Argo Investments (ASX:ARG)

Jason Beddow
CEO
Market Cap (AUD): 5.97B
Sector: Financials
Last Trade (AUD): 8.34 -0.01 (-0.12%)
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1. About

Argo is a long-term investment company listed on the ASX. Argo Investments Limited was established in 1946 and offers investors a professionally managed, diversified and easily tradeable exposure to the Australian equity market, without the need to pay fees to an investment manager.

As a listed investment company, Argo has a closed-end structure, unlike many unlisted managed funds. A key advantage of a closed-end listed fund is that the investment portfolio is insulated from investor inflows and outflows, as Argo shares are traded between buyers and sellers on the share market.

2. Business model

 

[1]

Business

Revenue ($,000)

% of Revenue

% of Profit (before income tax)

Profit drivers[2]

Argo Investments

$237,680

100%

100%

  • Argo's profit for the year ended 30 June 2018 was 3.5% higher than the prior year and earnings per share rose by 2.0%. Dividend income was 3.1% higher, led by increased dividends from Macquarie Group, BHP B and Rio Tinto.
  • Administration expenses increased by 1.5%, and include the costs of managing the external listed investment company, AGLI, for which Argo received $1.8 M in management fee income
  • Argo’s total assets increased from $5.4 B to $5.8 B, chiefly due to the impact of the stronger equity market on the portfolio value. Shareholders also contributed $40.6M through the Dividend Reinvestment Plan and $84.1 M through the Share Purchase Plan offered in March 2018. The number of Argo shareholders has increased again this year, with 84,120 holders on the register at 30 June 2018

3. Strategy

 

Key strategies include:[3]

 

  • The results of Argo’s future investment activities will depend primarily on the performance of its investee companies, their resulting share price movements and the dividends and distributions the Company receive from them
  • The performance of those entities is influenced by many factors which are difficult to predict, including economic growth rates, investor sentiment, inflation, interest rates, exchange rates, regulatory changes, and taxation levels. There are also specific issues such as management competence, capital strength, industry trends, and competitive behaviour
  • Due to the above factors and general market and economic conditions which can change rapidly, the nature of Argo’s business makes it very difficult to forecast future performance. However, the Company is conservatively managed and the diversification of the investment portfolio holdings generally help to reduce the volatility of Argo’s earnings and capital fluctuations
  • Argo will continue to focus on controlling costs, growing dividends to shareholders and achieving long-term capital growth

4. Markets

 

The Company operates in market including:[4]

 

Industry (Australia)

Industry Revenue (2018)

Annual Growth Rate (14-19)

Financial Asset Investing

$13 billion

2.4%

5. Competition

 

Major competitors include:[5]

 

  • Cannae Holdings Inc (NYSE: CNNE)
  • Compass Diversified Holdings (NYSE: CODI)
  • Draper Esprit PLC (LON: GROW)
  • Saratoga Investment Corp (NYSE: SAR)

6. History

 

1946[6]  

Company formed by Kevin Ward QC, solicitor and Alf Adamson, chartered accountant, to provide a means of investment for clients of their respective firms. It was established with a paid up capital of £10,000

Kevin Ward first Chairman, Alf Adamson Manager

 

1950  

Argo shares listed on the Stock Exchange

 

1954  

Acquisition of Austral Plaster Co. Ltd, an Adelaide-based investment company

Alf Adamson appointed Chairman

 

1957  

Acquisition of Freehold Assets Co. Ltd, a Melbourne-based investment company

 

1958  

Placement of 50,000 shares to London investors at $1.25 per share

 

1959  

Shareholders’ Equity (assets recorded at market value) exceeded $2 million for the first time

 

1960  

Argo sponsored the floating of Bounty Investments Limited, an Adelaide based listed investment company having the same management as Argo

Net operating profit exceeded $100,000 for the first time

Placement of 180,000 shares to clients of Sydney based sharebrokers at $1.45 per share

 

1961  

Placement of 60,000 shares in part payment for the acquisition of a Melbourne private investment  company at $2.00 per share

