AFIC And Others

Listed investment company and the larger of the Goldman Sachs JBwere-affiliated groups is Australian Foundation Investment Co and it has revealed a modest 8.5% drop in earnings before gains, and an unchanged final dividend of 13c a share.

The company said operating profit before gains on investments totalled $205.05 million, down from the $224.40 million earned in 2006-07.

AFIC declared a final dividend of 13c a share and with the unchanged interim of 8c a year, means a total payout of a steady 21c a share. Earnings per share were 21.2c (23.7c in 2007).

The shares eased just 3c to $4.89 after the report, but finished up a cent at $4.90.

AFIC said that annual profit after gains jumped 60% to $416.10 million, from $259.341 million in the previous year.

The increase came from a number of one-off gains from takeover activity during the year resulting in the sale of its holdings in Alinta, Coles Group, Dyno Nobel, Rinker, Smorgon Steel, Southern Cross Broadcasting and Symbion Health.

Chairman, Bruce Teele told shareholders that while the 2008 year was one in two halves (good first half, rotten second) "The factors driving market conditions are unlikely to change in the short term.

"Most sectors of the Australian economy have to deal with growing pressures on input costs, relatively high interest rates and restricted access to credit in an environment where the Reserve Bank is trying to soften demand," he said in a statement to the ASX.

"This is usually an environment which puts pressure on margins and earnings. However the resources and energy sectors are likely to benefit from continued strength in commodity and energy prices.

"The upcoming reporting season will also be an important guide to how companies are dealing with these pressures.

"The market will be closely monitoring trends in profit margins and their prospects for earnings growth over the medium term, particularly for those companies operating outside of the resources sector.

"As we move into the new financial year we will be attempting to look through the turbulence of present market conditions for opportunities to further invest in good companies with quality long term business franchises.

"AFIC moves into the new financial year with a relatively high level of cash and will be seeking to invest these funds judicially over the coming year”.

Mr Teele said the local equity market had been a "tale of two markets" in the past year.

"Investors have had to grapple with the conflicting themes flowing from the upheaval in global credit markets, possible recession in the developed world, the implications of accelerating commodity prices and the ongoing growth in China and other emerging markets," he said.

Mr Teele said share prices of financial and industrial stocks had suffered, as had companies with high levels of debt or complex financial structures.

The company said in its statement that the fall in the value of the Trading Portfolio, given the fall in value of the market over the second half of the financial year "had a negative impact on the profit result".

The Trading Portfolio is marked to market prices on an ongoing basis and the changes in market value are taken directly through the Company’s income statement.

"Whilst the Trading Portfolio averaged just under 3% of the Company’s total portfolio, over the financial year ended 30 June 2008 the contribution was negative $7.6 million whereas over the corresponding period last year the Trading Portfolio contributed a positive $30.5 million.

"Under the International Accounting Standards (AIFRS), Net Profit after tax includes realised gains made on sales from the investment portfolio. As previously highlighted to shareholders this measure varies significantly from period to period depending on the levels of sales from the Investment Portfolio.

"Such sales are inherently unpredictable. The profit on this basis for the twelve months to 30 June 2008 was $416.1 million. This was significantly higher than last year’s figure of $259.3 million and reflects the number and size of takeovers and disposals from the Investment Portfolio which occurred during the period.

The total portfolio return over the twelve month period after fees and tax paid (measured by change in net asset backing per share plus dividends reinvested) was negative 11.5% whereas the S&P/ASX accumulation Index declined 13.4% over the same period, while total shareholder return for the year to 30 June 2008 measured by the change in share price plus dividends reinvested was negative 7.6%.

The net asset backing per share at 30 June 2008 was $5.13 (before allowing for the 13 cent final dividend).

The total portfolio (including cash and bank bills of $261 million) at 30 June 2008 was $5.1 billion.

"The significant positive contributors to AFIC’s Investment Portfolio performance over the twelve months were BHP Billiton, Rio Tinto, Incitec Pivot, Woodside Petroleum, Santos and Origin Energy, all of which benefited from the strength in demand for commodities and energy.”

The Company also made some other adjustments to the portfolio to reduce its position in companies with relatively high levels of gearing and debt relative to their cashflows and balance sheet positions. As a result, we exited our entire holdings in Asciano Group, Centro Properties Group and Transpacific Industries during the year.

During the twelve months to 30 June 2008 we have been selectively adding to existing holdings across a number of areas. The major additional investments were in Wesfarmers, as an outcome

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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