Chairman`s Address to DJW AGM 25/9/01
Document date:
Tue 25 Sep 2001
Published:
Tue 25 Sep 2001 00:00:00
Document No:
181568
Document part:
A
Market Flag:
N
Classification:
DJERRIWARRH INVESTMENTS LIMITED 2001-09-25 ASX-SIGNAL-G HOMEX - Melbourne +++++++++++++++++++++++++ 1. RESULTS The year to June 2001 is the twelfth since the company commenced operation in November 1989. In presenting our results this year the accountants have obliged us to follow the new so called "trilogy" format. Under these revised accounting standards, what used to be the company's Profit and Loss Statement is now our Statement of Financial Performance. What used to be called the Balance Sheet is now called the Statement of Financial Position. The Statement of Financial Performance (previously the Profit and Loss Statement) sets out all changes in shareholder equity as a result of the operations of the company. It includes profit from ordinary activities after income tax and valuation adjustments both re-valuations of our portfolio and gains made from the realisation of investments (although it excludes buy-backs of shares and dividends paid to shareholders). For the year ending 30 June 2001 such total changes in equity were $43.5 million, comprising $30.3 million in profit after tax and $13.2 million increase as a result of valuation adjustments, that is, sales of assets and re-valuations. This represents a significant increase over previous years where the total changes in equity were $28.6 million, comprising profit of $30.9 million and a negative valuation adjustment of $2.3 million. We also took the opportunity this year to lift our dividend payout by just over 5% to 21.5 cents per share. Another way of assessing our performance in managing the portfolio is by looking at moves in Net Assets per Share and dividends. At 30 June 2000 our Net Asset backing was $3.41 on an ex dividend basis. At 30 June 2001 this was $3.49 ex dividend. Dividends relating to the 2001 year were 21.5 cents. Total return measured on this basis was an increase of just on 8.5%. One of the important features of Djerriwarrh's operation is that a very high proportion of the profit that we generate is paid out to shareholders as fully franked dividends. This slide gives a picture over the past ten years of the dividends as a component of profits. 2. TAX CHANGES When I spoke with you last year we were concerned about that the Government's Capital Gains Tax changes meant that shareholders in Listed Investment Companies such as Djerriwarrh were treated less favourably for distributions of capital gains made on stock held more than one year compared with Investment Trusts. As shareholders would be aware, we were very pleased in the recent budget changes when the Government announced a measure to provide equality of treatment. This had a flow on effect in that it significantly improved market sentiment toward Listed Investment Companies. The legislation is currently before Parliament and we hope it will be passed prior to the election. Another tax change which affected the company in the year to 30 June 2001 is that we are taxed on unfranked dividends which we receive from other companies. This had a small negative impact in the year. The third tax effect which will apply for the current financial year is that the tax rate for companies will reduce from 34% to 30%. This will be beneficial to reported profit, but has another impact in that fully franked dividends received by shareholders will now be accompanied by franking credits at 30 cents in the dollar rather than 34 cents. Finally on tax matters another change which has been beneficial to shareholders is that the Australian Tax Office now refunds excess franking credits for taxpayers on an average tax rate less than 30%. The effect of this for all individual taxpayers is that the fully franked dividend yield of say 6% from Djerriwarrh would be equivalent to an 8.7% plus fixed interest yield. 3. THE MARKET For sometime we have held a very cautious view of the outlook for both international economic growth and the level of equity prices. Both seemed excessively optimistic. As a consequence we allowed many of our options to be exercised towards the end of the year. The results of this strategy were: firstly an underweight position in the banking sector which experienced a dramatic increase in share prices towards the end of the financial year which impacted on our performance relative to the stock market indices. Secondly, your company was more liquid than normal, a situation which was in accord with our general market view. Looking forward we continue to tread carefully. The storm clouds are still very ominous and one might expect tough conditions in the market and increased volatility. Putting all this in context our approach is: * keep writing options over a significant section of our portfolio; * gradually migrate more of our portfolio into well traded option stocks; * hasten slowly when tempted to part with our cash; * be on the look out for re-emerging long term value. Another manifestation of our caution about markets is reflected in the percentage of our investment portfolio against which we have written call options. In June l999 we had written options of just over l5% of the portfolio and by June 2000 this had risen to 28%. During the 2001 year we allowed a number of our deeply in the money options to be exercised as mentioned above, so the percentage of our portfolio covered by options dropped to around 23%. However, as the new financial year has unfolded, we have now moved this up to over 38%. The dramatic fluctuations have had an impact in the options market on what is called volatility, which is the degree to which the price of the underlying stock fluctuates over time. The following table shows how this volatility has changed in the five major option stocks. This increased in volatility is advantageous to us in selling call options as we receive more premium. 4. FURTHER COMMENTS ABOUT THE MARKET MARKET UPDATE The tragic events in the USA on the 11 September have had a profound impact on investment markets. Few commentators now believe that a significant recession can be avoided, profit expectations are being revised down and share prices are falling as uncertainty replaces optimism. The situation is resulting in a major rotation of investment sectors highlighting the attractiveness of the lower volatile industries; repricing growth expectations across the board and a lower tolerance to risk. The outlook is one of great uncertainty and enhanced risk where a great deal of care is called for. MORE TO FOLLOW