We raise our fair value estimate for no-moat Soul Patts SOL by 3% to $35 per share. The upgrade is due to higher appraised values of its unlisted assets including the private equity and credit portfolios. On March 20 prices, shares in Soul Patts are fairly valued.

Soul Patts declared an interim dividend of $0.44 per share, fully franked. This is 4% higher than the previous corresponding period, consistent with its strategy to grow dividends.

Underlying net profit after tax of $285 million, 18% higher than the prior corresponding period (“PCP”), was underpinned by higher contributions from New Hope, with production increases at its coal mines, an improvement in Brickwork’s earnings, and a growing credit portfolio with 73% higher cash flow than the PCP.

The result was in line with our expectations with a 5% uplift in pretax net asset value to $12.1 billion. This was due to growth in the credit portfolio and private equity, contributing a combined $800 million to net asset value. In contrast, other portfolio assets contributed to a decline of $300 million. The credit portfolio is a new and growing segment for Soul Patts, representing 10% of the group’s portfolio assets in first-half fiscal 2025 from 6% the year prior. Here, the company provides loans to other Australian companies. In private equity, about 15% of the group portfolio, the largest business is swimming schools.

For cross-shareholding, Brickworks' underlying net profit after tax (“NPAT”) of $76 million was up 308% from the prior year when it reported a loss. Higher earnings were from the property segment, without the significant property devaluations in the PCP. The Australia and US building product businesses reported a decline in operating income, reflecting a cyclical downturn in the construction sector while interest rates remain high. Boosting cash flow, dividends from Brickworks' investment in Soul Patts were 8% higher than the PCP.

Business strategy and outlook

Washington H. Soul Pattinson, or Soul Patts, is a value style-oriented investment house with approximately $12 billion in net equity value. Its approach to growing shareholder value is somewhat distinct from many fund managers and capital allocators, benefitting from advantages in its corporate structure, investment-style, and from a relatively unconstrained investment mandate.

Soul Patts allocates capital largely in Australian equity markets- -both public and private--where it feels its reputation as a long-term passive allocator of capital provides it with advantages. This reputation has been built over decades and is supported by a cross-shareholding with Brickworks--a unique corporate structure in Australian equity markets—partially shielding Soul Patts from the vagaries of equity markets. As a result, the firm has greater flexibility to allocate capital, including the ability to invest in a contrarian manner and with long time horizons. Soul Patts’ structure provides further advantages. Constraints imposed by the requirement to fund redemptions in bear markets, and/or the need to ‘index hug’ in bull markets are less of a concern, as often is the case for mutual fund structures. While these attributes are advantageous, they don’t guarantee past successes will be replicated.

Soul Patts provides capital on a long-term and passive basis, differing from private equity firms which are actively involved in management and strategy of investee enterprises. The firm’s investment horizon also differs from private equity, with Soul Patts preferring to take very long-term buy and hold positions. While it often seeks investment opportunities which begin their lives in private equity markets, Soul Patts likes to float its investments in public markets in due course, while still retaining a significant stake in the business.

The acquisition of investment management company, Milton in 2021 changed the group’s portfolio composition. In 2020, 80% of net asset value was in three holdings: TPG Telecom, Brickworks, and New Hope Corporation. In 2024 these comprised about half of the firm’s portfolio, with the remainder mostly small investments in a diverse range of companies.

Soul Patts bulls say

  • Soul Patts total returns to shareholders has exceeded the comparable All Ordinaries Accumulation index for the past 20 years.
  • A cross-shareholding provides a strong defence against the short-term whims of equity markets.
  • Consistent with its track record, we expect Soul Patts to increase dividends each year regardless of investment performance.

Soul Patts bears say

  • Soul Patts past successes are no guarantee that future capital allocation will be as value accretive.
  • The New Hope investment is bold in the face of the significant carbon risk which thermal coal faces.
  • Brickworks’ industrial business is exposed to headwinds including a decline in demand for brick products, increased operating costs, and cyclicality in housing construction.

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