The Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) share price could be on the move on Thursday after the release of its half year results.
How did Washington H. Soul Pattinson (WHSP) perform in the first half?
For the six months ended January 31, the investment house announced a regular net profit after tax of $124.7 million and profit after tax of $51 million. This was a 33.2% and 71.5% decline, respectively, on the first half of FY 2019 and in the middle of its guidance range
Whilst on paper this is a disappointing decline, management stated that it does not consider its earnings to be the key indicator of the company's performance.
As with any investment portfolio, it feels the key drivers of success are growth in the capital value of the portfolio and growing dividends.
In respect to the latter, WHSP was still able to increase its interim dividend by 4.2% to a fully franked 25 cents per share. Whereas for the former, the gross value of its portfolio increased by approximately 0.2% during the period ending January 31.
What were the drivers of its underperformance?
WHSP's regular net profit after tax was impacted by:
New Hope Corporation Limited (ASX: NHC) – A material decline in coal prices offset higher production during the half and weighed on New Hope's performance. Pleasingly, coal prices have remained resilient since January.
TPG Telecom Ltd (ASX: TPM) – Management notes that TPG Telecom underperformed during the period due to weaker NBN margins and high amortisation costs in relation to its aborted mobile network rollout. WHSP is optimistic that the merger with Vodafone Australia will be a big boost to its future performance.
Brickworks Limited (ASX: BKW) – A significant decline in building activity in Australia and lower property earnings weighed on the building products company's performance over the six months. Brickworks also released its half year result this morning.
Round Oak Minerals – Lower zinc and copper prices and higher zinc treatment charges led to Round Oak Minerals increasing its losses during the period.
The underperformance of these businesses was partly offset by an increase in Parent Company earnings. This was due mainly to the increase in value of its Small Cap Portfolio.
Management commentary.
WHSP Managing Director, Todd Barlow, commented: "Over the last 20 years to 31 January 2020, an investment in WHSP with dividends reinvested has increased by 11.1 times while the Index has increased just 4.2 times."
Looking ahead, the managing director appears confident the company is well-positioned to benefit from the recent decline in asset valuations.
"While asset valuations were racing away in 2019, largely unsupported by growth in company earnings, WHSP remained cautious. WHSP positioned itself to have financial capacity to make new investments during any market correction."
"We believe that the recent events will provide WHSP with opportunities to make new investments and we are actively looking for opportunities where our long-term, patient and disciplined investment approach can deliver outperformance for shareholders."
