Timely with all the Soulpatts and Brickworks chat, Scott Phillips has just interviewed Rob Millner on his 2nd podcast "The Good Oil with Scott Phillips".

Search The Good Oil with Scott Phillips "The secret of long term investing success, with Rob Millner" in your pod machine of choice.

It's a light entertainment style show, so don't expect anything too hard hitting, but a nice chat with a successful bloke who has earned the right to be refreshingly frank. They shy away from the Berkshire comparison, but I get a similar vibe listening to Rob, Buffet and Munger. Avoid bullshit, keep it simple, trust in common sense and invest in good people. If only it was that easy.

SOL and the Milner have had an unintended massive tax win that the brokers are talking about. Some of these exact details may be wrong but this is my understanding - i have not confirmed any of these details and haven’t followed but anyway an interesting sequence of events:

Essentially a lot of fundies never wanted to buy SOL as it was primarily just 3 listed companies that had massive capital gains that made it impossible for SOL to sell as what they invested in would have to such a large upside to offset the tax paid. As a result the fundies were always like i can just go buy those 3 listed companies myself why do i need to own SOL and have that issue.

The merger with milton resulted in a billion dollar tax loss as the LIC continued to rally between the merger was announced and when it was finalised which resulted in a large goodwilll adjustment. No one really knows why Milton continued to rally so hard - some said retail/ passive buying. The goodwill adjustment was then impaired. Now they had a tax offset (over a $1B) - completely unexpected and all luck.

Now they have finally decided to collapse the cross shareholding, something fundies have been pushing for decades for the which the Milners always opposed, in part to keep control i believe.

Now the structure is collapsed at a time of the Milners choosing they have a diversified company that plays in private credit, listed equities and now some less dominant major holding that they can actually sell now due to the massive tax loss they lucked into. Furthermore, it’s expected they may be able to reset the cost base for a number of holdings due to the collapse of the cross shareholding.

Anyway, mostly by luck or perhaps patience SOL has a massive pool of closed capital and they can pick the attractive thing to allocate too - they can sell some of their large banks and allocate to private credit or whatever they want to do.

TLDR; 1+1 = 2 not 3

The proposed merger with Brickworks could result in a new ASX50 name.

Esther Holloway

Soul Patts and Brickworks have agreed to merge. The new combined entity will also raise about AUD 1.3 billion of new equity to cover transaction costs and reduce debt. Since the announcement, shares in Brickworks and Soul Patts were up 28% and 16%, respectively. 

Fundamentals don’t justify rally

The market likes the deal, and we agree that it has merits. It fixes a long-standing governance issue by eliminating the cross-shareholding, boosts free float, and may result in ASX 50 inclusion. Given the positive market reaction, we expect the merger to go through. 

We don’t see material synergies and neither does management. Cost-cutting in Brickworks isn’t on the table, and savings from lower listing fees are negligible. The merger doesn’t create value, so fundamentals don’t justify the share price rally. 

Instead, the merger reallocates value between the existing shareholders of Soul Patts, Brickworks, and the new investors in the institutional equity raise. One plus one still equals two, and for every winner, another party must pay up. 

Merger undervalues Brickworks

The merger undervalues no-moat Brickworks, and we cut our Fair Value estimate 9% to AUD 29 per share. It would lift Soul Patts’ fair value estimate by about 3%, but this is offset by transaction costs. Our AUD 35 fair value estimate stands. 

Both companies are overvalued after the rally. Perhaps Soul Patts shareholders expect more demand from passive money, and indeed, many large caps we cover trade at a premium. 

The combination of the two companies is likely to see extra near-term demand for the shares. But to unwind the cross shareholding, Brickworks shareholders will need to pay. We will make a call on the relative merits of this when we see a scheme booklet

This wasn't on my bingo card....

Investment house Soul Patts is set to merge with Brickworks, forming a $14 billion ASX-listed investments, private capital, property and building products giant, Street Talk understands.

Sources said stockbroker Aitken Mount Capital Partners pitched a $500 million equity raising to fund managers over the weekend as the foundation of the merger.

Perpetual is understood to have put its name forward for a significant minority of the funding, which sources said could be done at a nil discount to Soul Patt’s share price. L1 Capital, Ausbil Investment Management, and Cooper Investors are also expected to contribute.

Soul Patts, formerly Washington H. Soul Pattinson, is a diversified investment manager with stakes in New Hope Group, TPG Telecom and Ironbark Asset Management, among other things. Brickworks is one of Australia’s biggest brick making groups with a history stretching back to 1934.

