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Sygnia Limited: A scalable disruptor in a growing industry.

April 17, 2024
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Jordan Nel
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Jordan Nel

GARP. Growth in online education due to COVID. Very scalable business model with large TAM.

https://vineyardholdings.net/2020/09/23/sygnia/
 

SYG is a passive-strategy asset management firm based out of Cape Town, South Africa. They are run by an intelligent and divisive owner-operator in Magda Wierzycka. As market leaders in the passive investment and ETF construction space in Sub-Saharan Africa, they benefit from a growing industry boosted by the tailwinds of increasingly cost-conscious investor behaviour. They are a capital-light compounder with industry leading margins and large opportunities for reinvestment in an increasingly tech-centric industry.

Financially, they have shown growth in all major metrics between 20- 30% CAGR since listing on the JSE in 2014. Only their Assets Under Management (AUM) has grown slower (at 13% p.a.). They are conservatively leveraged, and management is well aligned with 60+% of the business being owned by insiders. Their TAM is around R5 trillion, with their AUM being R250 billion.

The bull thesis is essentially one of rapid scalability and gain in market share in a growing market. As low-cost providers, theirs is the cheapest product in a commoditized market (passive investment vehicles), and they offer the broadest range of products (which pander to South African's increasing desire to diversify offshore). The ETF construction process is initially a relatively complex one, which is made substantially easier by having an existing ETF in the target market, therefore giving SYG a first-mover advantage over competitor firms by having the broadest range of markets accessible.

The bear case is foremost that they are priced with strong growth expectations. There is little margin of safety at current valuations. There are also several governance and key person risks attached with having such a dominant shareholder/executive in Wierzycka, and they face stiff competition from South Africa's well-entrenched asset management firms. They also have erratic cash flow and will likely face short term headwinds as companies retrench workers and cost-cut contributions in the wake of COVID-19.

Ultimately, SYG has a solidified place on a watchlist, and offers significant upside should the bull thesis play out. However, that the current valuation has such growth baked in means that any short-term headwinds (and subsequent sub-expectation results) may buffet the stock price into more appealing territory. A target price is set at around R9.75 per share.

Predictions are notoriously impossible to get right. And the bull thesis is essentially a narrow prediction (SYG's outperformance) within a broad prediction (low-cost passive investment strategies will grow in popularity). As such, we will require a significant margin of safety to allow for error in this prediction before placing any bets.


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