UTR Family Investment Companies part 2xtract 111

8/10/2019 UTR Family Investment Companies part 2xtract 111

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INVENTIVE INVESTORAndrew Brown - Under the Radar Columnist

THE TWO LARGEST FICS

Last week we looked at some Family Investment Companies (FICs); this week we

focus on the two largest FICs, Washington H. Soul Pattinson (SOL)and Seven Group

Holdings (SVW), neither of which garner significant attention from the professional

investment market other than a couple of long standing institutional holders.

Their respective chairmen Robert Dobson Millner and Kerry Matthew Stokes both

keep relatively low profiles, and both have long-term investment horizons. You can

put money on the fact that neither will be especially concerned that their share

prices trade at significant discounts to the net asset backing of their respective

companies. Indeed, for the minority shareholder, this may even be a benefit.

THE MILLNER FAMILYS WASHINGTON H. SOUL PATTINSON (SOL)

SOL is a remarkable company it has paid a dividend every year since 1904 and

hasnt raised new equity since 1969 when it established the defensive

cross-shareholding with Brickworks (BKW). It has been chaired by a Millner since

1950, and currently by Robert Mil lner who definitely flies under the radar, despite

having been at the helm to make some of corporate Australias best ever decisions.

The Millner family now only owns about 8 per cent of SOL, but it maintains

control thanks to the Brickworks (BKW) cross-shareholding (see below **). The

company had a history of investing surplus cash flow from its original chemist shop

operations into shares and other real assets; the chemist shops are now long gone.

In the 1990s, the companys accounts were totally opaque since it wholly owned a

diverse range of operations. Over the past 13 years it has securitised a number of

them, selling minority stakes to the public; initially SP Telecoms in 2001, and the

coal assets in 2003 to form the listed vehicle New Hope; New Hope in turn bought a

significant stake in Arrow Energy off Macquarie Bank in 2006 and SOL made close

to $500m profit on that alone.

Having propped up the fledgling telecommunications business with its Newcastle

TV station NBN-3 in 2004, SP Telemedia (as it had become) did two classic

deals: sell the TV station for $250m to Nine Network in 2007, and the refocus on

telecoms, merging with TPG Telecoms (TPM)in February 2008 - and then let David

Teoh do the rest. If ever you need a lesson in patience, it is TPM; the shares fell as

low as 9 cents in December 2008 in the wake of the financial crisis. Seventy two

times your money in less than four years is pretty good in anybodys books. Its

now a third of SOLs value. The few clangers SOL have had in recent years have

been reasonably small.

A lot of folks get obsessed with the Brickworks (BKW)cross-shareholding **

BKW own 43 per cent of SOL, which owns 44 per cent of BKW. This mechanism

was installed in 1969 to actually protect Brickworks against a potential takeover

from London Brick. It is now a contrivance since BKW has no other investments

(it did then) and certainly acts to entrench the Millner family. This year, Perpetual

Investments and its consultant Mark Carnegie, attempted unsuccessfully to unravel

the cross shareholding. The closest an external party has come to forcing an end to

the cross shareholding was Ron Brierley in 1990.

My figuring is that should SOL start making big mistakes leading to even bigger

losses, theres enough outside legal and other pressure to force a change. The

problem with the Carnegie/Perpetual proposals apart from tax was that it came

at a time when the company was performing reasonably well.

under theradar investor

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theprofessionalinvestor

FUND MANAGERANDREW BROWN

TELLS YOU HOWYOU CAN PROFITBY RIDING ONTHE COAT TAILSOF TWO OFAUSTRALIASPOWER HOUSE

FAMILIES.


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213.4 TPG Telecom

495.7 New Hope Coal

65.6 Brickworks

Blue chip portfolio

33.6 Milton Corp

57.9 BKI Investments

Other listed associates (RHL, CLV, API)

Other listed investments

NET parent company assets

TOTAL

239.4 NET VALUE

TPM

NHC

BKW

MLT

BKI

1,510

1,293

873

372

144

90

179

41

206

4,708

$19.67

SHARES (M) COMPANY ASX CODE $M

For years, SOL was one of Australias most opaque companies. No longer. It has

an estimated net value of around $4.7bn, which after some simple accounting de-

consolidation, is roughly comprised of:

At $14.40, SOL is trading at a 27 per cent discount to its pre-tax assessed value of$19.83 a share. Thats very much towards the top end of its recent discount range.

