Shares of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) traded slightly lower this morning, following the release of the group's half-year financial report.
In the six months to 31 January 2015, the diversified holding company reported a 5.8% jump in revenue to $355.1 million, but a net profit of just $67.3 million, down 8.7% on the prior corresponding period.
However, using management's regular profit after tax figure (which is essentially profit from continuing operations excluding non-regular items), the company's six-month performance was actually quite strong, with profit coming in at $84.8 million – up 33.6% on the prior corresponding period.
As a holding company, WHSP receives dividends from its investments and interest from funds on deposit.
WHSP said the net increase in profit was attributable to higher contributions from its key equity holdings in New Hope Corporation Limited (ASX: NHC), TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW) and the non-public CopperChem Limited.
New Hope, TPG and Brickworks combined, accounted for roughly 76.7% of all regular profit contributions to the company during the period. All three companies – New Hope, TPG and Brickworks – recently reported their half-year results.
Pleasingly, WHSP declared an interim dividend of 20 cents per share, up from 19 cents per share a year earlier. The dividend will be payable on 14 May 2015.
Commenting on the results, WHSP Chairman Robert Millner said, "Our diversified portfolio of investments has again delivered a strong result for shareholders."
He said, "We are pleased to announce an increase in the interim dividend to 20 cents, up from 19 cents on the previous corresponding half year."
The interim dividend represents 79.5% of the ordinary dividend and interest WHSP received during the half year.
Looking ahead, Mr Millner said, "WHSP has cash reserves including wholly-owned subsidiaries of $191.7 million which means we are in a strong financial position."
At 31 January 2015, the company had just $57.8 million in interest bearing liabilities but $1.33 billion in term deposits.
Should you buy WHSP shares?
WHSP has been listed on the ASX for over 100 years and is oft compared to Warren Buffett's diversified holding company, Berkshire Hathaway – although its track record isn't quite as good. Indeed, this comparison has its limits.
Given the large majority of equity contributions to WHSP come from its major holdings in listed companies, investors considering buying WHSP shares should first determine whether it'd be more prudent to purchase those shares directly, or through ownership of WHSP (which lowers risk but could also decrease upside potential).
There is no better example of this, than by simply observing the share price movements of WHSP (stock ticker: SOL) and that of two of its key equity holdings: TPG and New Hope.
Source: Google Finance
As can been seen from the above graph, if investors bought TPG shares directly they would've done much better than if they'd got their exposure through WHSP. However the opposite is true for shares of coal miner New Hope, which has fallen 54% in the past three years.
Finally, investors must also consider the value of WHSP shares. Right now, WHSP shares trade at 1.15 times their net asset value. Meaning, if you do want a stake in its enormous cash pile and strategic share holdings, you'll have to pay a premium of 15% for the right.
Given that at today's price investors wouldn't be getting a bargain (in my opinion), I recommend investors wade into the stock slowly by buying in parts and taking advantage of any share price dips then holding for the ultra-long term (10 years or more).