 

1963  

Argo took over the management of Wakefield Investments (Australia) Limited, an Adelaide based listed  investment company

Placement of 40,000 shares at $1.70 per share in exchange for 100,000 Wakefield Investments (Australia) Limited shares

Acquisition of Metropolitan Building Investments Limited, a Sydney based investment company

 

1964  

Placement of 100,000 shares to London investors at $2.10 per share

 

1966  

Placement of 400,000 shares to London investors at $1.85 per share

 

1968  

Acquisition of an Adelaide private investment company for a share and cash consideration of  $1,050,000

Shareholders numbered more than 2,000

Placement of 375,000 shares to London investors at $2.15 to $2.30 per share

 

1969  

Robert Patterson commenced employment

Shareholders’ Equity (assets recorded at market value) exceeded $10 million for the first time

 

1970  

Acquisition of three Melbourne based investment companies for a cash consideration of $900,000

 

1972  

Allotment of 358,530 shares at $1.75 per share as consideration for shares in Leo Investments Limited, an investment company, in association with Bounty Investments Limited and Wakefield Investments (Australia) Limited.

 

1973  

Allotment of 41,470 shares at $1.75 per share as consideration for further shares in Leo Investments  Limited

 

1976  

Net operating profit exceeded $1 million for the first time

 

1978  

Shareholders’ Equity (assets recorded at market value) exceeded $20 million for the first time

 

1981  

Shareholders’ Equity (assets recorded at market value) exceeded $50 million for the first time

Net operating profit exceeded $2 million for the first time

 

1982  

Shareholders numbered more than 4,000

Sir Donald Bradman AC appointed Chairman

 

1984  

Mr. Lew. Barrett AO OBE was appointed Chairman

 

1985  

Net operating profit exceeded $5 million for the first time

Shareholders’ Equity (assets recorded at market value) exceeded $100 million for the first time

 

1986  

1,000,000 shares placed with New Zealand investors at $2.70 per share

 

1988  

Net operating profit exceeded $10 million for the first time

Placement of 9 million 10% convertible unsecured notes of $2.30 each

Shareholders numbered more than 10,000

 

1989  

Annual balance date changed from 31 March to 30 June 

 

1990  

Acquisition of Schroders Dual Fund Limited

 

1992  

Acquisition of Stoddarts Holdings Limited, a Sydney based listed investment company

Argo’s operations included a Sydney office

Accounts of Bounty Investments Limited and Wakefield Investments (Australia) Limited consolidated with Argo Shareholders numbered more than 20,000

 

1993  

Mr. David Wicks QC appointed Chairman

9 million 10% $2.30 convertible unsecured notes converted to shares

 

1994  

Company’s corporate objective was adopted

Shareholders’ Equity before provision for deferred income tax exceeded $500 million for the first time

 

1995  

Net operating profit before net gains on realisation of long-term investments exceeded $25 million

 

1996  

50th year of operations

Share Plan introduced

 

1998  

Mr. Chris Harris appointed Chairman

 

1999  

Shareholders’ Equity before provision for deferred income tax exceed $1,000 million for the first time

Dividend Reinvestment Plan introduced

 

2000  

Net operating profit exceeded $50 million for the first time

Argo merged with Bounty Investments Limited and Wakefield Investments (Australia) Limited

 

2004  

Shareholders’ Equity before provision for deferred income tax exceeded $2,000 million for the first time

 

2005  

Net operating profit exceed $100 million for the first time

 

2006  

Shareholders numbered more than 50,000

 

2007  

Purchase of unlisted investment company for $62 million

Shareholders’ Equity before provision for deferred income tax exceed $4,500 million for the first time

 

2008  

Net operating profit, before realised gains on the sale of long-term investments, was $182.3 million, a record to date

 

2010  

Jason Beddow appointed Chief Executive Officer

Retirement of Managing Director, Mr. Rob. Patterson, after 41 years’ service to the Company

 

2012  

Mr. Ian Martin appointed Chairman

 

2013  

Shareholders numbered more than 70,000

 

