Comment on SOL valuation

In by Jack Strudwicke1 Comment

Jack Strudwicke

Hey guys,

Love the podcast. Just a few comments on the episode you did on SOL (season 3, episode 201).

I don’t think you can apply the DCF valuation as used in the episode. You lump together earnings on vastly different risk levels and apply a single discount rate. You cite Buffett using 10% for all investments but I don’t think he would do that with SOL.

In Security Analysis Benjamin Graham is presented with this situation when valuing a company which has a significant holding in bonds. From memory the bonds had a 4% yield and thus made the earnings of the company look measure. But when you realise that these are bonds and not equity you value them much different.

How is this relevant to SOL?
SOL in its own right and via Brickworks has significant property assets. When there is no re-evaluation benefit only the distributions are counted and their risk is clearly less than the equity.

Additionally and more importantly is the accounting of many of SOL’s holdings. Many holdings are accounted using the equity method. Thus for its Brickwork holdings it essentially uses its share of net income minus dividends received. This has taro effects. The book value is understated as it is not held at fair value (no capital growth on the retained earnings for 50 years) and it understated SOLs return on equity.

SOL values it’s company at market value for us. Recently it was 5.2 billion as of Jan 31 2020. This does not factor in the deferred tax liabilities but since the turnover of the portfolio is so low it is inconsequential. This valuation does not give management any credit for its ability to create value which it obviously has for along time.

Is this sustainable? Yes, in my opinion. Management is able to invest counter cyclically in basically any asset class (listed, unlisted, property etc). By having the Millner’s and Brickworks on the share register owning atleast 60% of the company ensures that management and shareholders are aligned. With Tom Milner on the board and ready to take over for the next generation this looks to continue.

I value them around $25 and am a happy buyer at the moment. Interesting to note both Tom and Robert Milner picked up over $2,000,000 shares when the price was just below $19.

Thanks guys. Sorry for the long comment.

  • Edit
    Jack Strudwicke

    A few other things. They do pay out 80% of net regular profit from operations or there abouts. This is from dividends, distributions and interest. However they use their close to $400m large cap portfolio and their LICs for liquidity to fund new investments.

    Also they use their investment bank (Pitt capital partners) to take stakes in small caps and grow with them.

    And finally I expect them to increase their dividend at FY20 but also to potentially pay a special dividend. With the TPG/Vodaphone merger TPM paid a special dividend of 54c a share (I believe). That will be around $100m for SOL. Their total dividends last year was ~$135m so it is a huge distribution.

    I don’t expect they will pass on the whole lot given the highly uncertain economy and potential opportunities but I would think a 10c special dividend is possible. And if they retain the whole lot I expect them to use it wisely.