Australian Retail Franchise Group

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Listed Investor Cuts Risky Shares

Melbourne-based listed investment company, Djerriwarrh Investments (DJW) exited some interesting high risk investments in the December half, according to its interim profit statement released yesterday.

In fact some of the shares sold would sit comfortably in its portfolio at most times, but infrastructure, retailing property, a bank and a major building products companies were all sold as the investor de-risked and pulled its horns in.

The company said yesterday its sales included the “entire holdings in ConnectEast, CFS Retail Property, James Hardie Industries, Macquarie Airports, Suncorp Metway and Westfield Group. Other major sales arose because of takeovers, Queensland Gas by British Gas and St George Bank by Westpac”.

The portfolio is still dominated by big cap stocks such as BHP Billiton, the NAB, Commonwealth Bank, Telstra.

Suncorp was the worst performing financial stock and Hardie is exposed to the still slumping US housing downturn.

That’s a major statement of how the company, which is associated with the big Melbourne broker and investment bank, Goldman Sachs JBWere, sees the immediate future direction of the market.

It said it sold these stocks because of their heightened investment risk and because it wanted to boost its cash position.

Djerriwarrh has posted a 47.1% half-year drop in profit to $29.7 million on $15.1 million in losses incurred from offloading those shares.

Djerriwarrh’s interim net profit for the six months to December 31, fell from $56.218 million during the previous corresponding half, despite a 22% rise in revenue, to $29.271 million.

The $15.119 million loss on the sale of the shares during the first half was in contrast to a $29.5 million profit on securities sales during the previous corresponding half.

The company didn’t buy any shares: it picked up Westpac shares in the St George takeover and wrote call options against its portfolio to generate cash. It also took up shares in issues made by some of the remaining companies in its portfolio.

“Purchases were predominately from participation in capital raisings by the Commonwealth Bank, Incitec Pivot, National Australia Bank, QBE Insurance and Westpac (including shares from its takeover of St George Bank),” the company said in its statement to the ASX.

A further sign of the hunkering down is that although the company had a lift in returns, the value of its portfolio dropped in the half year and dividend is being held at 10 cents a share, but the discount for the dividend reinvestment program is being boosted from zero to 5% to encourage more holders to take shares instead of cash.

That will be something of an ask with companies already cutting dividends and many of DJW’s holders dependant on the dividend payments for income.
But it is a sign the company is trying to hold onto as much cash as possible

In the statement accompanying the profit announcement, the company said that volatile conditions in equities stemming from the dislocation in global credit markets provided a significant boost to Djerriwarrh’s income.

“The writing of call options forms a significant part of Djerriwarrh’s enhanced income activity.

“Option premiums during the period benefited from the high levels of volatility available on these call options. In addition, the general decline in share prices meant that very few option positions were bought back by the Company during the period.

“The Company’s income also benefited from participating in the Santos share buy back in early October 2008.

“With the interim dividend held at 10 cents per share the company said the yield on the share price is just over 7% fully franked.

“We believe the enhanced income characteristic of Djerriwarrh together with its diversified portfolio should be an attractive proposition for many investors in these uncertain times.

“The Company’s portfolio performance declined by 23% over the December half year compared to the 27% decline in the general market.

“This outperformance was brought about by the avoidance or removal from the portfolio of stocks, which Djerriwarrh perceived as having heightened investment risks and a move to improve the cash holding.”

Djerriwarrh directors said the company will look to continue to operate with relatively high levels of call option coverage whilst volatility remains high.

“It will also seek further opportunities to invest in companies with strong business franchises offering high fully franked dividend yields, acknowledging company dividends in general are likely to come under pressure as the economy moves through a period of subdued activity.

“Profit for the half-year (including net realised capital gains) was $29.7 million, 47% down from the previous corresponding period due to the decrease in the number of securities sold from the investment portfolio and the loss incurred on those sales (realised losses in the investment portfolio were $15.1 million for the half-year, down from a gain of $29.5 million during the corresponding period, before tax).

“Revenue from operating activities (excluding capital gains) was $29.3 million, 22.5% up from the previous corresponding period.”

The shares rose 6 cents to $3.64 yesterday.
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