WHSP Growing Shareholders Money In Distinctive Ways Than Other Fund Managers And Capital Allocators

Business Strategy and Outlook

WHSP is a value investment style-oriented investment house with approximately AUD 9 billion in net asset value. Its approach to growing shareholder value is somewhat distinct from many fund managers and capital allocators, benefitting from advantages in its corporate structure, investment-style and from an unconstrained investment mandate. WHSP allocates capital largely in Australian equity markets–both public and private–where it feels its reputation as a long-term passive allocator of capital provides it with advantages. This reputation has been built over decades and is supported by a cross-shareholding with Brickworks–a unique corporate structure in Australian equity markets—partially shielding WHSP from the vagaries of equity markets. As a result, WHSP has greater flexibility to allocate capital in a manner abiding with true value investing paradigms, importantly including the ability to invest in a contrarian manner and with long time horizons. The group’s structure–as an investment holding company with a source of captive capital–provides further advantages. Constraints imposed by the requirement to fund redemptions in bear markets, and/or the need to ‘index hug’ in bull markets are less of a concern to WHSP, as often is the case for mutual fund structures. While these attributes are advantageous, they don’t provide a guarantee that the firm’s past successes will be replicated.

WHSP provides capital on a long-term and passive basis, differing from private equity firms which are actively involved in management and strategy of investee enterprises. WHSP’s investment horizon also differs from uncertainty rating for WHSP. With negligible debt carried at the parent entity-level, WHSP’s cost of capital is therefore estimated at 11.0%. Analysts have incorporated the expected benefits of the Milton Corporation merger within their fair value estimate as of June 23, 2021. At the time, Analysts increased their fair value estimate by 9% to AUD 23.10 per share. It is seen that immaterial cost synergies associated with combining the two investment houses. Analysts’ valuation uplift is predominantly driven by WHSP financing the transaction with its overvalued scrip, which prior to the announcement was trading at a 43% premium to their fair value estimate.

Financial Strength

WHSP has an appropriately conservative approach to the use of debt. Net debt for the WHSP parent entity stood at AUD 26 million at fiscal 2021 year-end. Historically, WHSP’s approach has been for the parent-entity to remain ungeared and to hold significant cash balances at times. Holding significant cash balances at certain points in the equity market cycle is a central component of the value investment style and WHSP’s model for long-term shareholder value creation. Nonetheless, the advent of ultra-low interest rates in recent years has made the holding cash punitive. Therefore, the group uses debt facilities to access liquidity to take advantage of periods when equity market prices detach from long-term fundamentals. Nonetheless, WHSP parent-level gearing will remain modest with an upper limit of 15% (net debt equity) in place. The financial leverage of the group’s parent-entity is the most appropriate indicator of the financial health of WHSP. The financial exposure of WHSP to the fixed obligations, including debt, of its investments is inadvertently misstated in its consolidated financial statements. Under IFRS accounting standards, variation exists in terms of the extent and manner of reporting balance sheet items of WHSP’s investments in the group’s consolidated financial statements. The level of ownership in each investment dictates whether balance sheet items are fully consolidated or not. Regardless of the extent of WHSP’s ownership in each of its individual investments, there exists no material recourse or guarantees from WHSP of the debt or other fixed obligations of any of its investments. WHSP aims to pay steadily increasing dividends to shareholders from operating cash flow of the WHSP parent entity. The financial statements of the WHSP parent entity reflect WHSP’s status as an investor and the cash flows which WHSP receive as an investor in the multitude of businesses which it invests in

Bulls Say’s

WHSP’s uncompromising value investment style will likely see shareholder value creation continue.
A cross-shareholding provides a strong defence against the short-term whims of equity markets.
TPG’s recent merger with Vodafone Australia could improve the merged entity’s competitive position

Company Profile

Washington H. Soul Pattinson, or WHSP, is a value-oriented investment house which invests in public and privately held companies. As an investor, WHSP allocates capital with a view to taking a long-term position in its investments and on a passive basis. A long-held cross-shareholding in one of its investments–Brickworks–has provided a shield to WHSP from the short term-ism that is often pervasive in equity markets. In 2021, WHSP merged with fellow investment house, Milton Corporation

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.