WH Soul Pattinson & Co: Liquidity boost to drive dividend trajectory

About the author:

Steve Sassine
Author name:
By Steve Sassine
Job title:
Associate Analyst
Date posted:
24 September 2021, 9:30 AM
Sectors Covered:
Diversified Financials

  • WH Soul Pattinson & Co (ASX:SOL) released its FY21 result, with strong contributions from some of its core investment holdings highlighting the earnings cyclicality of these businesses (BKW, NHC, Round Oak). In our view, a broadly solid result, with underlying group NPAT of A$328m (+93% on pcp).
  • SOL’s investment portfolio remains resilient despite COVID disruptions, generating A$180m in net cash from investments, allowing for a 36cps (in line with MorgansE) fully franked final dividend to be declared.
  • With the MLT merger gaining Federal Court approval and a completion date expected of October 5th, 2021, we now factor the merger into our numbers. We raise our underlying NPAT forecasts in FY22/FY23/FY24 by > 40% on improved growth/portfolio yield assumptions and post the recent results of core holdings (BKW, NHC).
  • Our price target increases to (login to view) 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 released its FY21 result, which in our view, was broadly positive. The result was driven by strong contributions from some of SOL’s core investment holdings, which highlighted the earnings cyclicality of these businesses (e.g. BKW, NHC, Round Oak).

Group underlying NPAT was up 93% on pcp to A$328m, driven predominantly by: 1) BKW’s solid performance from both its building products Australia and Property divisions; 2) NHC’s +45% improvement in NPAT contribution due to the thermal coal price recovery; and 3) Round Oak Minerals increasing its NPAT contribution by A$103m on improved production and stronger commodity prices.

As an investment manager, SOL’s portfolio generated ~A$180m of net cashflow from investments and a portfolio pre-tax NAV of ~A$5.8bn. SOL declared a 2H21 dividend of 36cps (FY21 total dividends = 62cps, ~82% payout of net cashflow from investments).

Other points worth noting

With stronger than expected coal prices in 2H21 and tightening physical market dynamics, NHC had a strong year and contributed ~A$61m to SOL’s underlying NPAT. Thermal coal pricing is forecast to remain strong, boding well for NHC’s near term outlook.

The resilience/consistency of the SOL investment portfolio was again highlighted by the 21st consecutive increase (+3.3% on pcp) in total full year dividends, with SOL the only company in the All Ords to have achieved this.

The MLT merger is expected to complete on October 5, giving SOL a FY21 pro forma pre-tax NAV of ~A$9.1bn and FY21 pro forma net cashflows from investments of ~A$277m.

Management anticipates selling down parts of the liquid large cap portfolio providing >A$2bn of additional liquidity to fund further investments in private markets, global equities, property and structured yield.

Forecast and valuation update

The merger with MLT was granted Federal Court approval on September 20, 2021 and with the expected completion date early October, we now factor the merger (and subsequent equity issue) into our forecasts.

We raise our FY22F/FY23F/FY24F underlying NPAT forecasts by >40% on improved growth/portfolio yield assumptions and factoring in the recent results of core holdings (BKW, NHC). Our price target increases to (login to view) on the above changes and a valuation roll forward.

Investment view

In our view, 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.

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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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