Australian Foundation Investment Co, the country’s largest listed investment company, is taking a bullish stance on the market.
It sees "reasonable" valuations for companies and is cautious about the outlook for companies more exposed to the local economy, but it is more confident about the prospects for its two biggest investments, BHP Billiton and Rio Tinto.
The group yesterday revealed a 30% lift in interim earnings to $122 million for the six months to December. But despite the gain, dividend was an unchanged 8c a share.
AFIC said in its interim profit statement yesterday that it "enters the second half of the financial year close to fully invested".
That was after telling shareholders in August in the 2009-2010 profit report that the company had $83 million to raise as a result of the recent dividend re-investment program, but would be "taking a patient approach as our expectations are that the market is likely to trade broadly in a range around current levels for a period of time with higher volatility in the short to medium term",
The market volatility faded from August onwards and AFIC was obviously able to get set and ride the market rebound, especially in the final months of the year.
"We believe company valuations appear reasonable at this point, although there is a likelihood the equity market will rise further in the near term given the expected improvement in the Australian and United States economies and the ongoing growth in China," directors said yesterday.
"Whilst the impact of the ongoing demand for resources is encouraging for our large investments in BHP Billiton and Rio Tinto, we remain cautious about the remainder of the market particularly those companies that are more exposed to domestic conditions and a less buoyant operating environment.
"The rise in the Australian dollar will also negatively impact some companies.
"Ironically in the current two speed economy, many companies are facing increasing costs of doing business at a time when demand for their products and services remains subdued.
"The recent floods in Eastern Australia have also added uncertainty to the outlook given the significant impact these floods have had on communities and businesses in the affected areas.
"This will also put added pressure on Government funding for infrastructure replacement and improvement and the general support for these communities.
"In the medium to long term, sustained wealth creation for the nation and improvement in markets, depend on strong economic growth.
"This will require a greater resolve to bring about fiscal restraint and a revived determination for productivity improvements across the economy.
"In both the public and private sectors it is also important that spending decisions be directed at activities that create real value. However the current political environment makes progress in these areas less certain and this may weigh on the market.
"Another important influence on the future performance of Australian equities is the outlook for the banking sector which makes up a significant part of the market.
"Against this background it is interesting to note the recent debate about the level of bank profitability and whether further regulation is needed.
"From AFIC’s perspective it was encouraging to see the bank sector survive
"The recent global downturn and emerge as a well functioning industry that has the capability to finance Australian businesses as well as provide sound dividend returns to investors and critically for many Australian superannuants who rely on bank dividends.
"Also, it is important to note that in addition to the thirty percent of income banks contribute to the overall dividend return of the Australian equity market, they are also a source of interest income to many depositors," the company added.
AFIC shares added 4c to $4.95 yesterday.
The 30.6% rise in net profit to $122.2 million in the latest half compared with $93.6 million in the first half of 2009-10.
Operating profit, which excludes the unrealised value of the investment in Hastings Diversified Utilities Fund, gained 22.7% to $115.4 million.
AFIC declared a fully franked interim dividend of 8c per share, unchanged from the year before.
AFIC said major bank dividends were close to or exceeding pre financial crisis levels while companies such as Rio Tinto and Alumina had restarted dividend payments after suspending them last year.
"During the period the Company made a number of purchases, some of which were via capital raisings and dividend reinvestment plans at discounted prices.
"The largest of these were in ANZ Banking Group, Victoria Petroleum, QBE Insurance, CFS Retail Property Trust, National Australia Bank and Santos. Victoria Petroleum, which is primarily engaged in the exploration and development of oil and gas in Cooper Basin in South Australia and Queensland and the Surat Basin Queensland, is a new company in the investment portfolio, “directors said.
AFIC said the result also benefited from a non cash dividend of $4.9 million that resulted from the demerger of Dulux Group from Orica.
AFIC sold its stakes in Healthscope, which was taken over by private equity firms The Carlyle Group and TPG Capital, and Nufarm, which had at least four earnings downgrades and was all but bailed out by its banks towards the end of the year after a crimp in earnings and a debt blow out.
