Chairman`s Address to Shareholders
Document date:
Thu 10 Sep 1998
Published:
Thu 10 Sep 1998 00:00:00
Document No:
140730
Document part:
A
Market Flag:
N
Classification:
HOMEX - Melbourne
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CHAIRMAN'S ADDRESS TO DJERRIWARRH AGM
SUMMARY OF RESULTS FOR 1997/98
I said in my remarks in the annual report that Djerriwarrh directors
market conditions during the year. In summary, results for the year
were:
* Excluding abnormal items, profit was $25.4 million, in line with
profit for 1997. After taking account of abnormal items, the profit
was $13.9 million.
* Dividends of 20 cents per share were also in line with 1997.
Net asset backing at 30 June 1998 was $2.90. One year earlier it was
$3.01. The decline was a bit less than 4% in a market were the AU
Ordinaries index finished 2% down.
* The expense rate at 0.25% of the average value of portfolios was
also in line with the previous year.
The major development activity during the year was the raising of $85
million through the issue of 7.5% convertible notes to shareholders
on a 1 for 5 basis, which I foreshadowed at last year's AGM. As a
ABNORMAL ITEMS
Full details of the abnormal items occurring in 1997/98 are given in
the annual report. There were two favourable items, both of which
were overwhelmed by d large adverse item. The first of the favourable
items was $1.5 million of dividends associated with the buy-back of
shares by the Commonwealth Bank. The other positive item was $1.7
million resulting from the change, which I spoke of at last year's
AGM in the method of the accounting for dividends to recognise them
when the underlying securities begin being traded on an ex-dividend
basis. The negative abnormal item was the writing down of the trading
portfolio to its market value at 30 June 1998, which reduced profit
by $15 million.
The writing down of the trading portfolio complied with accounting
standards and reflected market prices at a single point in time -
close of business on 30 June 1998. At any other point in time the
result could have been quite different. The trading portfolio is held
primarily for the purpose of generating income through option-writing
activities. Changes in its value through movements in market prices
have little effect on its ability to generate premium income from
option writing activity. As can be seen from the expanded note on the
composition of operating profit now given in the annual report,
Djerriwarrh generates a substantial part of its pre-tax income from
its trading portfolio ($17 million in 1997/98 and $16 million in
1996/97).
MEASUREMENT OF PERFORMANCE IN GENERATING VALUE FOR SHAREHOLDERS
At last year's meeting I gave you some statistics on Djerriwarrh's
performance in generating value for shareholders. For this purpose,
"value" includes dividends paid by the company, the growth in the
value of net assets and the franking credits that can be passed on to
shareholders. In these terms, total value added in 1997/98 was 9%. As
in 1997, this result was in line with the growth in the 50 Leaders
index measured in the same terms. Consistent with the long view taken
by your directors, over the 8.6 years of Djerriwarrh's operations,
the company's rate of value added was 18.5% per year, a clear 5
percentage points ahead of the 50 Leaders benchmark.
THE SHAREMARKET
During the year the market exhibited some unusual behaviour and this
has continued into the new financial year. Global economic
uncertainty and extremely volatile markets make it impossible to
predict the likely outcome for the current year.
There was a strong tone in most western economies in the early months
of the year and this was accompanied by low inflation, declining
interest rates and sustained economic growth. The stock markets
responded quite buoyantly although the strength in the Australian
market was very much focused on a fairly narrow range of stocks.
While the American market continued its remarkable bull run the
Australian market experienced a significant correction in October
1997 as a result of the 'Asian meltdown'. The events in Asia have
been flowing on to other economies and there are fears that this
process will continue touching countries such as Russia, South and
Central America. Inevitably this adjustment has caught up with Wall
Street
The immediate effect as far as Australia was concerned was to bring
about significant declines in the commodity and cyclical stocks and
indeed this was the main cause for the need to write down the value
of your company's trading portfolio. Whether further writedowns will
be necessary or not during the current year is entirely a matter for
the market. We have seen the value of our trading portfolio
oscillating quite significantly with the volatility of the market.
One needs to remember that these moves are essentially accounting
entries merely tracing the market prices at a particular point of
time.
Over the year we have gradually added to our total investment
portfolio and have continued to increase the proportion in the longer
term investment portfolio which now represents 51% of our total. The
decision to place an initial holding of Telstra in this account was a
major item during year. Your company is close to fully invested
reflecting the view that the market is attractive for the long term
investor.
We do not pretend to know when the bottom will be reached, indeed
there may well be some volatility and uncertainty ahead. Our policy
is to continue to focus on long term value. Nevertheless it is very
difficult to avoid the conclusion that many of our leading companies
particularly in the resources area have been subject to very harsh
treatment in the market and this pricing effect seems to suggest that
the commodity price cycles which have been part of the global economy
for over a century will no longer recur. If and when the cycle turns
strongly positive we should not be surprised if there is a clamour
for these investments and that they are subject to takeover
pressures. Such a turn of events could even be several years in the
coming but those with an eye for value would do well not to panic out
of these stocks.
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