Company Overview: Washington H. Soul Pattinson and Company Limited (ASX: SOL) holds a diversified investment portfolio across industries such as mining, telecom, healthcare, building products, etc., and other growth asset classes such as private equity, property, listed equities, and fixed income. New Hope Corporation Limited (ASX: NHC) contributes ~69.8% of revenue from continuing operations of total revenue in FY21, followed by ~23.53% from Round Oak Minerals Pty Limited, ~1.17% from TPG Telecom Limited and remaining ~5.50% from other investing activities. As per its investment philosophy, SOL follows a flexible investment mandate and invests in firms to deliver value in the long term.

SOL Details

Recent Developments:

• SOL recently appointed Ms. Joe Pollard as one of the Non-Executive Directors of Washington H. Soul Pattinson and Company Limited, effectively from 1 March 2022.
• On 10 February 2022, Retail Food Group Limited (ASX: RFG) increased its shareholding from ~6.5% to ~7.85% in SOL.

Significant Achievements of FY21 & Highlights of December 2021 AGM:

• The revenue from continuing operations increased by ~9.7% YoY from ~$1,368.46 million in FY20 to ~$1,501.77 million in FY21.
• The regular profit after tax grew from ~$169.80 million in FY20 to ~$328.10 million in FY21, up by ~93% YoY.
• The Gross Asset Value (GAV) rose to $9.7 billion post-merger with Milton Corporation from $6.5 billion as of 31 July 2021.
• SOL paid a dividend (total) of ~62 cps in FY21 versus ~60 cps in FY20.

Encouraging Results at Round Oak Metals:

• Round Oak Metals posted revenue growth of ~62% YoY and a regular after-tax profit of ~$60.9 million for FY21 (vs. $42.5 million loss in FY20) due to favourable copper and zinc prices and increased production.
• On 11 November 2021, SOL declared its decision to withdraw the SOL shareholder offer for the IPO of Round Oak Metals (Round Oak) given the current market conditions for IPOs and receipt of positive exploration results. The results depict the potential to materially extend the mine life at the Jaguar project operations in Western Australia. SOL believes that an extended mine life at the Jaguar project and advancement on the Stockman project in Victoria will provide significant value for its shareholders

Synergistic Merger with Milton:

• Merger Completion: Under the scheme of the arrangement, SOL completed the merger with Milton Corporation Limited issued ~121.47 million new SOL shares for ~$4.61 billion in consideration on 5 October 2021.
• Actual & Expected Benefits: The merger is expected to provide increased portfolio diversification, scale, and liquidity to SOL to fund new investments across multiple growth asset classes. The equities portfolio of SOL post-merger with Milton Corporation has grown to ~36% of the portfolio valued at $3.47 billion as of 30 November 2021.

Portfolio Changes:

• In July 2021, SOL further reduced its shareholding in NHC (New Hope Corporation Limited) from ~43.94% to ~39.85%. ~4 years ago, SOL owned a ~60% stake in NHC.
• In October 2021, Wesfarmers Limited acquired SOL’s 19.3% shareholding in API (Australian Pharmaceutical Industries) upon the exercise of the call option granted to it in July 2021.

The trend of Regular PAT & Net Cash Flows from Investments, Highlights; (Analysis by Kalkine Group)

Key Metrics: SOL witnessed a 5-year CAGR of ~3.86% in regular PAT from ~$282.02 million in FY17 and ~$328.10 million in FY21. The net cash flows from investments grew at a 5-year CAGR of ~5.88% from FY17-FY21. EBITDA margin improved to ~37% in FY21 compared to ~25.5% in FY20 and ~32.2% in FY19.

Outperforming the Index & Growth in TSR:

• SOL has been paying dividends every year since 2000 and increasingly for the past consecutive 21 years. The company has declared to pay a fully franked final dividend of ~36 cents per share (cps). The total dividends for FY21 stood at ~62 cps, up 3.3% YoY.
• The stock of SOL generated an annualised TSRs (Total Shareholder Returns) of ~13.4% in the last 20 years thereby surpassing the ASX All Ordinaries Accumulation Index which offers an annualised TSR of ~8.7% in the same horizon.

Increasing Dividend Payments for Past 20 years; (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form ~39.59% of the total shareholding. Brickworks Ltd and J S Millner Holdings Pty. Ltd. holds a maximum stake in the company at ~­­­26.14% and ~2.76%, respectively.

Source: Analysis by Kalkine Group 

Key Risks:

• Investment Risk: The company undertakes necessary due diligence on the asset, industry, related markets, macro-economic conditions while evaluating the investment risk. However, there is no certainty as the market/ economic/ geopolitical conditions change.
• Environmental, Social, and Governance (ESG) Risks: SOL’s Board continuously undertakes portfolio review, opportunity, and potential risk assessment of its investee companies and their respective industries. The level of ESG risk assessment in the investment portfolio is restricted by the limits set by the Board as per its Risk Appetite Statement to achieve a long-term return on investment.

Outlook:

• The company expects an increase in net asset value per share, index participation, and more cash generation from higher portfolio dividends due to its merger with Milton Corporation.
• SOL is witnessing a high level of deal flow in alternative asset classes such as real assets, global equities, emerging companies, and private equity. It plans to use the significant liquidity available post Milton merger for investing across growth asset classes.

Valuation Methodology: Price to Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of SOL gave a negative return of ~21.57% in the past three months and a negative return of ~26.20% in the past six months. The stock is currently trading near its 52-weeks’ low level of $25.100. The stock has been valued using the P/E multiple-based-illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium to its peers, considering the diversified portfolio, acquisitive synergies, and consistent dividend payment. For this purpose of valuation, a few peers like Whitehaven Coal Ltd (ASX: WHC), New Hope Corporation Ltd (ASX: NHC), Yancoal Australia Ltd (ASX: YAL), and others have been considered, which comes under energy sector. Considering the current trading levels, growth in revenue, TSR, significant liquidity position, improved deal flow across alternative asset classes, expected merger benefits of scale and diversified portfolio, an indicative upside in valuation, and associated key business risks, we give a ‘Buy’ rating on the stock at the current market price of $25.220, as of 23 February 2022, 11:54 AM (GMT+10), Sydney, Eastern Australia.

SOL Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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