Washington H. Soul Pattinson (ASX: SOL, ‘WHSP’) is a grand old company with an interesting past and an even more interesting present. It was incorporated as a pharmaceuticals company in 1903, its name deriving from the two family businesses that merged to form it: Pattinson and Co. and Washington H. Soul and Co. Today, the pharmaceutical business still stands but WHSP is best defined by its investments in other companies, most notably coal miner New Hope Corporation (ASX: NHC), communications giant TPG Telecom Limited (ASX: TPM) and building materials manufacturer Brickworks Limited (ASX: BKW).
The businesses that make up WHSP’s large portfolio are surprisingly diverse. One thing they all share in common is profitability, and it is this that has enabled WHSP to endure for more than a century. Chairman Robert Millner, the fourth generation of the Pattinson family, says this success comes down mostly to good management.
“We’ve maintained the ability over a long period of time to pick the best people to run those businesses,” he explains. “As an investor in those businesses we have directors on their boards and we’ve been very fortunate to have some excellent managers running those businesses over the years.”
Robert himself is the chairman of not only WHSP but also of New Hope and Brickworks. He also sits on the board of TPG and the original pharmaceutical business, now called Australian Pharmaceutical Industries Limited (API). Although the companies all share board members, each has its own board and is run independently.
WHSP made its first mining investment in the late 50s, which turned out to be the perfect time. “WHSP bought a lot of mining stocks at very little cost, so when the mining boom arrived in the late 60s we made a lot of money which gave us the freedom to make further investments,” Robert explains.
WHSP acquired a 60% controlling interest in New Hope Corporation in 1970, the same year that the mining company achieved a production rate exceeding 250,000 tonnes per annum of marketable coal from underground mining. Bolstered by WHSP’s investment and influence, New Hope went on to grow rapidly: becoming one of the first Australian companies to export coal to Japan; pushing its production rate up to 6.29 million tonnes; and acquiring a good number of collieries and companies, including Queensland Bulk Handling, Northern Energy Corporation and Bridgeport Energy.
In 1985 WHSP acquired a 40% interest in PT Multi Harapan Utama, commencing two decades of operations in Indonesia during which it developed a deepwater bulk handling coal terminal facility. When it eventually sold these operations in 2005, it made a large profit. “We sold that business for more than US$500 million and were able to bring all that money back into Australia, where we could invest it in our continuing mining operations in Queensland,” Robert remarks.
“Since the last peak in the coal cycle three or four years ago, we sold one of our assets for $2.5 billion and we’re now redeveloping our New Acland mine in Queensland’s Darling Downs region. While the coal market is very tough at the moment and most of our competitors are losing money, we’re still sitting on about $1.1 billion of cash and looking to invest that in growing our assets. It all comes down to having some very good people running the company.”
New Hope increased its operating cashflows by 70% in the last half year and achieved record first-half sales volumes of 3.1 million tonnes. It made an after-tax profit of $34.2 million before non-regular items, though unfortunately losses from impairments and other non-regular items came to $57.4 million after tax. Despite a net loss, however, New Hope remains well funded and is looking to expand in the coming years.
Like the coal industry, the building industry in Australia has been going through a downturn over the last few years. However, Robert says that things are now starting to look up, particularly in New South Wales. He adds that WHSP is looking to take advantage of that through Brickworks Limited, the building materials manufacturing company in which it holds a 43% stake. It acquired this back in the 1970s through a share-exchange deal that saw Brickworks mutually acquire 45% of WHSP.
Over the decades that followed, Brickworks adapted its operations to complement the changing building market. It is now a dynamic group of Australian-owned companies whose main businesses include the manufacture and distribution of clay and concrete products, property development and realisation, and investments. The company recently expanded its roof tile business in order to overcome lower demand in other areas. Its decisions were obviously good ones, as in the last half year the company achieved a net profit after tax of $62.8 million – around 18% higher than in the same period a year ago. The headline net profit after tax, including significant items, was a healthy $42.2 million.
“Brickworks has a small amount of debt, but with things picking up we’ve managed to reign in some good cash, which we’ve put toward dividends and also toward growing the business,” comments Robert. “We’re now in a more confident period in the Australian building industry and we’re hoping this upturn will continue for a few years.”
The story behind WHSP’s 27% holding in TPG Telecom Ltd is a particularly interesting one. WHSP’s first foray into the telecommunications industry was when it bought a television station based in Newcastle, New South Wales, in the late 80s. It bought the station for $38 million and, once digital television came in and analogue stations began failing, sold it for $250 million. However, it retained ownership of the transmitting infrastructure and used this as the basis for TPG Telecom, which still runs off the infrastructure today.
“Having our own network independent of Telstra and others enables us to be the lowest-cost telecommunications company in Australia,” says Robert. “The company now has a massive market capitalisation of $7.2 billion, so it’s been a wonderful, wonderful investment for us.”
TPG provides a diverse range of communications services to households, small and medium enterprises, government, large corporate enterprises and wholesale customers. These include nationwide fibre-optic broadband, telephony services, Internet Protocol Television (IPTV) and SIM-only mobile plans.
Things have been going extremely well for TPG recently. In the last six months the company achieved a net profit after tax of $106.7 million, an increase of 18% compared with the same period a year ago. It will be giving its shareholders an interim dividend of 5.5 cents per share – 22% higher than that it gave out 12 months ago.
Dividends are integral to WHSP’s strategy as a company. Since 1903 it has not missed paying a single one, even during periods of war and other disruption. The company has been able to do this because it has always had cash – which is a point that Robert is keen to emphasise.
“Through picking good industries and selecting good management, we’ve always had cash; at the moment we’re sitting on $250 million within WHSP,” he says. “We’ve never had to talk to banks and we’ve always had money to move, and I think that’s due to always being led by people who have made sensible, long-term decisions.”
This is demonstrated not only in the businesses highlighted – New Hope, Brickworks and TPG – but throughout WHSP’s entire portfolio, including pharmaceuticals business API. Having moved more into the wholesale and retail of pharmaceutical products recently, Robert says this business also is doing “very, very well”.
As WHSP continues to grow its long-standing businesses, it also seeks new opportunities. Robert is feeling extremely positive about the company’s future – which could be another 100 years of sound investments. “We’re very fortunate to be well cashed up and very excited about the future,” he says. “We look forward to growing our business further.”