Updates: Argo Profit Down, Dividend Steady, Downer Shares Up On Rail Deal

Listed investment company Argo Investments has joined most of its competitors in revealing the impact of the weak stockmarket on its interim result.

Despite a 4.7% fall in net profit to $85.8 million for the half year, the company will maintain a 13c a share interim dividend because the result was better than it looks.

Revenue fell 5.8% to $93 million, but comparison with the first previous first half is misleading because the latter contained one-off transactions worth $11.4 million.

That boosted profit for the half year to December 2010 to $909 million. Strip that out and Argo has managed quite a credible result for the latest period.

"Overall, the company has delivered another solid result in uncertain economic conditions and despite a period of weaker equity markets, including the Australian market which dropped 11.8 per cent in the six months under review, "chief executive Jason Beddow said in yesterday's announcement.

He said the global economic outlook remained uncertain. Tentative signs of improvement in the US economy have been overshadowed by the continuing deterioration of the sovereign debt crisis in Europe.

Argo has no debt and $180 million in cash, and Mr Beddow says the company remains well placed to take advantage of any opportunities.

That's a position Argo's rivals, such as AFIC, Milton Corp and others are in: cashed up, but very wary of the market and the wider economy, both at home and offshore.

"Australia remains one of the strongest developed economies and we believe that for a long-term investor, value is beginning to emerge in the local equity market," Mr Beddow said.

Chairman Chris Harris, who will step down on February 29 after 18 years on the board, said in the statement that Argo had been cautious about the global macroeconomic outlook for some time and expected the high levels of offshore volatility to hamper any meaningful recovery in global equity markets.

Argo said that despite the indifferent performance of markets, Argo bought $12.1 million in ANZ shares, $4.5 million in Santos, $4.2 million in NAB, $3.9 million in Commonwealth Bank and $3.6 million in Coca-Cola Amatil.

"Our holding in Treasury Wine Estates was sold together with a few smaller holdings. A takeover for our holding in Fosters Group was accepted," the company said.

Argo's three biggest investments in its portfolio are BHP Billiton ($271 million), Westpac ($183 million) and ANZ ($157 million).

Shareholders will be paid a fully franked 13c interim dividend on March 7.

Argo shares rose 10c to $5.40.

Downer EDI shares have jumped to the highest in six months after the NSW government reached an agreement to restructure the financing of the troubled Sydney Waratah passenger train contract company, Reliance Rail, 49% owned by Downer.

Downer EDI shares surged 8.5% to $3.84 in morning trade, the highest since early last August.

They ended up a solid 7% at $3.79, a gain of 25c on the day.

The NSW government agreed to invest $175 million in Reliance Rail in 2018 in return for full equity in the company, according statements and reports over the weekend.

Downer will contribute all its equity in Reliance Rail as part of the restructure, and agreed to pay $12.5 million in 2018 if Reliance's senior debt needs to be refinanced.

Reliance Rail is building trains for the Sydney suburban rail network.

Downer also said yesterday that it had been awarded a six-year, $570 million magnetite mining contract with a WA iron ore miner, Karara Mining.

The NSW government support won the backing of Fitch Ratings yesterday.

In a statement, Fitch said the financial restructure of the Reliance "adds certainty to the cash flows derived by Downer from the Waratah rolling stock manufacturing contract ('Waratah project'). The announcement does not have an impact on Downer's Long-Term Issuer Default Rating (IDR) and senior unsecured ratings of 'BBB-'. The Stable Outlook is also unchanged.

"Fitch notes that the 'Financial Restructure Plan' ('Plan'), which sees the state government of New South Wales inject AUD175m of equity (subject to various contingencies) into Reliance Rail in 2018, does not result in any material cash contributions from Downer. The Plan reduces the risks to cash flows associated with the unwinding of the Waratah project and diminishes the need for Downer to inject further equity into Reliance Rail.

"Downer's rating is less contingent on the success or failure of the Waratah project than it is on the potential for Downer to provide financial support to Reliance Rail" said Johann Kenny, Director in Fitch's Industrial team. "Considered in concert, the non-recourse nature of Reliance Rail's funding, a factor already incorporated into Downer's rating, and the execution of the Plan, provide a compelling mitigant to the risk of financial support to Reliance Rail by Downer" added Mr. Kenny.

"Residual risks to the Waratah project arise from the step change in production levels required to meet the 2014 delivery deadline. Fitch notes that Downer has invested significant resources, manpower and expertise in ensuring the smooth execution of this phase of the contract. The results achieved from these investments, over the past six months, are encouraging."