BUY HOLD SELL – Washington Soul Pattinson (ASX: SOL)
Washington Soul Pattinson (ASX: SOL) is an investment company which listed on the ASX in 1903. It boasts an impressive and unmatched dividend record, never failing to pay a dividend to shareholders in its 117 years since listing. How’s that for consistency? Its major interests are in TPG, BKW and NHC. The stock caught my eye after scanning through Chris’ trading section with the company printing a 3MA buy signal (check out Chris’ webinar on 3MA signals HERE). Essentially confirming a technical sequence that suggests upside in the share price. Speaking of upside, SOL has had plenty of that recently, running convincingly into results that were announced yesterday morning. I have added the results write up below for those interested.
Full-year reported NPAT $953m vs year-ago $247.9m. The increase in statutory profit was largely due to an accounting gain of $1.05bn (lower than anticipated in July), relating to TPG Telecom following the completion of the TPG/Vodafone merger, partly offset by New Hope Corporation (ASX: NHC) impairments and restructuring expenses incurred in its Queensland mining operations.
Group regular profit fell 45% to $169.8m, although SOL doesn’t consider its earnings to be the key indicator of performance. Pointing to growth in the capital value of its portfolio and growing dividends as its preferred metrics. It declared a fully franked final dividend of 35 bringing total dividends for FY20 to 60c, up 3.4% vs year ago. FY20 Net assets outperformed the All Ordinaries Index by 6.9%.
Results pleased the market which, considering the impressive run into the release, had the potential to miss high expectations. Dividend growth in a challenging year one of the highlights, a 49% lift in net cash flows facilitating the pay-out.
- ROE isn’t anything special at 6.3%. Forecast to improve in FY2 then drop slightly in FY3.
- Revenue and EPS growth are both expected to firm this year and in FY2. Earnings are anticipated to outpace revenue until FY3.
- A PE of 27.2x is not what you’d call cheap, likely to fall to 22.6x in FY2.
- The dividend is what SOL prides itself on, over the last 20 years, dividends have grown at a compound annual growth rate of 9.2%. Making it the only company in the All Ords to have increased its dividend every year since 2000. Brokers are expecting FY21 to buck the trend – but what would they know?
- Only two brokers following the stock, one says HOLD, the other says BUY.
- It is trading at a 5.2% premium to the average broker target price and a 23.1% discount to intrinsic value.
WHAT SORT OF INVESTMENT IS SOL?
SOL is all about capital growth and dividends, with performance ultimately tied to its investments in its telecommunications assets, Brickworks (ASX: BKW) and NHC, which make up 69.2% of SOL’s portfolio. It has other interests in pharmaceuticals, mining and property but the majority of its focus is in the aforementioned. Given such large investments in these businesses the likelihood of divestment is slim, so it does appear that you are stuck with bets on the domestic and US housing markets, coal – which is predominantly used for electricity generation – and telcos. I’ve provided a couple of points on those interests below.
During the year, TPG was finally able to merge with Vodafone to create a very attractive telecommunications company. Synergies and market share growth looking promising. CEO Todd Barlow observing TPG is now an “integrated telco that can compete aggressively with Telstra and Optus.” Its post-merger interest in the company 12.6%.
BKW’s earnings were hit by lower building activity associated with COVID. The business is expecting improved earnings as building conditions normalise post the pandemic. That said, BWK’s performance is highly correlated to US housing starts which are expected to plateau, if Trading Economics is to be believed. The chart immediately below showing the forest trajectory.
BKW’s correlation with US housing starts (orange bars).
Its 50% shareholding in coalminer New Hope contributed $42m to regular net profit but the business also underperformed on lower coal prices. Below is a chart of coal price which has been in a pretty solid downtrend since the end of 2018. The commodity has just started to show some signs of life.
SOL is up ~40% since its March low and notably, a quarter of that performance was achieved in the last week. RSI, not surprisingly, is in overbought territory, although it has just started to edge lower. What it does have running in its favour is momentum and a positive results reaction. We know that results typically de-risk a stock for the next few months and have the potential to start new trends. Although not reflected on this chart, the stock has satisfied the criteria for 3MA.
Not much to take away from the top investor’s report. I had suspected director purchases as a possible catalyst for the recent share price rise (outside of results), but that was a clearly misplaced assumption.
A trend you would like to see on any normal stock chart, not one that inspires when it comes to short interest. A clear uptrend in short positions over the last three years. Currently just below 3%, not a level that should be worried about, but it shouldn’t be dismissed either.
Looking at the company as a sum total of its major investments, Washington Soul Pattinson (ASX: SOL) doesn’t strike me as the most attractive offering. BKW results were in line with expectations, but a drawn-out economic recovery and plateauing housing starts in the US don’t suggest much upside in the near term. NHC, which is tied to the coal price also doesn’t appear to be very attractive given the ~50% fall in the commodity from 2018. TPG presents the most upside in an investment sense for SOL, marrying its broadband strength with Vodafone’s mobile infrastructure. An opportunity to steal market share from Telstra is appealing. I do tend to favour companies that have run into results and have performed well after, but I’m not convinced there is much more upside to be gained. Volatility ahead of the US election is likely to make it a bumpy ride as well. HOLD. As Marcus always says, do not sell a stock because it’s going up, sell it when it goes down.
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