Washington H Soul Pattinson (ASX: SOL) has reported that revenue in FY2013 was down 13.3% and statutory profit down 26.3% — but don’t be deceived by these numbers.
Washington H Soul Pattinson (WHSP) is a conglomerate of listed and unlisted business. The directors use regular profit after tax to measure the company’s performance year on year, and this figure was down just 0.58%. Regular profit and statutory profit are never the same, but over the last 10 years total statutory profit has exceeded total regular profit by a significant margin. Irregular gains have resulted in special dividends being paid to shareholders on a number of occasions.
In 2013, the company raised its final dividend to 28 cents per share. The total dividend for the year was 46 cents fully franked, which equates to a grossed up yield of over 4.7% based on a share price of $13.90. The company can easily fund this (regular) dividend out of the dividends and interest it receives from its investments.
As at 31 July, the market value of all listed equities held by WHSP was $4.2 billion. The biggest three holdings are New Hope Corporation (ASX: NHC), TPG Telecom (ASX: TPM) and Brickworks (ASX: BKW). Brickworks also has a substantial cross-holding in WHSP, which is a defence against hostile takeover bids.
Aside from these big holdings, WHSP owns shares in many smaller ones. It has a reputation for backing companies early, and some investees grow into very profitable businesses. The company also owns shares in private companies such as the electrical engineering company Ampcontrol.
In the last few weeks, TPG Telecom has grown its market capitalization by 25%. WHSP owns 26.9% of TGP, and this portion is now valued (by the market) at over $950 million. However, WHSP’s largest holding is New Hope, of which it owns 59.7%. New Hope invests in coal mines, an industry that faces long-term head winds.
This is one of the main reasons I don’t own shares in WHSP. However, compared to its peers, New Hope seems well managed. The company is cashed-up and has no illusions about the likely persistence of low thermal coal prices. Impairments by New Hope against the carrying values of its investments accounted for $30.7 million of WHSP’s net loss on ‘non-regular’ items in FY2013.
On the other hand, Brickworks improved its performance in FY2013, reporting strong growth in NPAT and improved margins. TPG also announced strong results, and has revealed its plans to build both a fibre optic network and a wireless broadband network. I wouldn’t be surprised if one day, WHSP’s holding in TPG is worth more than its holding in New Hope.
It’s clear that WHSP trades at a discount to the value of the assets it holds, even assuming that the market is overvaluing some holdings. WHSP has over $1 billion in cash and term deposits after you subtract all liabilities. That kind of financial stability means that the investment company can take advantage of opportunities that arise in the future. The company currently trades on a market capitalization of $3.25 billion.
My desire to avoid investing in coal mining makes me hesitate to “buy and hold” Washington H Soul Pattinson. However, the company pays a decent dividend and I think that over the long term that dividend will continue to grow. It is very difficult to value such a diverse holding company, but I believe this company will generate respectable returns for long-term shareholders who buy at current prices.
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Motley Fool contributor Claude Walker has an indirect interest in TPG Telecom through a managed fund. Find him on Twitter @claudedwalker.