Argo Investments is planning a strategic capital raising of $441 million from its 54,000 shareholders in an attempt to build cash reserves to position itself to take advantage of any volatility in the market.
The Adelaide investment company’s announcement is a very different move to what we saw last week from two smaller rivals, Milton Corporation and Mirrabooka, which both had solid years but didn’t move to raise cash.
The news came as the company posted a 92 per cent rise in profit after one off items to $312.60 million: the group made $62.4 million in gains on the sale of long term investments.
Net operating profit was $70.14 million, up 18.6 per cent (best described as ‘underlying profit’).
Chief executive, Rob Patterson said “the outlook remains positive for the current corporate reporting season and all of the signs are for another generally buoyant period of healthy returns from many of the stocks in which Argo holds investments.”
In that respect it was just another solid result from a well run, conservative, listed investment company but the surprise was the $441 million renounceable rights issue.
Argo already has $115 million in cash and Mr Patterson said the issue would raise capital to enable the company to take opportunities when they became apparent.
He told Air that the company would not be investing the money in the market just to be invested in the market; “we are prepared to hold cash until we see value.”
Mr Patterson said it was in fact hard to see value in large parts of the market but he said ”diversified miners such as Rio and BHP showed value.”
He said Argo believed in the China story and with the volatility in the market in commodity prices, “there will be value in the prices of the diversified miners.”
Raising the cash also would give Argo the chance to participate in some forthcoming IPOs, such as the $1.5 billion float of Boart Longyear, a drilling services group which is coming out of Macquarie Bank.
Mr Patterson said Argo wanted to have cash to take advantages of situation like that.
But he made it clear that Argo ”is not going to be forced into investing the money it plans to raise.”
The one-for-eight renounceable rights issue will see around 61.2 million new Argo shares issued at $7.20 each, compared to the closing price of $8.68, up 2c after being as high as $9.20 yesterday.
Argo said its result for the six months to December 31 continues its strong earnings growth and the recent trend of strong distribution growth from many of the 180 stocks held in the company’s diverse investment portfolio, and reflected Australia’s very strong economy.
Argo declared an interim dividend of 12 cents per share, up from 11 cents in the same period in the prior year. Operating earnings per share rose 14.3 per cent from 12.6 cents to 14.4 cents per share, excluding realised gains on the sale of long-term investments
Argo had total assets of $3.7 billion at December 31, 2006. Argo earned a record $123.1 million in the 2006 financial year and annual dividend was up to 24c a share from 21c.
Argo last raised cash from shareholders in 2004 when picked up $194 million at $4.40 per share. An earlier issue was made in 2002 at $3.95
The new issue will be available to registered holders of Argo shares at the close of business on February 16. The shares will go ex-rights on February 12 and rights trading will start on that date. Rights trading will end on March 8 and the issue will close on March 16.
The new shares from the rights issue would participate in Argo’s final dividend for the current financial year, expected to be paid in September. Chairman Chris Harris said in a statement that this looked like being at least 13c a share.
Argo said in a statement that the interim operating profit “does not include $62.5 million (previous corresponding period $9.8 million) in net realised gains on the sale of long-term investments after tax. A number of these transactions are non-cash, scrip based, deemed sales which are eligible for roll-over relief for income tax purposes. These include large portions of the holdings in Alinta Ltd, Australian Gas Light Company and Brambles Industries Ltd. While these gains are required to be included in the Company’s reported profit under accounting standards, Argo identifies them separately and not as part of operating profit. Including these gains, the latest December half profit has risen from $68.9 million to $132.6 million. ”
Argo said significant investment purchases made by Argo in the December half were:-
BHP Billiton, $26.8; Telstra (including instalment receipts) $22.8; Rio Tinto, $15.1 and Woodside Petroleum, $14.9
There were no major sales, apart from the deemed sales referred to earlier. Alinta Infrastructure Holdings, Chiquita Brands South Pacific Ltd., DCA Group Ltd., Excel Coal Ltd., Gasnet Australia Group and UNiTAB Ltd. were taken over.
The Company’s net tangible asset backing per share rose to a record $7.56 as at December 31, compared with $6.81 at June 30, 2006.