Pepper Group (PEP:AU) is a leading financial services business operating in Australia, Europe, South Korea and Hong Kong. It provides a variety of consumer financial services including residential and commercial property loans, personal and automotive loans and credit cards.
Since listing on the ASX 2 years ago, Pepper Group has enjoyed impressive organic and inorganic growth, producing a 51% CAGR in income and a 91% CAGR in AUM (assets under management). Growth looks set to continue over the next few years with Pepper taking part in a Chinese consumer finance venture and an acquisition of a Mutual Savings Bank in South Korea, the latter set to contribute to the Groups profits materially next year. FY2017 NPAT is expected to be close to $68mln ($0.38 per share). It’s not unreasonable to expect earnings in FY2018 to be around $80mln ($0.45 per share). With continued growth over the next 5 years, the business should be more profitable still.
I made a small purchase in Pepper during mid May at $2.89 per share (~25% of my portfolio). The thesis was fairly basic; it was a well established and well run company (est. in 2000), expanding overseas and growing organically, management have plenty of ‘skin in the game’ – about 40% of the company is owned by management. There were apparently only 2 brokers covering it allowing it to slip under the radar. Importantly, it was trading at a discount to a reasonable estimate of it’s present and future intrinsic value.
Late in May, news arrived that KKR & Co had launched a takeover bid, offering $3.60 per share alongside a dividend of $0.03 per share to be paid without a reduction in this offer price. In an announcement to shareholders this week, Pepper noted the offer is a premium of 25.6% to the 1-month volume weighted average price of Pepper shares up to and including 26 May, 2017 or a 44.7% premium to the 12 month VWAP to this date (the day prior to the takeover rumour being discussed publicly in the media).
Whilst it’s a premium to Pepper’s May 26 price, it’s not a premium to Pepper’s current or future value.
I’m not the only one who thinks this. Investment group Perpetual, which owns over 12% of Pepper, is voting against the offer stating in an AFR article today that the offer
“does not capture the 25 per cent per annum net profit growth over the last five years, the strong management team at Pepper and the recent investments the company has been making in Pepper Asset Finance, UK Lending, Pepper Direct, Prime Credit and the Portuguese acquisition. We are somewhat surprised that the independent directors are recommending this bid”.
Portfolio managers of The Boat Fund, Ron Shamgar and Sam Orr have disclosed their valuation of $5.40 per share and TBF has said they will reject the offer. Although my tiny vote won’t have a material impact on the outcome, I’ll be doing the same. (I can still sit here loading my pea shooter!). My valuation of Pepper (not P/E based) is between $5.29 to $7.35 per share over the next few years, with a valuation at least $10 per share if things go reasonably well in the next 5-10 years.
What are your thoughts on the Pepper takeover offer? Would you accept this bid?