Market Drives Mir Higher

Goldman Sachs JB Were-associated investment group, Mirrabooka Investments says first half profit rose almost 20 per cent to $12.5 million as it rode the strong performance of the market, especially the small to medium cap companies it has investments in.

The company said strong cash flows from superannuation funds, takeovers and resilient earnings provided the underlying support for its profit increase.

On an after tax basis operating profit was $4.8 million, up 18.4 per cent.

Chairman Terry Campbell said the momentum in the market was overriding risk concerns about high valuations, cost pressures impacting profit margins and higher interest rates.

He said the small to mid-cap sector during the past six months was continuing to perform well.

“The environment has produced a very satisfying and rewarding period for the company,” Mr Campbell said.

“We have been active in adding new companies to the portfolio and topping up existing investments where we felt value was evident.

“While we acknowledge there will be some slowing in the domestic economy we expect further corporate activity and strong liquidity to underpin market sentiment at least in the near term.

“An interesting feature of this strength has been that the small to mid cap sector during the past six months has again outperformed the Fifty Leaders Index. We have been somewhat surprised by this trend although some of this outperformance has come from what we categorise as areas with inherently greater risk and the up-tick in takeover activity, both real and perceived.”

Mr Campbell said the company was looking to position the portfolio to generate good income flows for investors as well as long term capital growth.

“Mirrabooka currently has $14.5 million of cash to pursue these appropriate opportunities as they arise.

“The sectors of the market that Mirrabooka invests in continued their strong run throughout the half year with the combined small to mid cap index rising 19.7% over the period.

“There was no shortage of activity with a number of capital raisings coming to the market, increased merger and takeover activity and robust profit results driven by the underlying strength in the economy.

“Underlying income generated from Mirrabooka’s investment portfolio through dividends and other income increased 22.4% to $4.99 million in comparison to the corresponding period last year.

“This reflects our bias toward companies with track records in delivering increasing dividends over time. The corresponding contribution from the trading portfolio was also up marginally to $0.76 million, a good result as we became more cautious about the strength of market valuations and undertook less trading activity.

“We have been concerned for some time that valuations in general have reached levels where the risks inherent in the market are not being appropriately reflected in the pricing of securities.

“We have however been active in adding new companies to the portfolio and topping up existing investments where we felt value was evident. Typically these were investments in businesses with good franchises that were temporarily out of favour, or in companies where the industry dynamics, business model and market position offered comfort about their long term income growth prospects.

“The larger acquisitions new to the portfolio during the half were Macquarie Leisure Group, Paperlinx, Queensland Gas, Austbrokers, Patties Foods which was an IPO, and G.U.D. Holdings.

“We also added to our existing holdings in the Australian Infrastructure Fund, Dyno Nobel, Fleetwood Corporation and Regional Express during the period.

“The level of takeover and private equity activity has meant a steady stream of realised gains from the investment portfolio. The major sales of holdings which have been subject to such activity were DCA Group, Vision Systems (convertible notes) GroPep and Excel Coal. Other major sales from the portfolio were Domino’s Pizza, which announced an unexpected profit downgrade, Centennial Coal, Macquarie Airports, Transurban Group and Toll Holdings.

“In total these sales produced $10.49 million in realised gains.

“We have continued our approach of avoiding the more speculative areas of the market, particularly the single purpose commodity players. Whilst in the short term this downplays Mirrabooka’s relative return to the sector we believe the portfolio return of 20.1% generated over the six month period is very satisfying given its more conservative risk positioning.

“The performance of Mirrabooka’s portfolio is after expenses and tax provided on realised capital gains whereas the small and mid cap indices do not reflect such charges in their performance figures.”

Mr Campbell said that adding these back into Mirrabooka’s portfolio performance, the six month return was 22.3 per cent.

The total portfolio (including cash and bank bills) at 31 December 2006 was $269.1 million, including cash of $14.5 million.

Mirrabooka shares finished unchanged at $2.12.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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