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INVENTIVE INVESTOR
Andrew Brown - Under the Radar Columnist
THE TWO LARGEST FICS
Last week we looked at some Family Investment Companies (FICs); this week we
focus on the two largest FICs, Washington H. Soul Pattinson (SOL) and Seven Group
Holdings (SVW), neither of which garner signicant attention from the professional
investment market other than a couple of long standing institutional holders.
Their respective chairmen Robert Dobson Millner and Kerry Matthew Stokes both
keep relatively low proles, and both have long-term investment horizons. You can
put money on the fact that neither will be especially concerned that their share
prices trade at signicant discounts to the net asset backing of their respective
companies. Indeed, for the minority shareholder, this may even be a benet.

THE MILLNER FAMILYS WASHINGTON H. SOUL PATTINSON (SOL)
SOL is a remarkable company it has paid a dividend every year since 1904 and
hasnt raised new equity since 1969 when it established the defensive
cross-shareholding with Brickworks (BKW). It has been chaired by a Millner since
1950, and currently by Robert Millner who denitely ies under the radar, despite
having been at the helm to make some of corporate Australias best ever decisions.
The Millner family now only owns about 8 per cent of SOL, but it maintains
control thanks to the Brickworks (BKW) cross-shareholding (see below **). The
company had a history of investing surplus cash ow from its original chemist shop
operations into shares and other real assets; the chemist shops are now long gone.
In the 1990s, the companys accounts were totally opaque since it wholly owned a
diverse range of operations. Over the past 13 years it has securitised a number of
them, selling minority stakes to the public; initially SP Telecoms in 2001, and the
coal assets in 2003 to form the listed vehicle New Hope; New Hope in turn bought a
signicant stake in Arrow Energy off Macquarie Bank in 2006 and SOL made close
to $500m prot on that alone.
Having propped up the edgling telecommunications business with its Newcastle
TV station NBN-3 in 2004, SP Telemedia (as it had become) did two classic
deals: sell the TV station for $250m to Nine Network in 2007, and the refocus on
telecoms, merging with TPG Telecoms (TPM) in February 2008 - and then let David
Teoh do the rest. If ever you need a lesson in patience, it is TPM; the shares fell as
low as 9 cents in December 2008 in the wake of the nancial crisis. Seventy two
times your money in less than four years is pretty good in anybodys books. Its
now a third of SOLs value. The few clangers SOL have had in recent years have
been reasonably small.
A lot of folks get obsessed with the Brickworks (BKW) cross-shareholding **
BKW own 43 per cent of SOL, which owns 44 per cent of BKW. This mechanism
was installed in 1969 to actually protect Brickworks against a potential takeover
from London Brick. It is now a contrivance since BKW has no other investments
(it did then) and certainly acts to entrench the Millner family. This year, Perpetual
Investments and its consultant Mark Carnegie, attempted unsuccessfully to unravel
the cross shareholding. The closest an external party has come to forcing an end to
the cross shareholding was Ron Brierley in 1990.
My guring is that should SOL start making big mistakes leading to even bigger
losses, theres enough outside legal and other pressure to force a change. The
problem with the Carnegie/Perpetual proposals apart from tax was that it came
at a time when the company was performing reasonably well.
under the
radar investor
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the
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investor
FUND MANAGER
ANDREW BROWN
TELLS YOU HOW
YOU CAN PROFIT
BY RIDING ON
THE COAT TAILS
OF TWO OF
AUSTRALIAS
POWER HOUSE
FAMILIES.
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213.4 TPG Telecom
495.7 New Hope Coal
65.6 Brickworks
Blue chip portfolio
33.6 Milton Corp
57.9 BKI Investments
Other listed associates (RHL, CLV, API)
Other listed investments
NET parent company assets
TOTAL
239.4 NET VALUE
TPM
NHC
BKW