This reflects six things:

The perceived curmudgeonly attitude towards the Perpetual/Carnegie break-up

proposals;

The obvious concentration of assets, although this is far better than in 2011

when a soaring New Hope made up over 60% of estimated value;

The implicit tax bill if they sold there is an approximate $3.6bn unrealised

gain on the current assets, though the full tax would not apply as certain

assets are grandfathered as pre-1985 acquisitions for capital gains tax;

A belief that Brickworks is fully priced, with which I concur;

The start of a changing of the guard exhibited in recent board changes; and

A questioning of where the next big thing for SOL is coming from.

SOL is usually a strong performer in bear markets, and has been steadily increasing

its dividend each year though it still yields only 3.4 per cent fully franked. Its the

sort of good tortoise that you pick up when its out of favour. I reckon thats

around now.

THE STOKES FAMILY SEVEN GROUP HOLDINGS (SVW)

If SOL looks a little cheap, SVW might be better described as a pariah. Some of its

businesses are in a tough part of their cycle and the company is experiencing a few

difficulties in building out a new business unit in oil and gas. Its shares are down

43 per cent from their peak of $11.44 in March 2013. So what does management,

led by Executive Chair, Kerry Stokes, who owns 68 per cent of the company, do?

It buys the shares back.


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A year ago, Margaret Simons, a freelance journo wrote the only available book of

any substance on Stokes: Self-Made Man. He apparently hates it. I love it. It

gives a real glimpse into the reasons why:

Stokes is so driven, but so very, very private;

Stokes does deals in various industries, but has a long standing attraction to

media, property and Caterpillar franchises; and

Stokes is trying to create some sort of dynasty.

Lets boil things down to basics. When a bloke starts with nothing, but over

roughly 55 years ends up being the 14th wealthiest person in Australia, you have

to have amazing confidence to start betting against him, especially if you can stand

alongside him at a very large discount to the real long-term value of the assets that

give him his wealth. I know very few people who have made money in Australia

betting AGAINST the medium-term mega wealthy (as opposed to the paper based

nouveau riche).

The bulk of Kerry Stokes wealth comes from his 70 per cent stake in SVW, having

bought his initial holding in April 1995, just under two years after its public listing by

the receivers of Qintex Australia. The holding has increased through a variety of on

and off-market buys and asset swaps for scrip. SVW is comprised of five existing

sets of assets (media, investments, property, industrial services and mining services

in the WesTrac Caterpillar franchises), although his team is patiently trying to create

a sixth in the oil business.

If you have a medium term horizon, you can buy the Stokes team talents at

their lowest rating in some years.

In my view, the best way to look at it is to break down the company using current

market values to ascertain what you are paying for the main cash flow generator,

the WesTrac Caterpillar franchise businesses, given its cyclicality. This is very

abridged and rough, but a good guide:


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If you have a medium

term horizon, you can buythe Stokes team talents at

their lowest rating in some

years.

Value of SVW equity

Net debt

Listed convertible debt

TOTAL ENTERPRISE VALUE

Seven West Media (SWM)

SWM preference shares

Listed equity portfolio

Coates Hire

Property assets at book

Other assets

TOTAL PORTFOLIO VALUES

IMPLIED VALUE OF WESTRAC

302.7m shares x $6.52 share price

Includes derivatives & dividend from SWM

Hybrid securities (debt) ASX code SVWPA

(A)

Listed ASX code SWM = Seven TV, West Australian, mags

Includes TLS and Agricultural Bank of China

46% ownership at SVW accounts value - high

Very undervalued

includes Nexus debt, industrial business at book

(B)

(A-B) Estimated EBIT c.$200m = P/E 7.3x

1,974

1,070

457

3,501

563

302

916

452

35

201

2,469

1,032

COMMENTS$M


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The effective value placed on the entire WesTrac business at present of around

$1bn contrasts with SVWs entry price of about $1.9bn, which is the mid-point of

the 2010 independent experts reports on the 2010 merger of Seven and WesTrac,

plus some other businesses. All these businesses made over $440m EBIT in fiscal2013 (peak cycle) before corporate costs.

Mining services plays are about as out of fashion as you can get. But what would

you rather buy a contractor with short term contracts on a couple of mines, or

one of the worlds biggest distributors of the equipment the big miners really need

for the ongoing operation of mines?

At current prices, Ive shown that you are paying half the cost the SVW

businesses. In 2010 Stokes put his private business, WesTrac, into Seven

Group Holdings, taking his shareholding up to close to 70 per cent. Youll

need to be patient; there is the risk of downgrades of profit; but this is more

than priced in and SVW is real straw hats in winter stuff you are buyingthis company when it is deeply out of favour, and you get a 6.1 per cent fully

franked dividend yield to boot (plus the company is buying back 10 per cent

of its shares). n

Please Note: The author has a beneficial interest in the securities of

Seven Group Holdings.


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UTR Family Investment Companies part 2xtract 111