Djerriwarrh Investments, another listed investment company associated with Goldman Sachs JBWere, looks like depending more on income from its options writing program for any earnings growth in the 2010 financial year, as it expects dividend income to slide.
The company, which is associated with Mirrabooka, which reported last week, and Australian Foundation, which is expected to report later this week, revealed a loss after taking impairment charges, but a solid rise in underlying earnings before revaluations.
The company reported a sharp rise in income from its options writing in the year to June.
The investment company said it was forced to classify some if its investments as impaired due to a large fall in market values in the 2009 financial year, resulting in a charge of $49.7 million for unrealised losses.
Djerriwarrh’s net loss for the year ended June 30 was $14.08 million, compared to a profit of $66.68 million in the previous year.
Excluding the charge, net profit was $35.6 million and the group’s net operating profit, excluding capital gains, was $55.2 million, up 21.1% on the previous corresponding year.
Annual revenue was $48.1 million, up 3.7% and Djerriwarrh declared a fully franked final dividend of 16 cents, equal to last year’s.
The company’s portfolio declined in value by 15.9% over the financial year, compared to the 20.1% fall in the general market, Djerriwarrh said.
It said option writing activity increased during the volatile market conditions, with the company participating in a number of capital raisings and dividend reinvestment plans at attractive prices.
"Djerriwarrh’s option writing activity has benefited greatly from the volatile market conditions which have prevailed throughout the year.
"In a year where dividends received from companies have begun to decline Djerriwarrh has been able to harvest significantly more income from its option writing activity given a higher level of call option coverage over the portfolio and the very large moves in shares prices evident through the year," the company’s directors said in the profit report.
The number of stocks in Djerriwarrh’s portfolio was reduced to fund some of these opportunities and build overall cash position, it said.
"Djerriwarrh will look to continue to operate with relatively high levels of call option coverage although as markets have stabilised somewhat the overall level of volatility has started to decline," it said.
Dividend income has come under pressure as a result of the adverse economic conditions, Djerriwarrh said in the statement to the ASX.
"These factors may have implications for the level of future income that can be generated from the portfolio although the company enters the new financial year with a very good level of written option premium," it said.
At June 30, the company’s largest investments were in BHP Billiton ($85.2 million), Westpac ($78.3 million) and National Australia Bank ($55.9 million).
The profit was seemingly at variance to the revenue figure, but the company’s options trading explained that.
Directors said that total income for the year from its "options underwritten portfolio" was "$23.3 million (2008: $19.8 million) plus the unrealised gains on the open options position of $10.5 million (2008: loss of $4.8 million), both before tax, was a net pre-tax ‘profit’ of $33.8 million (2008: $15.0 million)".
Directors explained the portfolio: "The Company enters into option contracts in the options written portfolio for the purpose of enhancing returns via the premiums that it earns from the writing of these contracts.
"It is separate from both the trading portfolio and the investment portfolio, and the options are designated as “assets measured at fair value through the profit and loss statement”.
“Where the Company sells a call option it is obligated to deliver securities at an agreed price if the taker exercises the option.
"Whereas if the Company sells a put option it is obligated to buy the underlying shares at an agreed price if the taker exercises the option."
DJW shares rose 14 cents to $4 as investors appreciated the very strong profits from the options business.
