AFIC Very Cautious On Market Outlook.

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AFIC Very Cautious On Market Outlook.
January 31st. 2008 - Australasian Investment Review – (AIR)

Australia’s largest listed investment company, Australian Foundation investment Company is taking a very conservative approach to the market given the tremendous volatility seen over the past month.

The company’s chairman, former broker, Bruce Teele made his caution very apparent in releasing AFI’s interim profit statement yesterday.
He said the company had become even more risk conscious and had sold off shareholdings in Centro Properties and Transpacific, and cut its shareholding in Asciano: all companies with gearing or high debt problems in the eyes of the market.

AFI had not been trading actively in the half because of the gathering uncertainties and is looking to tap shareholders for between $100 million and $200 million by way of a new share buying facility, as well as the DRP.

He said he believed the Australian economy was well placed and the interim profit reporting season, now starting, would tell a lot about how local corporates were handling the new, riskier and more costly environment.

The company, which is also the largest of the listed investment companies associated with Goldman Sachs JBWere, yesterday reported an interim operating profit after tax of $110.7 million, 3.7% up from the December half of 2006-07, on revenue from operating activities (excluding capital gains) of $117.6 million, 9.8% up from the previous corresponding period.

Net Profit attributable to members (including capital gains) was $326.1 million, 185.2% up from the previous corresponding period due to the large increase in realised gains from the company’s investment portfolio this period. This was primarily due to increased take-over activity compared to the previous corresponding period (e.g. sales of the Company’s holdings in Alinta, Coles Group, Rinker and Southern Cross Broadcasting).

The directors have declared an unchanged interim dividend of 8c a share, fully franked Earnings per share were 11.5c (11.4c previously) a share.

Directors said that “Given the uncertainties surrounding market conditions, the Directors felt it prudent to keep the interim dividend in line with last year’s interim dividend”.

Net tangible assets per share before any provision for deferred tax on the unrealised gains on the long-term investment portfolio as at 31 December 2007 were $5.96, up from $5.30 at the end of the previous corresponding period (both before allowing for interim dividends).

The company’s shares traded up 1c yesterday at $5.71.

“From our perspective we have been very reserved about the market given the prolonged growth over recent years, the build-up in risks and high valuations surrounding a number of stocks in the market,” Mr Teele said in a statement accompanying the profit report.

“We have only been adding incrementally to the Investment Portfolio. We have kept the trading account at low levels during the six months to 31 December 2007.

“We have also kept our borrowings low at a level which is equivalent to our interest rate hedge of $50 million.

“‘The Company also travelled with a reasonable amount of cash through the period following the receipt of funds generated by the acquisition of our holding in Rinker Group by Cemex S.A.B. de C.V., and part of the consideration for the Coles Group paid by Wesfarmers. At the end of December, we had $196 million of cash.

“Since 31 December 2007 equity markets globally have undergone a major decline. This reflects a very negative assessment of the short term outlook. The markets appear to be factoring in a recession in the United States which spills over into the global economy.

“Investors consequently are now extremely wary of risk.

“In Australia the upcoming reporting season will be an important guide to how our companies are dealing with the rising costs of labour and production as a result of our strong economy, and the impact of the reduction in availability of credit and rising interest rates.

“The market will be closely monitoring trends in profit margins and the prospects for earnings growth in the substantially altered forecast outlook.

“In our view the Australian economy appears reasonably sound. Many major companies have strong balance sheets, are well managed and have good prospects for growth, even though we have entered a period of uncertain global economic conditions.

“The prospects for continuing growth in China resulting from urbanisation and the further growth in other emerging economies such as Brazil, India and Russia are also likely to sustain demand for resources over the medium to longer term. Many Australian companies will benefit from this trend.

“We have good reserves of cash which we have not hastened to reinvest in the market.

“However, continuation of recent market turbulence will provide opportunities to add good quality stocks to the portfolio at more attractive prices than were previously available.”

“The activity in the Investment Portfolio was dominated by sales through corporate activity. Coles Group was taken over by Wesfarmers and Rinker by Cemex S.A.B. de C.V. In addition, a number of other companies in the portfolio were subject to change with Southern Cross Broadcasting being taken over by Fairfax & Macquarie Media, Smorgon Steel taken over by OneSteel and Alinta by a consortium of interests.

“In addition, given our heightened concerns about the level of gearing and debt profile evident in some company balance sheets, we decided to exit our positions in Centro Properties Group and Transpacific Industries, and reduce our holding in Asciano Group.

“During the six months to 31 December 2007 we have been selectively adding to existing holdings. In the context of the overall portfolio these have been incremental in nature, with the additional investments in Equity Trustees, Campbell Brothers and Dyno Nobel being the major additions.

“The key positive contributors to AFIC’s performance over the six months were Rio Tinto, BHP Billiton, Woolworths, Commonwealth Bank, Westpac Banking Corporation and Incitec Pivot.”

As at December 31 the value of the company’s investment and trading portfolios at market value, including cash, was $5.8 billion.

AFI says it may raise between $100 million and $200 million through the resumption os a special share buying offer last week.

Under the plan AFI shareholders would be able to buy up parcels of shares worth up to $5,000 at a five per cent discount to the volume weighted average trading price in the five days to February 11. The discount is similar to the Dividend Reinvestment Plan which is also current at the moment.

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