Investments In Illiquid Assets Will Heighten Risk Amid Market Volatility

Key Takeaways

• Increased investments in private credit and equity introduce higher risk and may affect net margins due to potential market volatility.
  
• Cash reserves depletion leading to net debt could limit future opportunities, impacting revenue and earnings growth.
  
• Soul Pattinson's strategic diversification and prudent management enable resilient cash generation, portfolio growth, and above-market returns, ensuring long-term earnings stability.

Catalysts

An investment company, engages in investing various industries and asset classes in Australia.

• Soul Patts' net profit after tax was 28% lower than the previous year, largely due to weaker performance in key portfolio investments like Brickworks and New Hope, suggesting pressure on future earnings if these businesses do not recover or diversify their revenue streams.
  
• The company has significantly increased investments in private credit and private equity, which could introduce higher risk and affect net margins if these illiquid assets underperform or become less valuable due to market volatility.
  
• The company's cash reserves decreased significantly, leaving it in a net debt position. This could limit Soul Patts' ability to capitalize on future opportunities, potentially impacting revenue and earnings growth.
  
• A heavy focus on emerging markets and specific sectors like energy might expose the company to sector-specific risks or economic shifts, which could impact revenue streams if those sectors underperform.
  
• Despite a strong historical track record, Soul Patts' portfolio underperformed the All Ordinaries Accumulation Index by 1.4% in FY '24, raising concerns about its strategic asset allocation's effectiveness in driving competitive returns and potentially affecting shareholder value and returns.

Washington H. Soul Pattinson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Washington H. Soul Pattinson's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.5% today to 31.5% in 3 years time.
• Analysts expect earnings to reach A$399.2 million (and earnings per share of A$1.21) by about December 2027, down from A$498.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.2x on those 2027 earnings, up from 25.6x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 3.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.75%, as per the Simply Wall St company report.

Washington H. Soul Pattinson Future Earnings Per Share Growth

Risks

• Soul Pattinson has demonstrated solid cash generation, with net cash flows from investments increasing by 10.3% and a declaration of growing dividends. This continued cash generation and dividend capability can positively impact net margins and shareholder value.
  
• The portfolio grew in value, with net asset value per share increasing by 12% after dividends, suggesting robust earnings growth. The company's ability to grow its portfolio value 6.4% above the market benchmark over three years indicates resilient long-term performance.
  
• The company remains adept at managing investment risk through diversification and consistent rebalancing of its portfolio, which includes deploying $800 million in cash into high-quality, resilient businesses. This approach supports sustainable revenue generation and earnings stability.
  
• Soul Pattinson's private and public equity investments, especially in emerging sectors like energy, have shown a capacity for above-market returns, with the private equity portfolio achieving a 15.9% return. This strength positions the company to maintain or improve its earnings in the future.
  
• The company has exhibited financial resilience with its established strategies for capital management, its ability to prudently manage cash reserves and net debt positions, facilitating continued investment in attractive opportunities. This strategic flexibility allows earnings growth potential despite market volatility.

Valuation

• The analysts have a consensus price target of A$35.15 for Washington H. Soul Pattinson based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be A$1.3 billion, earnings will come to A$399.2 million, and it would be trading on a PE ratio of 35.2x, assuming you use a discount rate of 6.7%.
• Given the current share price of A$34.73, the analyst's price target of A$35.15 is 1.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.