Argo investments Ltd.

ARG Details

·         Weak bottom line: Argo Investments Limited (ASX: ARG) reported a full-year profit of $211.5 million which fell 2.2 per cent in the fiscal year of 2017 as compared to the prior corresponding period. Accordingly, the Basic and diluted earnings per share decreased to $30.7 during the year from $32 in the prior corresponding period. But they enhanced their final dividend of 16 cents per share fully franked. Full year dividends per share reached 31 cents during the fiscal year of 2017 as compared to 30.5 cents in the prior corresponding period. The group’s Net Tangible Asset Backing per Argo share rose to $7.71 during the 2017 financial year from $7.11 in the prior corresponding period. The group does not want to dispose their long-term investment portfolio as they are a long term investor. The net tangible asset backing per share reached to $6.80 as at 30 June 2017, from $6.34 in the prior corresponding period. Total revenue rose to $229.835 million during the year from $228.035 million in the prior corresponding period. The group’s Cash and cash equivalents reached $209.483 million as of June 2017.
 
·         Investment performance: The group’s net tangible asset backing performance generated +12.9% after deducting all costs and tax for the year ended at June 2017 as compared to ASX200 Accumulation Index which generated 14.1% without allowing for any costs or tax. The group shares generated 10.3% which even comprised the benefit of franking credits on the dividends paid to shareholders. On the other side, the group bought back $159 million of long-term investments. They got $218 million from long-term investment sales, which comprised $135 million from the takeovers of Asciano and DUET Group. The group’s major portfolio investments include QANTM Intellectual Property, Speedcast International, oOh!media, Murray River Organics Group and Motorcycle Holdings. Moreover, they added to 26 current holdings but total number of stocks held in the portfolio slightly fell over the year to 98. The group manages internally and does not charge fees to shareholders. This internal management structure enables them to control operating costs. For the year ended 30 June 2017, total operating costs were 0.16% of average assets at market value. Fair value of investments sold reached $218.2 million in fiscal year of 2017 as compared to $115.1 million in the prior corresponding period. Total profit after tax on these disposals reached $36.4 million during the year from a loss of $11.4 million in the prior corresponding year which was transferred from investment revaluation reserve to capital profits reserve.

 
Top twenty investments (Source: Company reports)

·       Challenging outlook: The group forecasts that the global macroeconomic and geopolitical influences would continue to have a major impact on the Australian stock market. Rising interest rates in the US as well as expected unwinding of stimulus across several developed economies would also hurt the performance. Domestically, the banks also faced pressure while the recent Australian dollar strength post commodity price rises and speculation that interest rates would begin to rise again, might hurt the firms with some major offshore earnings. On the other hand, given the results reporting season, the group would be tracking on how the firms would be strategically position themselves for the longer term, to combat the challenges.The group’s cash balances have improved as compared to the earlier years, showing their cautious approach. But they are not planning for any share purchase plans as they have sufficient cash to bear the volatility of the reporting season.
 
·         Recommendation: ARG stock generated over 6.7% in this year to date (As of August 14, 2017) and has a decent dividend yield. The group’s underweight position in the materials sector, especially in the smaller and mid-size resource companies, hurt their performance as compared to the broader market. Given the group’s preference for the companies that could generate a rising dividend income, their portfolio positioning is different.  Given a weak bottom line in fiscal year of 2017 and a challenging outlook we recommend investors to avoid the stock. Based on the foregoing, We give an “Expensive” recommendation on the stock at the current price of $8.02

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