the sake of context, Wierzycka has two children, both overseas and both recent graduates. Sygnia I would argue is her third child and cutting that umbilical cord by stepping down as co-founder and the powerful figurehead of the business was never going to be easy.

Sygnia is Wierzycka’s third child, cutting ties would always be difficult...

With much of her vast self-made fortune tied to Sygnia, handing over one’s child to a custodian could not have been easy. One would always wonder from afar if the child was being raised and steered in the right direction or being led astray. I use the analogy that Wierzycka is a domineering but protective mother, who saw her child not living up to its potential. She thus returned to tutor it again as executive chair in June 2021. She could just not stay away; it’s just not in her DNA.

Sygnia’s underlying success has always been intertwined with its high-profile co-founder, one-time Chair and often CEO.

I recognize that the headlines on Sygnia in the past months have raised many investor and shareholder eyebrows especially as little has publicly emerged as to what the rationale could be. The extremely poor optics of a revolving door of senior management exiting leading Wierzycka to gallop back and take the reins, often perplexes the market, especially as Sygnia is opaque with its own corporate communication. The optics swirling around the company bear little resemblance to the reality of its strong underlying operational performance.

Former Sygnia exec Niki Giles returns to the company as CFO and brings back a wealth of experience...

With the media’s focus on the revolving exit door, little was commented on the coup of luring one-time Sygnia lifer Niki Giles from Prescient back to the company. Giles joined Sygnia in 2006 and had positions as financial director and was COO from 2009 to 2018. From 2019 Giles joined Prescient Fund Services and now brings back a wealth of knowledge, not just on Sygnia as one of the original core lieutenants, but also one with governance, risk, and compliance experience. In my former life as a corporate broker, I often had to soothe institutional nerves when JSE SENS announcements detailing departures of senior executives or their sudden share sales, rattled investor, and share sentiment.

A JSE SENS is often bland, it cannot articulate the occasionally highly personal nature and decisions that relate to the corporate announcement. I recall one SENS on a sudden senior executive’s exit was due to a tragic family issue. I was aware of the departure rationale, but the market just saw a resignation notification. Another SENS saw an executive sell a vast tract of shares which raised gasps. I was cognisant the seller was going through a messy divorce and needed cash, the market wasn’t. The occasional SENS can lead the media into a sensationalist byline. It will not be aware that a genuine empathetic story relating to a personal issue is the reality rather than any Machiavellian plot.

The optics of the revolving door of management at Sygnia may appear poor, but I have no qualms or concerns it’s just noise...

Much the same is true given Sygnia’s recent poor optics. Events have just hit in a concentrated timeline. I have absolutely no qualms or concerns over the revolving door, it’s simply noise. So, what could be the next chapter for Sygnia with its co-founder back at the helm? Some guidance can be gained from the interim results as to where the permutations may lie as well as Wierzycka’s own recent media utterances.

There is minimal growth in the institutional asset management space, assets are like musical chairs, could this lead to sector consolidation...

Institutional AUM in South Africa has been a tale of musical chairs with growth attained through the loss of a mandate from a rival asset manager or amalgamations. The domestic landscape for retirement funds is flatlining due to non-existent economic or employment growth. Given the stale environment, I’d wager that sector consolidation must be under serious consideration.

Should consolidation occur Sygnia might be huntress but is more likely pray...

If consolidation in the domestic asset management sector were to occur, Sygnia might

be huntress but is more likely pray. The only key area of sector growth has been in the retail sector amongst low-cost offerings in the ETF or index tracking fund sector. Sygnia is that dynamic, low-cost asset manager but to my mind, it needs scale and better distribution to go to the next level. Sygnia has shown itself adept at growing an asset management business to scale, launching innovative products and generating strong returns. Sygnia’s platform, I speculate, would be of interest to a consolidator looking to bring in fresh innovation and AUM to bolster its own asset management or investment business.

Could Wierzycka loosen the apron strings of control over her third child...

I cannot see Wierzycka ever fully forsaking her child, but the apron strings could be loosened. Any self-made billionaire entrepreneur must fret over their fortune given the existential problems currently plaguing South Africa. With a stake currently valued at R1,6 billion, Wierzycka commented in a media article “virtually all my wealth is tied to Sygnia”. What a quandary. Power and control over preserving a dynastic fortune.

Power and glory or protecting your vast self-made fortune...

Much of Wierzycka fortune is linked to an ever-weakening rand, a decomposing economy and ever tighter exchange controls throttling the fat dividends Sygnia pays to its majority shareholder. Having all her eggs in one basket must weigh heavily on Wierzycka. Sygnia listed in October 2015 at 840 cents and peaked at near 2200 cents. It has since drifted. Sygnia has performed admirably since IPO and paid 827 cents per share in total dividends since its listing, and much to its co-founder and majority shareholder. Wierzycka is 54 years old in October. It is unlikely, I believe, she would ever willingly relinquish the role of CEO, but at some stage she will have to decide where she and her fortune wants to be, the UK or South Africa.

The devil wears Prada...but what would she do...

If I were in her Prada shoes would l really want the aggravation and stress of devoting years of my life to agglomerating a major rival asset or multi manager. Or would I prefer to reduce my controlling stake and take some cash off the table, remove myself from a toxic domain, and carry on with my life and perhaps a new endeavour? I know that’s what I would do. I cannot speak for Wierzycka.

