Washington H. Soul Pattinson, the conglomerate that has holdings in New Hope, TPG Telecom, Pengana Capital and Brickworks, has reallocated nearly $1 billion of capital into private markets over the past year.
The tilt revealed in the annual results released yesterday comes as investors see equities as too expensive and lower yielding.
The company said in an investor presentation it had reallocated $900 million away from equities and had made $547.1 million of “additional investment and revaluations” in private equity and $542.2 million extra investment in structured yield.
“The market has recognised the cost of debt is higher than a couple of years ago … the risk premium on top of that has also gone up,” said WHSP’s chief executive, Todd Barlow, of its increasing investment in private credit. “Double-digit returns for corporate credit is normal … we will keep adding to that portfolio.”
The company, which began in the pharmacy business, now has a private equity portfolio worth $1.2 billion as of the end of the financial year.
“WHSP was a seller of $1.4 billion in equities, mostly large caps, with the majority of proceeds allocated to private equity and structured yield portfolio investments to generate attractive risk-adjusted returns,” the company told shareholders yesterday.
It also has a cash and term deposit balance of $911 million, with interest-bearing debts of $225 million. “In what is a volatile market we have actively accumulated cash – awaiting investment opportunities,” the company said.
Earlier this year, WHSP said it was taking a more defensive stance, including stockpiling more cash, considering the current economic environment and potential for recession.
The group reported net profit jumped to $690.7 million from a loss of $12.9 million the year before, following its previous merger with ASX-listed Miltons. WHSP’s net asset value rose 8 per cent on the year before to $10.8 billion.
The group prefers the measure “regular profit” after tax, which adjusts for one-off items, and this dropped by 9 per cent to $759.3 million for the financial year ending June.
Brickworks, in which WHSP is a major shareholder, posted a 54 per cent drop in net profit yesterday to $395 million for the last financial year, pushing shares almost 7 per cent lower.
WHSP investors followed suit in selling off the stock, with the company’s shares closing down $2.15, or more than 6 per cent, at $31.84. The sell-off was despite a 20.8 per cent increase in dividends. The fully franked dividend is 51¢ and total dividend is 87¢ a share.
“It really caught me by surprise. I thought it was an excellent result. We grew the portfolio, generated strong cash flow,” Mr Barlow said of the sell-off.
Property holdings – which make up 1 per cent of the portfolio – dropped from $226.6 million last financial year to $112.6 million in the year ending in June. Executives said the company had been pulling back on its direct property investments, particularly due to Brickworks’ substantial exposure to industrial property.
Mr Barlow said industrial property was its preferred asset class in the sector, because the commercial market was struggling with work-from-home trends and in the residential market house prices felt “unsustainably high”.
WHSP is also a major investor in coal producer New Hope. Mr Barlow said New Hope had found other markets to sell to since Australian coal was shut out of the Chinese market, and little had changed since the ban was lifted.
“When China comes back into the market saying it can buy Australian coal again, the Australian suppliers say, ‘well, I’m not going to get burned again because I prefer to have more customers elsewhere’,” Mr Barlow said.
“It’s going to take some time before China actually can buy Australian coal again. And that assumes Australian suppliers even want China as customers.”
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