PRELIMINARY FULL YEAR ANNOUNCEMENT TO 30 JUNE 2008
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Salvus Strategic Investments Limited (SAM) | 12:30 pm, Friday 29 August 2008 | SAM | 0.670 |
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SALVUS STRATEGIC INVESTMENTS LTD PRELIMINARY FULL YEAR ANNOUNCEMENT TO 30
JUNE 2008
29 August 2008
Reporting Period: 12 months to 30 June 2008
Previous Reporting Period: 12 months to 30 June 2007
Audited NZ$'000
Current Period; Previous Corresponding Period
TOTAL OPERATING REVENUE (1056); 8366
OPERATING SURPLUS (DEFICIT) BEFORE TAXATION (2704); 7707
OPERATING SURPLUS (DEFICIT) AFTER TAX (2704); 7707
NET SURPLUS (DEFICIT) FOR THE PERIOD (2704); 7707
Basic EPS: (13.6) cps; 38.8 cps
NAV per share: $1.14; $1.33 cps
Executive summary
The Directors of investment company Salvus Strategic Investments Limited
("SSI") announce the results of the 12 months of trading to 30 June 2008. The
company produced a net deficit after taxation of $2,704,063 after accounting
for unrealized losses on the portfolio. The audited Net Asset Value per share
(NAV) of the portfolio fell 14.3% over the period compared to a fall of 20.4%
for the benchmark NZX SmallCap Capital Index, resulting in a relative
outperformance by the fund of 6.1%. This outperformance indicates the manager
defended well against a severe downturn in the share market during the
reporting period. This excellent track record now extends over a long period
(as highlighted in the following table) and bodes well for the medium to long
term prospects for SSI shareholders.
1yr 2yr 3yr
SSI NAV* -14.3% 17.4% 12.9%
NZX SmallCap Capital Index (Benchmark) -20.4% -5.4% 1.5%
Relative outperformance 6.1% 22.8% 11.4%
Median Return for Active NZ Funds** -23.1% -3.7% 3.3%
*accumulated net returns (after tax, fees and distributions) for periods
ended 30 June 2008
**Rates of return are before tax and management fees and are annualized for
periods exceeding 1 year
Portfolio income, primarily derived from dividends on the fund investments,
was behind that of the prior year because of a higher emphasis on capital
growth situations which pay no dividends. The movement into loss reflects the
accounting treatment for unrealized losses in the market value of portfolio
investments as a result of the poor market conditions.
Operating costs were higher this year because of the legal and accounting
fees associated with the transition to Portfolio Investment Entity (PIE)
status and the adoption of NZ IFRS accounting policies. Operating costs were
also higher over the period due to the payment of a performance fee to Salvus
Asset Management Ltd. The performance fee is calculated as a three year
rolling average and reflects the average outperformance of the Manager versus
the benchmark index over the past three years. This further demonstrates the
strong trend of relative gains achieved by the SSI management team in a
variety of market conditions.
The Board of SSI has declared a fully imputed final dividend of 2.5 cents per
share. The final dividend for the 2008 financial year is consistent with the
Company's dividend policy which is to pay a final dividend equivalent to the
interest and dividend income received by SSI after deducting the operating
and management costs. The dividend has a record date of 10 October 2008 and
will be paid on 24 October 2008.
Shareholders in SSI may elect to receive fully-paid ordinary shares in lieu
of cash dividends through participation in the Company's dividend
reinvestment plan (DRP). The DRP provides ordinary shareholders with the
option of subscribing for fully-paid ordinary shares each time a dividend is
paid by SSI. The shares issued under the DRP will rank equally in all
respects with all other shares of SSI and will be issued at a 3% discount to
the volume weighted average share price calculated on all sales of shares
which take place through the New Zealand Stock Exchange in the five trading
days prior to the dividend record date.
The share price discount to the NAV at balance date was 18.4%. An on-market
share buyback program was implemented in August 2007 to narrow the size of
the share price discount to NAV. Over the reporting period, SSI repurchased a
total of 426,767 ordinary shares under its share buyback program and held
them as treasury stock.
Impact of transition to NZ IFRS
The Company's Financial Statements fully comply with New Zealand equivalents
to International Financial Reporting Standards (NZ IFRS). Changes have been
made to the past Financial Statements of the Company in order to comply with
NZ IFRS and these changes are explained in the Notes to the Financial
Statements in the Annual Report which will be sent to shareholders in
September.
The most significant impact of our transition to NZ IFRS is that the fair
values of our quoted investments are now based on current bid prices. Under
the old NZ Financial Reporting Standards, the fair values of our quoted
investments were valued using the last sale price. In our opinion, the
different accounting treatment makes no material difference to the value of
your investment but the new NZ IFRS policies are slightly more conservative.
Strategic positioning
At the Annual Shareholder Meeting in November, SSI announced that the Company
was planning to expand its investment universe into Australia after the
exercise of the warrant issue in March 2008. However, as a result of poor
market conditions, the warrant issue was poorly subscribed and therefore
these expansion plans have been put on hold. The Board is examining other
ways of raising capital to be put in place when market conditions stabilize.
