Washington H. Soul Pattinson chief executive Todd Barlow says the conglomerate has a $1bn war chest to deploy into equity markets and private equity deals as the COVID-19 pandemic creates market dislocation that is depressing valuations in sectors such as healthcare, tourism and financial services.His comments come as the health crisis and resulting economic shock have a varying impact on Soul Pattinson’s portfolio of investments, with strong growth at its telecommunications businesses — led by the merger of TPG and Vodafone — countered by a poor performance from its stake in coal play New Hope, falling returns on its equities holdings and earnings constraints at its Brickworks stablemate.Outside of its largest investment, a 44.3 per cent holding in building supplies group Brickworks, there were valuation increases for smaller segments of its portfolio, including its private equity division, whose valuation doubled in 2020 to $272m, and its healthcare and pharmaceutical assets, which rose in value by $20m to $285m, although earnings on its healthcare investments fell in the year.
Speaking to The Australian after Soul Pattinson posted a 284.3 per cent leap in statutory net profit to $953m for the 2020 fiscal year as it reaped a one-off profit from the merger of one of its portfolio investments TPG with Vodafone, Mr Barlow said Soul Pattinson was primed to take advantage of market turmoil.“It is really opportunity-led. We do think and we are starting to see some of the market dislocation creating opportunities so would we go and deploy all our money in the market at this point? No, I think we are being quite cautious but for individual opportunities that are starting to emerge we are ready to go,’’ Mr Barlow said.He said Soul Pattinson was sitting on as much as $1bn to invest in new opportunities presented by good valuations across several sectors.“During the year we took on an extra $500m of liquidity and that was ‘opportunity money’, and we have always taken the view we have had liquidity through other assets that we effectively are investing cash, but happily would sell down those investments to take advantage of new opportunities,” he said.“We think we have $1bn of liquidity (in total).”Mr Barlow is eyeing several sectors for Soul Pattinson to invest in. “We start from what are the industries that we like — demographic trends that support healthcare, tourism and financial services, those demographics haven’t changed and yet the valuations of some of those things might have been impacted by recent events,” he said. “We take a longer-term view and can look through some of the short-term pain those sectors might be feeling, and longer-term we believe those will be good sectors to invest in.”Meanwhile in the 12 months to the end of July its portfolio benefited from the telco merger but was hit by falling earnings for New Hope. Once the effect of the TPG and Vodafone merger was stripped out from the result, Soul Pattinson said its regular profit was down 44.7 per cent at $169.8m, with revenue for the 12 months to the end of July down 15.3 per cent at $1.368bn.Soul Pattinson received a special dividend of $121m before the merger of TPG and Vodafone and the rise in the value of TPG generated a non-regular after-tax accounting gain of $1.05bn.
The company now has a 12.6 per cent shareholding in the newly created telco business.Mr Barlow said Soul Pattinson’s investments performed relatively well during COVID-19 and its resilience proved the value of its diversified portfolio model.“From a portfolio perspective, our company is doing very well,” he said. “We focus on beating the market and that means where there are periods the market is falling we want to fall by less, and our portfolio did that last year and we outperformed by 7 per cent.“We also want to be able to generate enough cash from our investments to pay increasing dividends and we did that last year as well.”Brickworks, which also reported its full-year result on Thursday, will for the first time offer a dividend reinvestment scheme, which Soul Pattinson is precluded from participating in as its holding is already above the takeover level of 19.9 per cent. This will see Soul Pattinson’s stake in Brickworks being slightly diluted, depending on the take-up of the DRP by Brickworks shareholders.Soul Pattinson declared a final dividend of 35c, up 2.9 per cent, with a record date of November 23 and a payment date of December 14. It is the only company in the All Ordinaries Index to have increased its dividend every year in the past 20 years.Washington H Soul Pattinson closed up 3c at $23.51.
SOL Price at posting:
$24.61 Sentiment: Hold Disclosure: Held
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