Australian Foundation: Watchful Outlook

The country’s biggest listed investment company, Australian Foundation Investment Company (AFI), has taken a different approach to the market than some of its associates, such as Djerriwarrh Investments (DJW) which basically stayed out of the market in the December quarter.

It sold a swag of shares in infrastructure related stocks and one bank, Suncorp Metaway, but apart form picking up shares in takeovers, like the Westpac offer for St George, the market was a no go for DJW.

But AFI took a different approach: it quit a swag of stocks, like DJW, but made some low level purchases, just as another LIC in the stable, Mirrabooka did.

In its report for the December half released yesterday, Australian Foundation said:

"Major sales in the Investment Portfolio were driven by corporate activity, St George Bank was taken over by Westpac and Queensland Gas was taken over by British Gas.

"The Company also decided to divest its position in ConnectEast and sell the majority of its holding in Suncorp-Metway during the period.

"Whilst AFIC has been taking a cautious approach to investing, recent capital raisings have provided some opportunities to invest.

"As a result the major purchases during the half year were Alumina, Commonwealth Bank, Incitec Pivot, National Australia Bank, QBE Insurance, Tox Free Solutions and Westpac."


DJW’s approach was vastly different, as it said last week in its interim statement:

"Purchases were predominately from participation in capital raisings by the Commonwealth Bank, Incitec Pivot, National Australia Bank, QBE Insurance and Westpac (including shares from its takeover of St George Bank).

"The Company sold its entire holdings in ConnectEast, CFS Retail Property, James Hardie Industries, Macquarie Airports, Suncorp Metway and Westfield Group. Other major sales arose because of takeovers, Queensland Gas by British Gas and St George Bank by Westpac."

But while that was different, the conservative, limited outlook approach to the market at all the associated companies was apparent in directors comments at Australian Foundation.

"Recent conditions provide investors with a number of challenges, not least of which is understanding the full implications of current events and time frames for equity market recovery.

"As a long term investor AFIC has taken some opportunities to buy selected stocks with good business franchises, primarily though capital raisings, to appropriately position the portfolio for an eventual improvement in economic conditions.

"However, the Company remains very cautious about how quickly global economic conditions will improve and the short term outlook for company profitability, including dividends.

"As a result, AFIC will be adopting a patient approach to investing its remaining cash position.

"AFIC has continued to hold a relatively strong cash position during the past six months and had a cash holding of $236 million at December 31.

"This approach in concert with its ongoing strategy of avoiding exposure to companies with complex business models and or high levels of debt meant its portfolio was relatively less impacted by the recent market turbulence," The company told the ASX.

AFIC said its portfolio outperformed the general market by 3% with a fall of 24% over the December half year compared to the 27% decline in the general market.

"Net Operating Profit was down marginally to $107.8 million from $110.7 million last year. Income from investments and deposit interest were up however this was offset by a decline in the value of the Trading Portfolio.

"Revenue from operating activities (excluding capital gains) was $134.0 million, 14% up from the previous corresponding period.

"Operating Profit after tax was $107.8 million, 2.6% down from the previous corresponding period due to the net losses on the trading portfolio.

"In the opinion of Directors, this is the best measure of the Company’s performance in deriving on-going investment and trading income from its portfolios.

"Net profit after tax was $108.9 million (last year $326.1 million, down 67%). This figure varies greatly from year-to-year as it includes realised capital gains from sales from the Company’s Investment Portfolio.

“This was significantly lower than last year’s figure and reflects the absence of major sales in comparison to the corresponding period last year when Coles Group and Rinker Group were taken over."

The interim dividend is 8 cents per share, fully franked, the same as last year’s interim dividend.

Net tangible assets per share before any provision for deferred tax on the unrealised gains on the long-term investment portfolio as at 31 December 2008 were $3.81, down from $5.96 at the end of the previous corresponding period (both before allowing for interim dividends).

The Dividend Reinvestment Plan for the interim dividend has been maintained with the discount increasing from 0% to 5%, as it has at the other associated investment companies.

Australian Foundation shares ended down 3 cents at $3.86.

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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