Argo Investments, Australia’s second largest Listed Investment Company (LIC) remains cautious about current market conditions, despite the surge in most global markets in recent months (but not so much Australia).
The company yesterday reported a modest a 6.2% increase in half-year profit to $110.5 million with directors increasing the interim dividend half a cent to 15.5 cents a share fully franked.
Argo also revealed it intends to offer a Share Purchase Plan to shareholders in the near future. Director said an announcement will be made to the ASX when details are finalised.
That’s despite the company having $235 million in cash on hand, or a high 4.2% of assets at the end of December 2017.
Directors said the stronger first half profit “was driven by improved dividends from a number of companies in the portfolio, led by BHP Billiton and Rio Tinto.”
"Many companies in the resources sector had reduced their dividends this time last year, but most have rebounded as commodity prices continue to rise amid improving global growth. Overall, ordinary dividend revenue received in the portfolio increased by 8.4%. Income generated from Argo’s trading activities was also higher.
Looking to the rest of the financial year and 2018as a whole, Argo said “global share markets have continued to march upwards, led by the US repeatedly hitting all-time highs. Positive economic indicators have firmed throughout the second half of 2017, with additional fuel provided by the Trump administration’s tax cuts.”
"The Australian economy looks in reasonable shape, with historically reliable indicators such as the NAB business sentiment survey, government infrastructure spending and employment all producing strong readings,” The company said in yesterday’s statement.
But despite this upbeat assessment directors displayed a note of caution as well in their outlook.
"Despite the positive economic outlook, we continue to be cautious of relatively high valuations in some sections of the Australian share market, as we noted at last year’s Annual General Meeting in October.”
"Since then we have seen the ASX200 Index return +7% in the December quarter and the A$ jump by 8% since mid-December, and we feel that valuations are looking further stretched with some frothy areas of the market emerging.
"The larger cap end of the Australian market outside of resources looks to be where there may be some better value, following another year of strong share price performance from smaller companies.
"Argo is a long-term investor and we maintain our valuation discipline by not chasing stocks which we believe to be overvalued. However, the upcoming corporate results reporting season may throw up some opportunities for further purchases of quality companies that do not meet the short-term earnings expectations of the market,” director explained in yesterday’s statement.
Looking at its portfolio Argo directors said the company had “electively increased our positions in a number of smaller companies, including Monash IVF Group, iSelect, Tassal Group, Speedcast, Managed Accounts and Steadfast Group, and a new holding was initiated in Novonix, a supplier of materials and services to the lithium battery industry.
The number of stocks held in the portfolio reduced slightly to 96 and during the half year Argo said it purchased $99 million of long-term investments and received proceeds of $49 million from long-term investment sales. Among the larger movements in the portfolio:
Purchases included Aristocrat Leisure, CBL Corporation, Event Hospitality & Entertainment, Ramsay Health Care, Tabcorp, Telstra, Transurban, Westpac.
Sales included Australian United Investment Company, Milton Corporation, Programmed Maintenance (takeover) Westfield Corporation and Woolworths
"Argo’s investment (NTA) performance returned +6.8% after all costs and tax over the half-year to 31 December 2017, underperforming the ASX200 Accumulation Index which returned +8.4% (without any allowance for costs or tax).
"This short-term underperformance was primarily due to the strong run of resources stocks, including many of the smaller companies in that sector. Argo generally holds lower than market weightings in these companies, as they often pay relatively low or no dividends and can be somewhat speculative. Argo’s share price performance returned +8.2%.
"For the full 2017 calendar year, the NTA return was +10.0%, led by a strong performance from Macquarie Bank and some recovery from Origin Energy and Santos on the back of the rising oil price. Argo’s share price return was +13.4%. The index performance was +11.8% for the year.,” the company added.
Argo shares fell 0.2% to $8.34.