Soul Patts owns a 43.3 per cent stake in building products group Brickworks valued at $2 billion. Brickworks owns 26 per cent of Soul Patts, worth $3.5 billion. The merger will see the end of a 60-year-old cross-shareholding, first negotiated at Eastwood Rugby Club in Sydney’s north-west to achieve diversification and protect both firms from hostile takeovers.

Soul Patts reporting 25 years of dividend growth:

Outperformance over a 5, 15 and 25 year timeframe:

Defensively positioned (performs better in down markets than up):

The investor call is at 1330 today (Sydney time), and much to digest in the slide pack and financial report still.

Disc: held in RL and SM.

Chart Update 16th Sep 24

chart Update Fri 26th July

I would love to own this stock, however I must wait quiet some time. I believe we are already in a large C wave down with w(ii) up completing nowish. This then allows me to plot 28.93 ish as the next major pause in its journey for a large w(iii) down. Im not placing waves (iv) or (v) yet until I see how the stochastics looks when it reachs the bottom of w(iii), although it should then bounce for a w(iv) and then back down to 25.05ish for w(v). So now I wait.

Ignore the time frames as plotting Fibonacci numbers doesnt take into account how fast or slow this could happen.

•  Group profit after tax up 35% to $68.9 million (1H FY20: $51.0 million)
•  Diversified portfolio showing resilience against market volatility
•  Interim Dividend up 4% to 26 cents per share (1H FY20: 25cps) o Grown at a compound annual growth rate of 8% for 20 years
•  The only company in the All Ordinaries to have increased its dividends every year for the past 20 years
•  Total shareholder return of 1,189% over 20 years o Total Shareholder Returns have outperformed the market by 5.6% per annum for 20 years
•  Number of shareholders increased 13% on previous corresponding period

DISC: I hold

SOL has sold 50,000,000 of their shares in New Hope, and so no longer own over 50% of New Hope's shares. They still retain 365,000,000+ shares which is still about 44% of shares on issue.

Form 604 is also attached

Is this a sign that SOL is moving on from NHC?

I have a holding in SOL

20-Nov-2020:  REG: Regis Rejects Non-binding Indicative Offer

Also, 19-Nov-2020 (4:42pm, i.e. after market close):  Non-binding indicative proposal to acquire Regis Healthcare   and (4:48pm)   Becoming a substantial holder from SOL

SOL (Washington H Soul Pattinson & Co) have an arrangement with Ashburn Pty Ltd and Ashburn owned 27.23% of Regis Healthcare (REG) yesterday.  SOL and Ashburn Pty Ltd have together launched an offer to acquire REG for $1.85/share, reflecting a 25% premium to last night’s $1.475/share close.   So far, REG is up around +20% today, at around $1.77, but have been as high as $1.815, so there is obviously some doubt that this deal will go ahead, particularly as the REG board have rejected it this morning.

WHSP (SOL) has proposed two alternative forms of consideration to Regis shareholders, being full cash consideration or a scrip alternative in a newly incorporated company, allowing Regis shareholders to retain an exposure to Regis as a privately operated business.  Funding is expected to be provided by cash, undrawn credit facilities and other liquid financial assets on WHSP's balance sheet.

Now we wait and see if any other bidders join the fray, or if SOL/Ashburn are prepared to sweeten their offer to get the REG board onside.

We were discussing PE (Private Equity) companies here over the past couple of days, and I mentioned that WMA have around one quarter of their LIC invested in PE companies, and that IFT is a listed company that operate exactly like a PE company [I hold IFT shares].  Well, WHSP (SOL) are another company that do operate in a similar way to PE, however SOL do tend to have a longer term focus and are prepared to hold many of their positions for decades.  They also don't mind the odd shorter term deal here and there, but they definitely have a longer term focus than the majority of Private Equity consortiums out there.  The big turn-off for me however with SOL (meaning lately, because I used to hold them) is their controlling 50% interest in New Hope Coal, one of Australia's largest thermal/energy coal producers.  If they offloaded their NHC stake, I would probably buy back into SOL - at the right price.