When it is considered appropriate we will continue with the plans put in
place to expand into the Australian market.
PIE registration
On 1 October 2007, SSI became a PIE. Although the implications for investors
in SSI will depend on their personal circumstances, it is likely that many
shareholders will benefit from SSI electing into the PIE regime (particularly
shareholders on personal marginal tax rates of 19.5% and 39%).
Key tax implications for shareholders of SSI:
Gains arising from the disposal of New Zealand shares, as well as some
Australian shares, should not be subject to tax for SSI.
Distributions to New Zealand resident shareholders should generally not be
subject to tax. However, New Zealand resident shareholders may elect to treat
the imputed portion of any distribution received as assessable income in
their tax return. Generally only shareholders on a 19.5% marginal tax rate
would choose to do this, to allow the excess imputations credits (i.e. the
difference between 19.5% and 33%) to be utilised against other taxable
income.
The combined effect of these changes is that certain gains will now be able
to be distributed to shareholders free of tax, thereby boosting the after tax
return for SSI shareholders.
New Zealand resident shareholders subject to tax at a rate of 39% will have
their tax liability on SSI dividends capped at 30% from 1 July 2008 (unless
they elect otherwise).
For non-resident shareholders, fully imputed distributions will be subject to
15% non-resident withholding tax (NRWT). This can be mitigated by SSI
applying the Foreign Investor Tax Credit regime. Any non-imputed dividends
will not be subject to NRWT.
SSI's registration as a PIE and the amalgamation of our subsidiaries should
make it possible to produce even better investment outcomes for our
shareholders going forward.
Managers Report
The portfolio had a strong year outperforming the benchmark index by 6.1%. Of
the listed core holdings, the most significant contributors to performance
over the period were:
New Zealand Oil & Gas (NZOG): relative outperformance +62%.
The company benefited from Tui reserve upgrades and production exceeding
expectations at a time of very strong global oil prices. The share price of
Pike River Coal (in which NZOG has a 31% shareholding) also reacted
positively to expectations of significantly higher hard coking coal prices
for next fiscal year and beyond, corporate activity in the Australian coal
sector and its inclusion in the NZX50 Index.
Abano Healthcare Group Limited (ABA): relative outperformance +54%.
Our largest holding had another exceptional year for a number of reasons. The
company announced record earnings for the 2007 financial year, raised its
earnings guidance for the 2008 financial year and was the subject of two
takeover offers. Subsequent to our financial year end, ABA announced a record
net profit after tax (NPAT) of $7.8m (+56% year on year) for the 2008
financial year and provided FY09 NPAT guidance of $10.5m.
Energy World Corporation Limited (EWC): relative outperformance +25%.
EWC continued to outperform on the back of renewed strength in LNG prices.
The company also announced that it had entered into a Memorandum of
Understanding (MOU) with Indonesia Power (a subsidiary of the state-owned
enterprise PLN, the Indonesian electricity utility) to supply up to 5 million
tons of Liquefied Natural Gas (LNG) per annum in two stages. It is intended
that a formal agreement will be signed with Indonesia Power by the end of
2008. However, the MOU with Indonesia Power is non-exclusive and discussions
between EWC and other potential Asian LNG buyers remain ongoing. The MOU
significantly reduces the risks around the development of the Sulawesi LNG
plant and further underpins the intrinsic value of EWC's assets. The company
also announced plans to monetize its Australian gas assets which provide
significant upside potential to the current share price.
The main underperformers were:
Hallenstein Glasson Limited (HLG): relative underperformance -28%.
The share price of HLG fell significantly over the period after announcing a
downward revision to its forecast earnings for FY08 and also after downward
revisions from other listed retailers. Fundamentally HLG remains a well
managed company with a strong balance sheet and should steer itself through
the current economic downturn.
Methven Limited (MVN): relative underperformance -16%.
The share price of MVN fell significantly over the period despite the fact
that the company announced better than expected results for the financial
year ended 31 March 2008. The result showed growth across all its
geographical segments and the successful integration of a major acquisition
(Deva in the UK). All of this was achieved despite a tough market environment
for showerware and tapware products. SSI still has an expectation for
positive earnings growth in FY09 despite a tough operating environment and
this reflects a full year contribution from Deva, a reduction in the US loss,
further growth in Australia and various cost containment initiatives. At the
current share price, we believe the company has strong value characteristics
that are accompanied by an attractive dividend yield.
Portfolio changes:
Over the period the fund increased its weighting in core holdings Methven,
Energy World Corporation and Wellington Drive Technologies on share price
weakness. New holdings in New Zealand Oil & Gas, Syft Technologies Limited
and Comvita were added.
In January 2008 the fund sold part of its holding in Abano Healthcare Group
to Crescent Capital for $5.15 per share. The partial sale by SSI was driven
by portfolio risk management as opposed to any view on the valuation of the
company. Abano Healthcare Group remains our largest holding.
Over the period the fund also sold its holdings in Rakon, Terra Vitae
Vineyards and Dorchester Pacific and significantly reduced its weighting in
Provenco. We accepted the LWR Manufacturing takeover offer for Pod and the
Henry Schein takeover offer for Software of Excellence.