Similarly, given the irreverent press coverage and low interest in the listed company, aside from the dwindling status of the JSE, I ponder why Sygnia even remains a listed entity. The listed asset management sector has had a mixed year Sygnia’s share price as I write this feature is trading at 1650 cents. Year to date the stock is down 7.0% versus +1.7% for Coronation, -0.3% for Quilter, +5,2% for Ninety One and

-1.9% Alexander Forbes.

Recent Sygnia interim results to March saw the share priced unmoved despite credible

results and another fat dividend. H1 2023 saw AUM rise 5.9% from the September 2022 disclosure to R312,7 billion leading to a 2.8% rise in revenue to R408,6 million. Operating profit declined 6.6% to R173,6 million with profit before tax down 2,2% to R191.6 million. The institutional market in the six months was tough with no natural industry growth, something usually driven by employment creation. 

The key driver to results was revenue growth from investment administration which rose +12.4% to R64 million and treasury ahead +19.8% to R76,6 million. The core investment management division saw a 7.0% decline in revenue to R232,2 million. I understand that 50% of Sygnia’s book is now offshore and thus an inferred rand hedge. Expenses in the six months rose 11.1% to R235 million though I understand a once-off item hit this line which should normalise at YE2023.

Despite solid growth from underlying divisions, the expense cost was the main determinant to HEPS being a touch lower at 91.8 cents per share with dividend increasing +8.8% to 87 cents per share. Growth for Sygnia can originate from existing businesses and it is these very drivers, I speculate, that could also draw interest from suitors.

Within Sygnia are the building blocks for further growth in the business or, I venture, the plug-and-play offering for a sector consolidator.

Sygnia is well-known for its low-cost offering. Its range of index tracking funds and EFT’s have grown its AUM and that suite of funds has ample runway for growth especially in an investment environment where fees are paramount to trustees. 

Further low hanging fruit can be harvested from the retail sector. In Sygnia’s H1 2023 results, the retail segment saw a +13.8% growth in assets to R59,4 billion. Unlike some rival asset managers, Sygnia is growing overall AUM and in its latest results saw growth of 5,9% versus 4% for Forbes. With a past of launching dynamic retail funds such as the 4th Industrial Revolution and OSI Fund, Sygnia has had a quiet patch with few new products launched. Sygnia’s innovation and funds should be the ones grabbing headlines, rather than office water cooler talk. 

Sygnia’s marketing budget towards the retail segment is minute, yet its growth has been robust. The division in my view needs a larger marketing budget, a wider distribution model and even an alliance to fully exploit its offering. Other company growth platforms are The Sygnia Umbrella Retirement Fund (SURF) which from a token base has grown to R13,2 billion (+26.9%) with a further R2,5 billion awaiting transfer. SURF is now the sixth largest commercial umbrella fund in South Africa.

I am aware of how accretive good marketing and connections with independent financial advisors can grow AUM. Unlisted sector rival Anchor Group has grown from R500 million in assets to R103 billion in a decade through a mix of performance and aggressive marketing.

However, the nature of asset management is fast evolving. A US CNBC segment recently commented that the rise of artificial intelligence (AI) would hit the asset management sector with it stated, “one in six US asset managers having to close or be consolidated by 2027 due to the rise in AI”.

AI-driven predictive maintenance is revolutionising asset management in supply chain operations by minimising downtime, reducing costs, and improving overall efficiency especially in client interface. Sygnia has an offering in that arena via its roboadvisor. Within Sygnia are the building blocks for further growth in the business or, I venture, the plug-and-play offering for a sector consolidator.

I wrote another IM article on Sygnia in May 2022 at 1585 cents and commented that Sygnia was “a taste that could grow on you” and set a target price of 1800 cents. In the intervening period, Sygnia attained and exceeded my target peaking in late-2022 at 1987 cents and additionally paying out 297 cents in dividends in the period.

The past twelve months have been difficult for domestic asset managers given stagnant economic growth, a volatile rand and a lackluster JSE returns. Year to date gains for the ALSI are modest, not a great environment for asset management returns and performance fees.

At 1650 cents and a market value of R2,5 billion, Sygnia is trading at a trailing valuation of 8.6x and a dividend yield of 12,7%. Should my assumptions on sector consolidation play out what speculative valuation for Sygnia?

The stock has been in a narrow trading band since 2021. The 52-week high is 1987 cents and average premiums paid to acquire companies are 20% plus. That would suggest a starting buy-out price for Sygnia of 2384 cents. Would that price and market value of R3,6 billion be enough to tempt Wierzycka to sell part or all her controlling stake in her child?

I believe Sygnia is better placed as an unlisted business and smart growth can only be attained from sector consolidation. Wierzycka alone has the absolute power to decide the company’s and her fortune's destiny.

My overall view is that Sygnia would be better placed as an unlisted business away from the public eye. Smart sector growth in South Africa can only be attained from consolidation and Sygnia is one of the few desirable shiny baubles of scale that could be available, at the right price, as a lone individual has the absolute power to decide its destiny as well as her own. For this reason, I must place a special situation buy on Sygnia. Target 2200 cents

(+33%).

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