24-Sep-2020:  WHSP FY20 Results Media Release   plus   WHSP FY20 Presentation   and   Preliminary Final Report

Cash generation from investments up 49%, 20 years of increased dividends

Key highlights:

• FY20 Group Regular Profit after tax*: $169.8 million, -44.7%
• Group Statutory Profit after tax: $953.0 million, +284.3%
• WHSP’s net asset value (pre-tax): $5.2 billion, -5.3%
• Net cash flows from investments**: $252.3 million, +48.8%
• Total Dividend per share (fully franked): 60 cents, +3.4%

*Regular profit after tax is a non-statutory profit measure and represents profit from continuing operations before nonregular items.  A reconciliation to statutory profit is included in the Preliminary Final Report on page 25.

**Refer to Preliminary Final report – Alternative Performance Measures - for the definition of net cash flow from investments

• Washington H. Soul Pattinson remains the only company in the ASX All Ordinaries to have increased its dividends every year for the past 20 years
• Dividends have grown at a compound annual growth rate of 9.2% for 20 years
• Total Shareholder Returns have outperformed the market by 5.2% per annum for 20 years
• Diversified portfolio showing resilience against market volatility – FY20 Net assets outperformed the All Ordinaries Index by 6.9%

WHSP’s objective is to deliver to its shareholders:

1. Superior investment returns:  In the year to 31 July 2020, the All Ordinaries Index fell 12.2% however, the gross value of WHSP’s portfolio decreased by only 5.3% generating a 6.9% outperformance.
2. Steady and growing dividends:  WHSP declares its dividends from the cash it receives from its portfolio (rather than accounting earnings). The net cash flows from investments received by WHSP for the full year FY20 was 49% higher than the previous year. This strong cash generation allowed the Company to declare another increase to the final dividend and places WHSP as the only company in the All Ordinaries Index to have increased its dividends every year for 20 consecutive years.

--- click on links above for more ---

Comments on above results

Net profit after tax (including non-regular items) attributable to members

The statutory profit after tax attributable to shareholders was $953.0 million compared to $247.9 million last year.  The increase in statutory profit after tax of $705.1 million was largely due to the accounting gain of $1.05 billion on de-recognition of TPG Telecom as an equity accounted associate following the completion of the TPG/Vodafone merger, partly offset by New Hope Corporation impairments and restructuring expenses incurred in its Queensland mining operations. The prior year included the gain on the sale of WHSP’s 160 Pitt Street Mall property.

Regular profit after tax attributable to members

The regular profit after tax attributable to shareholders for the year ended 31 July 2020 was $169.8 million compared to $307.3 million for the previous corresponding period.

The decrease in regular profit after tax was mainly attributable to the following:

• New Hope (NHC) revenues lower due to USD thermal coal prices and lower production at its Queensland mines, partly offset by a full year contribution from its 80% interest in the Bengalla Joint Venture and a lower AUD/USD exchange rate ($92.4m) (69%)
• TPG Telecom contribution lower due to net margin reduction from the migration to the NBN and WHSP not taking up a share of TPG’s income from 29 June 2020 due to the merger of TPG and Vodafone ($23.4m) (25%)
• Brickworks experienced a fall in demand in its building products businesses in Australia and North America due to COVID-19, partly offset by a solid contribution from its property division ($12.7m) (23%)
• Reduction in investment and trading income and an increase in net interest expense from increased gearing ($20.6m) (26%)
• Round Oak saw increased revenues from its Barbara and Mt Colin mines entering production, offset by lower commodity prices and high ore treatment charges +$11.6 +21%
• Total ($137.5) (45%)

Refer to Chairman’s Review and Review of Group Entities for further details on the results

31-March-2020:  Livewire: A word of advice from one of Australia’s most experienced investors

26-Mar-2020:  A number of announcements were released by SOL today, including:

Half Yearly Report and Accounts

Media Release

Analysts Presentation

As expected, with their large positions in NHC (New Hope Coal) and TPM (TPG Telecom), plus their CopperChem business, WHSP (Washington H Soul Pattinson, ASX: SOL) have announced lower revenue and lower earnings, yet have once again increased their dividend, as they ALWAYS do.  

"WHSP does not consider its earnings to be the key indicator of the Company’s performance.  As with any investment portfolio, the key drivers of success are growth in the capital value of the portfolio and growing dividends."

They pay their dividends out of their cashflow, and their cashflow remains strong.

This company is a core holding in my super portfolio, and while their SP will fluctuate in the short term, it rises consistently each decade, and they pay higher dividends every single year.  There is only one other decent sized ASX-listed company that have that sort of multi-decade track record of consistently raising their ordinary dividends - and that company (which I also hold) is Ramsay Health Care (RHC).