WH Soul Pattinson: Dividend growth consistency should please

About the author:

Steven Sassine
Author name:
By Steven Sassine
Job title:
Associate Analyst
Date posted:
29 March 2021, 11:50 AM
Sectors Covered:
Diversified Financials

  • SOL released its 1H21 result, which highlighted the earnings cyclicality of some of its core businesses (eg NHC, Round Oak). The result overall was broadly positive.
  • SOL's investment portfolio remained resilient, generating ~A$85m (-8% on pcp) of net cash flow, allowing for a 26cps full franked dividend to be declared (23rd consecutive increase).
  • We raise our FY22F underlying NPAT forecast by ~33%, factoring in improved growth assumptions and earnings upgrades post recent results of core holdings (e.g NHC/BKW). Our price target increases to A$28.84 on the above changes and a valuation roll forward.
  • SOL's management team continues to deliver both organic and inorganic growth over the long term. We continue to like the SOL story, particularly its track record of growing dividend distributions. Hold maintained.

Result summary

SOL's 1H21 headline (accounting) numbers highlighted the earnings cyclicality of a few of its core businesses (eg NHC, Round Oak). Its statutory profit of ~A$69m (+35% on pcp) was primarily due to lower impairment charges from NHC (+ prior period impairment reversals). Its underlying NPAT of ~A$90m was down 28% on pcp, with the fall attributable to a lower contribution from NHC and the derecognition of TPG as an associate.

As an investment manager, SOL's portfolio generated ~A$85m (-8% on pcp) of net cash from investments and a portfolio pre-tax NAV of ~A$5.2bn. SOL declared a full franked 26cps interim dividend (~2% yield at current levels).

The positives

  1. Despite a subdued 1H21 contribution from NHC, the Bengalla mine has returned to full operation and 2H21 is showing strengthened coal prices, highlighting a much improved outlook in the near term;
  2. The 26cps full franked dividend is the 23rd straight increase in the interim dividend (8% CAGR over the last 20 years), showing the resilience and consistency in the SOL investment portfolio, in our view;
  3. BKW's Property division recorded a strong result (EBIT of ~A$92m, +3% on pcp), driven by revaluation gains (cap rates compressing ~25bps across the portfolio) and property sales (~A$38m);
  4. Round Oak's revenue was up 95% on pcp to ~A$146m (higher sales volumes, firmer commodity prices and favourable changes in smelter charges).

Things to keep an eye on

  1. With NHC, the referral back to the Land Court (next hearing Nov-21) adds further delays to the potential development of Acland 3 by ~1-2 years;
  2. The recent issue of A$225m in convertible bonds not only lowers the groups average cost of debt but also provides plenty of liquidity to take advantage of post-COVID opportunities; and
  3. TPG is still facing NBN headwinds with a 356k decline in DSL subscribers and mobile roaming declines due to a continued absence of international travelers.

Changes to forecasts and investment view

We raise our FY22F underlying NPAT forecast by ~33% on the back of increased growth assumptions and earnings upgrades post recent core holding results, eg NHC (firmer coal prices) and BKW (improved housing confidence/Property performance).

Our SOTP/DDM valuation rises (Morgans clients login to view) on the above changes and a valuation roll-forward. We continue to like the SOL story and its long history of consistent dividend distributions.

Hold maintained.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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