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Washington H Soul Pattinson & Company Ltd – How will this be on your pocket?

September 29, 2015 | Team Kalkine
Washington H Soul Pattinson & Company Ltd – How will this be on your pocket?

This is the second oldest listed company in Australia. Starting as a chemist shop in Pitt Street Sydney in 1872, it listed on the Australian Securities Exchange 30 years later. Since listing, the company has paid a dividend every year including through the depression of the 1930s. It is now a diversified investor with many interests including telecommunications, building products, coal, pharmaceuticals, real estate, copper and financial services.
 

Results for FY 2015


 
The company announced its financial results for the year ended 31 July 2015 and reported a regular profit after tax attributable to shareholders of $ 156.4 million, an increase of 27% over the previous year. The increase in regular profit can be attributed to another strong result from TPG Telecom which was up 30.5%, a solid operating result from New Hope which was up 19.8% in a difficult market, Brickworks capitalising on the improving building sector up by 15.2%, Australian Pharmaceutical Industries continuing the upward trend in profitability up by 24.3% and an improved result from CopperChem Limited.


Financial Overview (Source: Company Reports)

Group profit after tax (excluding non regular items) was $ 83.3 million which is a decrease of 38.7% over the previous year. The net loss from non regular items came to $ 73.1 million compared to a profit of $ 8.5 million in the previous year. Chairman Robert Millner said that it was pleasing to see an increase in regular profits for all the major listed investments and, in addition to the increase in regular profits, a growth of 6.1% in the overall value of the portfolio. The increase in value was driven by the 12.6% increase in value of major strategic investments. This compares favourably with the Non--Ordinaries Index which achieved an increase of only 1% over the same period. The company takes a conservative approach focused on value and with this approach, it has outperformed the ASX Non-Ordinaries Accumulation Index by 5.2% per annum over the last 15 years.
 


Interim Dividend History (Source: Company Reports)

The board of directors have declared a fully franked final dividend of 30 cents per share which is an increase of 3.4% over the previous year. The company receives dividends and distributions from its investments and interest from the funds on deposit. This final dividend represents 87.9% of ordinary dividend and interest receipts net of regular operating costs. The value of the asset portfolio as on 31 July 2015 was $ 5.5 billion representing an increase of $ 319 million on the same date in the previous year. The company has raised the dividends continuously at 11.3% CAGR.

As for the outlook, the company expects interest rates to continue to be low for a long time and regards it as a good time to invest in real assets. It has been reasonably well buffered against the recent volatility in share markets and its share price outperformed the All Ordinaries index by 7%. It takes the long view and has been reinvesting and will continue to reinvest in the capital markets. The strong balance sheet and cash flow has enabled the company to provide reliable rewards for shareholders in the form of fully franked dividends.
 

Review of major group entities

TPG Telecom Ltd (26.9% held)

 

The company reported a net profit after tax of $ 224.1 million, an increase of 31% over the previous year. EBITDA grew by 33% to $ 484.5 million and EPS increased by 31% to 28.2 cents per share. The consumer business recorded an EBITDA of $ 237.9 million and this was driven by organic broadband subscriber growth as well as an increase in the contribution per subscriber. As of 31 July 2015, there were 821,000 broadband subscribers and 320,000 mobile subscribers. The corporate business division reported an EBITDA of $ 242.3 million for the year representing a growth of 52.4% over the previous year. A large proportion of this was derived from a full 12 month contribution from acquiring AAPT compared to 5 months in the previous year. There was another strong cash flow result with cash generation from operations being $ 492.8 million and free cash flow was $ 213.8 million. The free cash was deployed in making equity investments of $ 115.6 million in Covata and Amcom, making debt repayments of $ 21 million and paying increased dividends of $ 81.4 million.



Subscribers_Growth (Source: Company Reports)
 

Brickworks Ltd (44.2% held)



The company posted a record net profit after tax of $ 120.5 million up 18.8% over the previous year. A feature was the diversified earnings contribution with Building Products, Land and Development, and investments delivering a growth in underlying earnings over the previous year. After excluding significant items, the figure was down 24% to $ 78.1 million; and the significant items related to noncash impairments in Austral Precast and Auswest Timbers as well as New Hope Corporation and CopperChem/Exco. On record sales revenue of $700.9 million, Building Products EBIT was $ 56.4 million up 25%. EBIT for Land and Development was $ 64.4 million primarily because of a revaluation profit at The Joint-Venture Industrial Property Trust and the sale of the Coles Chilled Distribution Centre. Operating cash flow increased by 14.4% because of the higher level of trading and the decreased working capital. The directors increased the final dividend to 30 cents fully franked bringing the total dividend to 45 cents per share reflecting an increase of 7.1% over the previous year.


Shareholder Return (Source: Company Reports)
 

Other investments

The listed equity portfolio (excluding Strategic Listed Investments) amounted to 11.3% of the total portfolio and the market value was $ 622 million. $ 75.3 million was invested in the equity markets in FY 2015 and the proceeds from disposals were $ 17 million. Ordinary dividend income was up 7.8% at $ 24.8 million. The unlisted equity portfolio amounting to 4.6% of the total portfolio had a total value of $ 254 million and the value of portfolio was reduced by $ 74 million primarily because of impairments to copper assets. The property portfolio amounting to 1.3% of the portfolio had a value of $ 69 million and was reduced by $ 132 million as a result of sales of properties. The property division contributed $ 11.5 million to group profits and further acquisitions are expected in FY 2016.
 
However, the company is conservative from financial standpoint and cash has also been held. Also, the portfolio seems to be little concentrated. Although the results are impressive and there is growth across all businesses, we consider the stock to be EXPENSIVE at the current price of $14.80.


SOL Daily Chart (Source: Thomson Reuters)

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