2014  

Jason Beddow appointed Managing Director

 

2015  

Net operating profit was $228.1 million, a new record to date

Inaugural winner of Financial Review Smart Investor Best Australian Listed Investment Company

Established a new ASX-listed investment Company - Argo Global Listed Infrastructure Limited

 

2016  

Shareholders numbered more than 80,000

CoreData SMSF Service Provider Award winner for LICs - As voted by Advisers

CoreData SMSF Service Provider Award winner for LICs - As voted by Members

 

2017  

CoreData SMSF Service Provider Award winner for LICs - As voted by Advisers

CoreData SMSF Service Provider Award winner for LICs - As voted by Members

7. Team

 

Board of Directors[7]

 

Russell Higgins AO – Non-Executive Chairman – Independent

Anne Brennan – Non-Executive Director – Independent

Chris Cuffe AO – Non-Executive Director – Independent

Roger Davis – Non-Executive Director – Independent

Elizabeth Lewin – Non-Executive Director

Joycelyn Morton – Non-Executive Director – Independent

Jason Beddow – Managing Director

 

Management Team

 

Jason Beddow – Managing Director

Tim Binks – Chief Operating Officer

Andrew Hill – Chief Financial Officer

Andy Forster – Senior Investment Officer                                                                                             


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8. Financials

 

Financial year 2017/18 (ended 30 June)[8]

 

Business

Revenue ($,000)

% Change

Profit (before income tax) ($’000)

% Change

Argo Investments

$237,680

3.4%

$231,343

2.3%

Total

$237,680

3.4%

$231,343

2.3%

9. Risk

 

Major risks include:[9]

 

Credit risk

The risk that a financial loss will occur because a counterparty to a financial instrument fails to discharge an obligation is known as credit risk. In relation to cash and cash equivalents disclosed in Note 6, the maximum exposure to credit risk is the carrying amount of bank deposits and any interest accrued. The Company’s cash investments are managed internally under Board approved guidelines. Funds are invested for the short to medium term with the major Australian banks which have a Standard & Poor’s short-term rating of A1+. The maturities of bank term deposits in cash and cash equivalents are within three months while bank term deposits in other financial cash assets mature from three to six months.

 

Liquidity risk

Liquidity risk is the risk that the Company is unable to meet its financial obligations as they fall due. The Company has no borrowings and monitors its cash flow requirements daily which includes the amount required for purchases of securities, the amount receivable from sales of securities, and dividends and distributions to be paid or received. The Company’s inward cash flows depend mainly upon the amount of dividends and distributions received from the investment portfolio as well as the proceeds from the sale or takeover of investments. Should these inflows drop by a material amount, the Company would amend its outward cash flows accordingly. As the Company’s major cash outflows are purchases of investments and dividends paid to shareholders, the level of both is controllable by the Board and management. The assets of the Company are largely in the form of tradeable securities which, if necessary, could be sold on market to meet obligations

 

Market risk

Market risk is the risk that changes in market prices will affect the fair value of financial instruments. The Company is a listed investment company that invests in tradeable securities. Due to the nature of its business, the Company will always be subject to market risk as it invests its capital in securities which have fluctuating market prices. A general fall in the fair value of long-term investments of 5% and 10%, if equally spread over all assets in the long-term investment portfolio, would lead to a reduction in the Company’s equity of $192.0 million (2017: $178.1 million) and $384.0 million (2017: $356.1 million) respectively, after tax. The investment revaluation reserve at 30 June 2018 has an after tax balance of $1,619.2 million (2017: $1,423.3 million). It would require a 42% (2016: 40%) after tax fall in the value of the long-term investment portfolio to fully deplete this reserve. The Company seeks to reduce the market risk of the long-term investment portfolio by ensuring that it is not, in the opinion of the Board, overly exposed to one company or one particular sector of the market. The relative weightings of the individual securities and market sectors are reviewed and risk is appropriately managed. The Company does not have set parameters as to a minimum or maximum amount of the long-term investment portfolio that can be invested in a single company or sector.