At balance date, the portfolio was 96% invested and consisted of 13 holdings
of which one is currently unlisted. Core holdings (which accounted for 73% of
net assets) included Abano Healthcare Group, New Zealand Oil & Gas, Methven,
Energy World Corporation, and Wellington Drive Technologies.
The investment rationale for the core holdings is as follows:
Abano Healthcare Group (ABA) 20.4% (portfolio weighting at balance date) -
The group operates businesses in four key sectors of the healthcare and
medical services industry: Rehabilitation, Diagnostics, Dental and Audiology.
The most significant value lies with the Audiology business which contributes
approximately 60% of group operating profit. ABA has transformed itself into
a profitable and growth-orientated healthcare play. Confirmation of this
earnings momentum was recently reflected in its record earnings for the 2008
financial year and its earnings projection for 2009.
New Zealand Oil & Gas (NZOG) 19.2% - NZOG has stakes in three major
developments: the Tui oil field, the Pike River coal field and the Kupe
gas-condensate field. The company provides the fund with exposure to the
strong oil, gas and metallurgical coal markets and continues to de-risk as
the exploration projects it is involved with (Kupe and Pike River Coal) get
closer to production. Subsequent to the end of the year, NZOG announced that
they had raised $191m from the exercise of 127m options. The cash injection
comes on top of the significant cash flows currently being generated from the
Tui oil field and provides the company with the opportunity to utilize its
significant balance sheet capacity to transform its future growth profile.
The company should also be a beneficiary of a weaker New Zealand dollar
(NZD).
Energy World Corporation (EWC) 13.9% - Energy World Corporation owns and
operates gas, LNG and power generation assets in Indonesia and Australia. The
company has recently confirmed that their power station and LNG development
projects are progressing to budget and schedule. Discussions with potential
offtake partners for the LNG have been positive and are ongoing with
significant interest from these parties to purchase the full production
output from the LNG plant at market competitive rates. There is a significant
and growing market for LNG throughout Southeast Asia, and to this end the
company plans to utilize their large Indonesian and Australian gas reserves
to exploit this growing demand. The company's proved and probable (2P) gas
reserves have been recently upgraded to 700 billion cubic feet (BCF). To put
this in context, the Kupe gas field in New Zealand has 2P gas reserves of
approximately 240 BCF. EWC provides the fund with exposure to a robust LNG
market and the potential for further value creation from the
commercialization of stranded gas assets. The discount to intrinsic value and
the growth options available to EWC illustrate some of the features that
characterize the investment style of SSI.
Methven (MVN) 13.3% - Methven is involved in the design, manufacture and
supply of quality tap and showerware in New Zealand, Australia, USA and the
UK. The company has successfully expanded into Australia and is now entering
other international markets using its innovative SatinJet shower technology
as the flagship. The recent acquisition of Deva should result in a number of
significant benefits accruing to the company including Methven's proprietary
products gaining access to new distribution channels and the potential to
leverage the respective sourcing and supplier relationships in China.
Elsewhere, we expect the company to be a beneficiary of a weaker NZD and the
R&D tax credit regime announced in the last Budget, given the significant
resource the company commits to R&D each year.
Wellington Drive Technologies (WDT) 7.6% - The company is experiencing a
strong acceleration in demand for their energy efficient electric motors
driven by supportive macro factors such as renewed strength in energy prices.
This has included a number of strategic client wins that herald's wider
industry recognition for its products. Recent capital raisings will allow WDT
to accelerate their global expansion plans and fund the high growth phase
that they are now entering. We also expect the company to be a beneficiary of
a weaker NZD.
Outlook:
We remain confident that our trend of strong relative annual gains against
the market will continue. This is because the construction of the portfolio
has been based around growth companies such as Abano Healthcare Group that
are currently trading on attractive valuation multiples. The portfolio also
has exposure to the strong oil, gas and metallurgical coal markets and the
recent depreciation of the NZD should also provide a positive environment for
exporters such as New Zealand Oil & Gas, Methven and Wellington Drive
Technologies. We have deliberately reduced our weighting in companies where
there is significant economic exposure that can not be compensated for by
medium term growth opportunities.
The NZ market continues to be negatively affected by foreign selling as
global economic and stock market conditions weaken further. We see this as an
opportunity to acquire selective assets at attractive valuations.
We are grateful for the support of our shareholders. SSI regularly updates
its shareholders with monthly and quarterly reports in between interim and
annual reports. Shareholders who wish to receive this information by e-mail
should register on our website www.salvus.co.nz.
KEY STATISTICS AT A GLANCE
As at 15 August 2008
NAV per share: $1.127
Shares on issue 20,143,907
Portfolio summary (% net assets):
Abano Healthcare Group: 20.4%
Methven: 16.2%
New Zealand Oil & Gas: 15.0%
Energy World Corporation: 12.5%
Wellington Drive Technologies: 6.6%
Top 5 holdings: 70.7%
Cash: 4.3%
Number of holdings: 13
Contact:
Andrew Couch 021 443035; Simon Wilson 021 711041
