Washington H. Soul Pattinson and Company

Friday, April 30th, 2010

Washington H. Soul Pattinson and Company (ASX:SOL) is one of Australia’s oldest companies.

When Caleb Soul and his son Washington opened their first store at 177 Pitt Street, Sydney, in 1872 neither of them could have imagined that over 130 years later their single pharmacy would have evolved into such a significant Australian company. Further, they could not have anticipated the diversity of business operations that are now part of SOL.

Listed in January 1903, the company has transformed over time into an investment house with a portfolio encompassing many industries – its traditional field of pharmacy as well as building materials, resources, equity investments, media and telecommunications, merchant banking and funds management.

“Gone are the days when the company was known purely as a chain of chemists.”

Management has been grounded in successive family members with one of the strengths being stability. A number of decades ago SOL and Brickworks (ASX:BKW), whom we analysed last week struck up a strategic alliance via a cross shareholding arrangement. At the time it was thought that both companies were vulnerable to takeover due to being run conservatively without debt and paying dividends. The strategy has certainly been successful, decades later SOL holds a 45% stake in BKW and BKW holds a 48% stake in SOL.

The main operating subsidiaries include New Hope Corporation (60%) and Pitt Capital Partners (78%). Associated companies include Brickworks (44.6%), Australian Pharmaceutical Industries (25%); TPG Telecom (28.2%); Clover Corporation (28.6%); Arrow Energy (16.7%) and Raralco Holdings (23.5%).

The majority of SOL earnings come from two sources, the listed companies – New Hope Corporation (ASX:NHC) and Brickworks (ASX:BKW).

Listed in September 2003, NHC is a coal miner and is involved in coal seam gas investment and R&D for coal to liquids. NHC has large reserves and a solid balance sheet. Production is primarily thermal coal and is mostly exported with a smaller component consumed locally. The business owns its own coal terminal at the Port of Brisbane. NHC is exposed to currency, coal price fluctuations and possible regulatory changes associated with climate change. The high cash levels are currently diluting total return on equity and this must be employed or returned to shareholders. The experienced management team will address this issue and the recent offer for Macarthur Coal shows the intent of management.

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