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LIC Djerriwarrh Disappoints

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Melbourne-based Listed Investment Company (LIC), Djerriwarrh Investments has confirmed it had a miserable 12 months to June 30 as it’s income and profit lines were battered by lower dividend income and unfavourable timing in its options trading.

Derriwarrah is a stablemate of Australian Foundation Investment Co and Mirrabooka Investments as well as the small company specialist, Amcil. In its 2016-17 results yesterday Derriwarrh told the ASX that earnings for the year fell 17.2% to $33.7 million, from $40.7 million in 2015-16.

The company said the net operating result for the year was $33.8 million, down 19.8% per cent from $42.2 million in the previous corresponding period.

"In the opinion of Directors, this is a better measure of Djerriwarrh’s performance in deriving ongoing investment, trading and options income from the Company’s portfolios as it excludes the valuation impact of net unrealised losses on open option positions at year end.

That was on a 16% slide in dividend income to $30.6 million from $36.8 million, which directors said reflected “the lower contribution from resource and energy holdings. Dividend income was also impacted by reduced holdings in bank shares as call options were exercised late in the financial year before their dividends.”

Djerriwarrh’s said its option income fell to $10.9 million from $16.1 million.

"As the Australian market rose, volatility fell to low levels contributing to reduced income from options. The pace of market increases also meant that a number of call option positions were at risk of being exercised,” directors said.

"In this environment, Djerriwarrh looked to buy back a significant number of in-the- money call option positions to capture more of the potential upside of these holdings. This also reduced option income for the year but enhanced the total portfolio return.

The final dividend was 10 cents per share fully franked, down from 14 cents per share last year. Total dividends for the year are 20 cents per share fully franked, down from 24 cents last year. The Dividend Reinvestment Plan is in operation with a 5% discount.

Djerriwarrh said its portfolio return including franking for the year to 30 June 2017 was 16.6% whereas the ASX 200 Accumulation Index return including franking was 15.7% (franking added 3.6% to Djerriwarrh’s return and 1.6% to the Index), according to directors.

The major contributors to portfolio performance were the four major banks, BHP, Rio Tinto and CSL.

"Given the rise in banking and resource stocks over the year, a number of the larger purchases in the portfolio were to replenish holdings in these sectors as option exercises reduced exposures. Djerriwarrh also looked to add to its holdings in CSL and Macquarie Bank, although again some were sold because of option exercises.

"The focus on adding incrementally to a range of existing smaller company holdings continued as attractive opportunities arose. This also included participation in capital raisings by IRESS, TPG Telecom, Qube Holdings and Cover-More Group (subsequently taken over).

"New companies added to the portfolio during the period were Isentia Group, Link Administration Holdings (including participation in its share placement to purchase Capita Asset Services in the UK), Cochlear, NetComm Wireless and Wellcom Group.

"With a mixed outlook for the Australian economy the upcoming reporting season will be crucial in providing support to current market valuations. With dividend payout ratios relatively high, profit results will also be important for the outlook for dividend income.

"We may see some increase in profitability from resource companies, although the outlook for many other companies in a low growth, highly competitive environment in our view still remains subdued. In respect of the banking sector it was very disappointing as investors to see the Federal and SA State Governments seek to introduce a punitive tax on the country’s five biggest banks.

"These taxes bypass the company tax system, as such they provide no franking credits for shareholders and represent double taxation on these companies’ activities,“ directors said yesterday

The shares fell 1.5% to $3.76.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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