MLT
BKI



1,510
1,293
873
372
144
90
179
41
206
4,708
$19.67
SHARES (M) COMPANY ASX CODE $M
For years, SOL was one of Australias most opaque companies. No longer. It has
an estimated net value of around $4.7bn, which after some simple accounting de-
consolidation, is roughly comprised of:
At $14.40, SOL is trading at a 27 per cent discount to its pre-tax assessed value of
$19.83 a share. Thats very much towards the top end of its recent discount range.
This reects six things:
The perceived curmudgeonly attitude towards the Perpetual/Carnegie break-up
proposals;
The obvious concentration of assets, although this is far better than in 2011
when a soaring New Hope made up over 60% of estimated value;
The implicit tax bill if they sold there is an approximate $3.6bn unrealised
gain on the current assets, though the full tax would not apply as certain
assets are grandfathered as pre-1985 acquisitions for capital gains tax;
A belief that Brickworks is fully priced, with which I concur;
The start of a changing of the guard exhibited in recent board changes; and
A questioning of where the next big thing for SOL is coming from.
SOL is usually a strong performer in bear markets, and has been steadily increasing
its dividend each year though it still yields only 3.4 per cent fully franked. Its the
sort of good tortoise that you pick up when its out of favour. I reckon thats
around now.
THE STOKES FAMILY SEVEN GROUP HOLDINGS (SVW)
If SOL looks a little cheap, SVW might be better described as a pariah. Some of its
businesses are in a tough part of their cycle and the company is experiencing a few
difculties in building out a new business unit in oil and gas. Its shares are down
43 per cent from their peak of $11.44 in March 2013. So what does management,
led by Executive Chair, Kerry Stokes, who owns 68 per cent of the company, do?
It buys the shares back.
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A year ago, Margaret Simons, a freelance journo wrote the only available book of
any substance on Stokes: Self-Made Man. He apparently hates it. I love it. It
gives a real glimpse into the reasons why:
Stokes is so driven, but so very, very private;
Stokes does deals in various industries, but has a long standing attraction to
media, property and Caterpillar franchises; and
Stokes is trying to create some sort of dynasty.
Lets boil things down to basics. When a bloke starts with nothing, but over
roughly 55 years ends up being the 14th wealthiest person in Australia, you have
to have amazing condence to start betting against him, especially if you can stand
alongside him at a very large discount to the real long-term value of the assets that
give him his wealth. I know very few people who have made money in Australia
betting AGAINST the medium-term mega wealthy (as opposed to the paper based
nouveau riche).
The bulk of Kerry Stokes wealth comes from his 70 per cent stake in SVW, having
bought his initial holding in April 1995, just under two years after its public listing by
the receivers of Qintex Australia. The holding has increased through a variety of on
and off-market buys and asset swaps for scrip. SVW is comprised of ve existing
sets of assets (media, investments, property, industrial services and mining services
in the WesTrac Caterpillar franchises), although his team is patiently trying to create
a sixth in the oil business.
If you have a medium term horizon, you can buy the Stokes team talents at
their lowest rating in some years.
In my view, the best way to look at it is to break down the company using current
market values to ascertain what you are paying for the main cash ow generator,
the WesTrac Caterpillar franchise businesses, given its cyclicality. This is very
abridged and rough, but a good guide:
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If you have a medium
term horizon, you can buy
the Stokes team talents at
their lowest rating in some
years.
Value of SVW equity
Net debt
Listed convertible debt
TOTAL ENTERPRISE VALUE
Seven West Media (SWM)
SWM preference shares
Listed equity portfolio
Coates Hire
Property assets at book
Other assets
TOTAL PORTFOLIO VALUES
IMPLIED VALUE OF WESTRAC
302.7m shares x $6.52 share price
Includes derivatives & dividend from SWM
Hybrid securities (debt) ASX code SVWPA
(A)
Listed ASX code SWM = Seven TV, West Australian, mags
Includes TLS and Agricultural Bank of China
46% ownership at SVW accounts value - high
Very undervalued
includes Nexus debt, industrial business at book
(B)
(A-B) Estimated EBIT c.$200m = P/E 7.3x
1,974
1,070
457
3,501
563
302
916
452
35
201
2,469
1,032
COMMENTS $M
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The effective value placed on the entire WesTrac business at present of around
$1bn contrasts with SVWs entry price of about $1.9bn, which is the mid-point of
the 2010 independent experts reports on the 2010 merger of Seven and WesTrac,
plus some other businesses. All these businesses made over $440m EBIT in scal
2013 (peak cycle) before corporate costs.
Mining services plays are about as out of fashion as you can get. But what would
you rather buy a contractor with short term contracts on a couple of mines, or
one of the worlds biggest distributors of the equipment the big miners really need
for the ongoing operation of mines?
At current prices, Ive shown that you are paying half the cost the SVW
businesses. In 2010 Stokes put his private business, WesTrac, into Seven
Group Holdings, taking his shareholding up to close to 70 per cent. Youll
need to be patient; there is the risk of downgrades of prot; but this is more
than priced in and SVW is real straw hats in winter stuff you are buying
this company when it is deeply out of favour, and you get a 6.1 per cent fully
franked dividend yield to boot (plus the company is buying back 10 per cent
of its shares). n
Please Note: The author has a benecial interest in the securities of
Seven Group Holdings.
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