Investment: Tough Time Ahead, According To Early Reporters

It's not 'new' news, given the damage done to share portfolios over the past six months or so, but we had further confirmation yesterday that the poor performance of equities is going to be bad for the country's listed investment companies and broking firms.

Three companies operating in and around the market have so far reported December half year results: Euroz Ltd the Perth-based broker. Mirrabooka, the Melbourne-based listed investor and its stablemate, Djerriwarrh Investments which yesterday produced its interim figures.

None of the trio's reports makes for happy reading.

Djerriwarrh said interim profit fell 9.5% to $23.1 million, from the $25.6 million result in the first half of the 2010-11 financial year.

That figure however is a bit misleading, as it includes the sharp rise in the unrealised value of the company's investment in Hastings Diversified Utilities Fund and Peet Notes, which is required under current accounting standards. (Hastings is under takeover attack from APA Holdings, a rival pipeline company.)

A more accurate result was the 18.2% fall in net operating profit (which measures the underlying income generated from the investment and trading portfolios) to $19.2 million in the December half, compared with the corresponding figure of $23.4 million last year.

Revenue from operating activities (excluding capital gains) was $22.6 million, up 1.1% from $22.3 million in the previous corresponding period.

An unchanged interim dividend of 10c share has been declared.

Directors said in a statement that, "Option writing activity, which is an important part of Djerriwarrh's investment activities increased its contribution over the corresponding period last year as the level of volatility in the market improved the returns from writing call options.

"However the Company was reluctant to sell too many call options at what it considers a low point in the market. As a result option coverage over the portfolio finished the half year at 25 percent.

"During the market weakness, the Company has kept its trading portfolio low as a percentage of total investments (around 3 percent). Its contribution to the profit was affected by the market decline."

Djerriwarrh said its portfolio return was negative 7.9% for the six months to 31 December 2011, better than the 9.7% fall in the main benchmark for listed investors, the ASX 200 Accumulation Index.

But directors claimed this performance "does not reflect the benefit of the fully-franked nature of the Company's high dividend yield which over the longer term adds approximately another 1.5 percent per annum to investor returns when compared with the overall market".

Djerriwarrh said that while it was fully invested during the period, "opportunities did arise to make some adjustments to the portfolio to add to holdings with strong fully franked dividend yields or which offer the potential for enhanced option income".

Major acquisitions in the period included Wesfarmers, Rio Tinto, BHP Billiton, National Australia Bank and ANZ.

Major sales were Fosters and Eastern Star Gas, both because of takeover activity.

"Market conditions are likely to remain volatile for some time as economic uncertainty continues to strongly influence the Australian market," directors said.

"To ensure the portfolio is well positioned to generate sustainable fully franked dividend income Djerriwarrh will maintain its focus on quality companies that are well positioned in their industries and that have the ability to produce reliable cash flows even during uncertain times.

"In addition, Djerriwarrh will seek to capture the market's current volatility in its options activities by looking to increase call option coverage during periods of market strength.

"We will seek to do this without surrendering too much of the potential upside if there is a market recovery," directors added.

The company's shares rose 3c to $3.73 yesterday.

The company said that net tangible assets per share before any provision for deferred tax on the unrealised losses on the long-term investment portfolio as at 31 December 2011 were $3.15 (before allowing for the interim dividend), down from $3.70 (also before allowing for the interim dividend) at the end of the previous corresponding period.

For the smaller stablemate, Mirrabooka, it was a similar story for the six months to December 31 last and it expects market volatility to continue for the next six months before a return to some normality late this year.

Earnings fell 9.5% in the period to $6.9 million, but the company said its portfolio outperformed the general small and midcap market sectors during the period, which fell by 12.6%.

That saw the company declare a steady interim, fully franked dividend of 3.5¢ a share.

However, unlike with the Djerriwarrh directors, there seems to be a touch more optimism at Mirrabooka, even though the two companies share managements and have common board members.

"Our expectation is the market will experience ongoing volatility in the coming months before settling into a period of more normalised returns in the second half,'' the company said last week.

But directors added that the local sharemarket should benefit from further falls in interest rates, plus evidence of a more sustained recovery in the US.

Mirrabooka managing director Ross Barker said the company's focus had been on companies that were well positioned in their industries, with strong balance sheets and cash flows that will lead to growing dividends.

And the company says it is well placed to take advantage of any buying opportunities amid the expected volatility in coming months.

Mirrabooka benefited from corporate activity, with a takeover bid launched late in the half for Hastings Diversified, a pipeline owner and operator, along with strong price rises for holdings such as Senex Energy, James Hardie and Campbell Bros.

Mirrabooka's major buys were in latex products group, Ansell, four-wheel-drive accessories manufacturer ARB Corp and Ramsay Health Care.

And Perth-based listed broker, Euroz saw an 85% drop in unaudited December half year profit to just $2.7 million.

Directors blamed the volatile equity markets and global economic uncertainty for the fall, but the weaker result does follow a strong first half in the 2011 financial year which saw earnings leap to $18.4 million for the period.

Despite that, the sharp fall in the latest result saw the company halve interim payout to shareholders to 1.5c a share, fully franked.

Euroz said volatile equity markets combined with global economic uncertainty had affected first half turnover and deal flow.

"Our equity accounted investments in the Westoz Investment Company and Ozgrowth have negatively impacted short term earnings this half," Euroz said.

"Market conditions remain difficult but our businesses experienced an improved second quarter and we remain optimistic with a solid deal pipeline for the second half."

The upshot of these three reports is that competitors such as Australian Foundation, Argo, Milton and smaller groups can be expected to produce similar performances and commentary.

Results for large groups such as the AMP will be of considerable interest, especially in the wake of the takeover of AXA Asia Pacific.

That concentrated the AMP's assets in Australia, which will have hurt 2011 performance and possibly inflows from investors, especially in the second half of last year.