Australia’s biggest listed investment company, Australian Foundation Investment Co seems to have changed its investment focus.
Chairman Bruce Teele told the AGM in Melbourne yesterday that while still concentrating on major companies like BHP Billiton and the banks, AFI will now look for companies with “annuity streams”.
"Equity market valuations in Australia look reasonable, he said. But he also saw a need "to be patient to find value.
So the new approach which sees AFIC not only looking for companies with “annuity streams” and but also providing an ongoing return on invested capital.
A year ago that strategy was not on the cards, or even hinted at the AGM where Mr Teele expressed great caution about the outlook and the use of AFI’s spare cash to reinvest in the market.
He did say the company thought the trough in dividend reductions would be ending and companies would start cautiously increasing payments to shareholders, but he was also worried about the outlook internationally.
This year the worries about the international outlook were still mentioned, but no mention of investing cautiously, AFI is now going to look for companies that have high cash flows, strong recurrent earnings and a good history of paying dividends.
Mr Teele told the meeting yesterday that despite the continuing strong demand for resources/energy from Asia which is still driving the Australian economy – "some sectors are under performing."
He said the "structure of the Federal Government likely to cause some political uncertainty in the market in the short term" and "the developed economies still face major structural issues, particularly with sovereign debt."(The strength of the developed economies was an issue a year ago as well).
Mr Teele said the company’s outlook was formed by sending its team of investment analysts to presentations by 155 companies from which the following conclusions were drawn:
"Current domestic conditions remain patchy with little in the way of outlook comments from companies; activity levels in Europe and the US remain subdued; China/Asia growth has been important for Australia; small cap resources stocks have been significantly strong performers and the level of activity in this space is increasing.
"Labour shortages are beginning to re-emerge in WA, raising concerns over wage pressure and project delays; poor housing affordability has become a more prominent structural issue for many in the property market and building and construction industries.
"Most companies now have balance sheets that are in good shape and taken out a lot of costs.
"Corporates concerned about political environment in Australia and internal investors are wary about the RSPT, labour productivity, housing prices, Telstra," he said.
Mr Teele also provided views on some of the company’s biggest investments.
BHP is the biggest investment, this year at August 31 it was worth $528 million, a year ago at the same date it was worth $537 million.
Mr Teele said AFI regards BHP as having “a strong/experienced Management and Board, generating strong cash flows and has a strong balance sheet."
"It operates at low end of the cost curve for its projects – and is able to withstand significant price variations/ "Attractive and diversified organic growth options" and has the "capacity to pay higher dividends."
AFI has holdings in the four big banks. The CBA stake was worth $427 million at August 31 2010 ($438 million a year earlier); the stake in Westpac was worth $395 million this year, $478 million a year ago.
The stake in the NAB was worth $ 203 million against $279 a year ago, while the stake in the ANZ had risen in value to $172 million from the 2009 figure of $156 million.
Mr Teele said AFI considered that each of the major 4 banks have slightly different strategies, in an attractively structured competitive industry.
He said Australia "had passed through the worst of the economic cycle which means bank provision levels should decline further – improved risk processes since GFC."
While the banks’ funding pressures remain, they had "stabilised more recently" and they had "good exposure to the growing wealth management segment."
Telstra remains a problematic investment.
A year ago AFI’s stake was worth $163 million; at August 31 it had fallen to $137 million (and further last week).
Mr Teele said while the company had reached an in principal agreement with Federal Government about NBN, "details and implications for shareholders are still unclear.
He said the "long lead time for implementation of NBN could create business uncertainty for Telstra for some time."
"The minority Federal Government means political uncertainty remains."
He also said Telstra’s "business performance in key areas has recently been concerning.
"Telstra has a strong franchise which will benefit from management’s commitment to its improve customer focus."
AFI shares rose 4c yesterday to end at $4.76.
