AFI Rides Market Boom

As expected, Australian Foundation Investment Company produced a strong result in the year to June with after tax net operating profit rising by almost 25 per cent to $224.4 million from 2006's $179.6 million.

And there are expectations of another strong first half to the current year with the company selling its Rinker holding to Cemex this month and takeover deals for the likes of Smorgon Steel, Coles and Southern Cross Broadcasting expected to be completed in the half.

And the company's chairman, Bruce Teele, says that the company is fully invested, and looking to borrow to buy if it spots value.

He said that because the large cap stocks (banks, Telstra etc) have lagged behind the stronger performance of small and medium cap stocks, there could be some good value buy opportunities.

AFI was the last of the quartet of investment companies linked Goldman Sachs JBWere to report 2007 full year earnings. The others, Mirrabooka, Amcil and Djerriwarrah, have all reported strong results in the past 10 days.

And all have either matched or beaten the 25 per cent gain in the ASX All Ordinaries in the year to June.

Including realised gains, AFI said after tax profit was $259.3 million (2006, $214.1) and earnings per share based on net operating profit were 23.7 cents, an increase of 22.0% over 19.4 cents last year.

A fully franked final dividend of 13 cents a share will be paid on August 22, bringing total dividends for the year to 21 cents a share, up 23.5% from 17 cents in 2006.

Mr Teele said in a statement accompanying the results that: "With another year of substantial gains, it has been an extraordinary period for equity markets over the past 4 years, one that is virtually unprecedented in my time in the market.

"Total portfolio return for AFIC over the twelve-month period (measured by change in net asset backing per share plus dividend reinvested) was an increase of 29.3%.

"The Net Operating Profit after tax performance was also very satisfying as the Company continued to enjoy a strong flow of fully franked dividends (including special dividends) which were up 13.6% to $165.3 million."

Unfranked dividends were also up strongly to $25.3 million (of which $11.4 million was as the result of Asciano's de-merger from Toll Holdings).

He said the impact of continuing economic development in China and other emerging economies has provided significant stimulus to the Australian economy through development of our significant reserves of natural resources and long-term improvement in the terms of trade.

"This has had a pervasive effect across the broad economy providing the backdrop for strong levels of business investment, low levels of unemployment and a resilient consumer, despite relatively higher interest rates and subdued housing sector.

"In this environment corporate profits remained strong with balance sheets in as good as a position as we have seen them for many years."

An interesting by-product of this strength and the relatively low real cost of debt has been the recent surge in takeovers and private equity activity.

"A number of companies in AFIC's Investment Portfolio are currently subject to corporate action which may mean a realisation of significant gains in the early part of this financial year," Mr Teele said.

These include large holdings in the Coles Group, Southern Cross Broadcasting, Smorgon Steel Group and Alinta. Our holding in Rinker has been disposed of during July 2007 following CEMEX reaching the compulsory acquisition threshold.

"This activity caused us to write to shareholders recently on the challenges and issues such bids have for a long-term investor such as AFIC.

"The short-term focus of the market we believe undervalues the irreplaceable long term strategic value of companies and the impact of tax on selling shares, particularly when trying to find suitable alternative investments to produce equivalent returns," Mr Teele said in the statement.


On the company's outlook, Mr Teele was confident to bullish at times.

He said the positive conditions that have been driving strong returns in equity markets do not appear likely to change significantly. However, market sentiment can be affected by volatility in the short term.

"In our opinion, whilst valuations in general look high, they do not appear excessive.

"It is interesting to note that the returns from the large cap sector of the market have continued to lag behind the small to mid cap sector of the market which have in part benefited from strong profit rises and a general re rating of price earnings ratios.

"This underperformance by the larger companies potentially provides further investment opportunities for AFIC. We entered the new financial year fully invested, with capacity to borrow if we see any attractive opportunities emerge".

"The major investments in the Investment Portfolio during the period were Rio Tinto, BHP Billiton and Telstra through the T3 offering of Instalment Receipts (as a result of our entitlement as Telstra shareholders).

"A number of others changes occurred within the portfolio as a result of corporate activity. In particular, large changes occurred as a result of the de-merger of Asciano Group from Toll Holdings, Suncorp Metway's takeover of Promina Group and Fairfax Media's takeover of Rural Press.

"New additions to the Investment Portfolio include: ASG Group, a provider of computer infrastructure and other specialist technical services; Equity Trustees, a specialist financial services company; Oakton, an IT services company; Queensland Gas, focused on becoming an integrated energy supplier in Australia based on coal seam gas resources."

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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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