A short but interesting recent conversation with Robert Millner, the chairman of the ASX-listed Washington H. Soul Pattinson (WHSP). WHSP is a diversified investment company with a long and impressive track record; it is one of the oldest companies listed on the ASX. Millner is fairly well known in Australian corporate and investment circles, but perhaps less so in Asian ones.
Those familiar with the region, however, might recall that New Hope (in which WHSP has a majority stake) was involved in Indonesia from the late 1980s, acquiring an equity interest in PT Adaro and then eventually selling its stake to a consortium of investors including Noonday and GIC in 2005. Of course, because this was mid-2000s Indonesia, the deal wasn’t without its share of drama.
Anyway, in the interview with Livewire, Millner talks about WHSP’s investment approach, where he thinks we are in the cycle, the recent portfolio tilt to private markets and some of the company’s larger strategic investments. My notes are below (these are for personal reference only and any mistakes in transcription are my own).
Family beginnings: he is the 4th generation of his family involved with WHSP, his great-grandfather started the business in the 1880s. It originally owned and operated pharmacies in Australia, but has evolved into a diversified investment company. Some of their larger strategic investments today include New Hope, TPG Telecom, Pengana Capital and Brickworks. The company was listed on the ASX in 1903 and has never missed paying a dividend to its shareholders, right through the Great Depression, two wars, the GFC and Covid-19. WHSP is also the only company in the All Ordinaries Index to have increased its dividend every year for more than 20 years. He says the primary reason they have done so well over a long period of time is because they have always had good people. Without good people, you don’t have a business.
On where we are in the cycle: they have reduced their exposure to listed investments (mostly large caps). Currently have a large nest egg sitting in the bank, at least they are getting ~5% for that at the moment. The excess cash puts them in a position to move pretty quickly if there is some sort of downturn. He thought we might have already had some attractive investment opportunities by now, but things still seem to be reasonably strong despite us being in a high energy cost, high labor cost environment. Higher interest rates are now also starting to impact a lot of people and we have still got inflation. Quietly confident they will start to see some bargain hunting coming in the next few months or by early in the new year, and they are certainly well positioned for it.
On their investment approach: they do not invest to replicate any index – they pursue a flexible, unconstrained investment mandate. They have always been very patient investors, willing to hold cash if they cannot find the right opportunities. As an example, you can go back to when New Hope sold its stake in Adaro, they got ~A$500m from that and later also sold an asset to BHP, so they had over ~A$1bn for 5-6 years. People kept pestering him about what he was going to do with the capital and eventually they bought a stake in the Bengalla thermal coal mine near the bottom of the market. They did not borrow money for most of their history, up until very recently when interest rates were virtually zero and it made sense to borrow some money.
On their increased allocation to private equity and structured debt: most of the proceeds from selling down their listed equities have been reallocated to private market investments, which is now ~17% of the portfolio (as of Jul 31, 2023). They have got a very smart team at their investment bank, Pitt Capital Partners, who always have their eyes and ears open. Previously, when people came to them with an idea or to raise money, he knew they must have been pretty desperate. But over the last 8-10 years, they have really built their team and track record. Now, if they see a deal, they know that not many other people are being shown it. ~A$400m of the private equity portfolio is invested in agriculture (water and horticulture assets, including citrus, macadamia and table grapes). In terms of the structured debt portfolio, he is happy to be a disciplined lender, but would not like to borrow at the terms they are doing some deals at.
On their investments in coal: countries around the world are still building coal-fired power stations (or, in some cases, running them for longer than previously planned). Australia has the most efficient and cleanest coal in the world, so they should be providing coal to these assets. Their leases expire in 2039, so are not going to be affected by the 2050 net zero targets. We all want to go down the renewable energy path, but anyone with common sense knows these things take time. We cannot realistically move away from hydrocarbons until we are able to invest sufficiently in developing these other energy sources. You are seeing countries starting to acknowledge this – Sweden passing new energy targets, Britain recently committing to grant hundreds of North Sea oil and gas licenses, etc. New Hope has also been an incredible cash cow over the period they have owned it, allowing them to redeploy the capital in other areas, while also being a leader in rehabilitation programs to return mined land back to agricultural and conservation uses.
Brickworks: in terms of the building products business, if you want to build something that is going to last, bricks are a very stable product to use. With a lot of these newer, lightweight products, the builders are having problems servicing the 6-year warranties. Unfortunately, the business is facing higher manufacturing costs for producing bricks and pavers – gas prices have gone through the roof, other cost pressures across the supply chain etc. They increased their prices by ~8% but this is not keeping up with the increase in costs, which has put pressure on margins. But they were also fortunate that their forebears were very smart people and bought the land where the clay was. Brickworks has undergone a significant transformation in recent years, driven by the continued sale of surplus land into the industrial trust joint venture with Goodman, and its subsequent development (as well as the strong growth in the value of that prime industrial property).
On whether they continue to see attractive investment opportunities in Australia: yes, but things have also gotten more difficult. You can’t get regulatory approvals easily, labor costs are high, energy policy is a mess, etc. Australia got this far because of cheap energy. He hopes the country can start processing and refining their own metals (e.g., lithium). More broadly, when they debate internally about potential areas of investment in the future, they spend a lot of time thinking about whether that that business will be around in 10, 15, 20 years. They are also very focused on the quality of the people running the business. They have invested in TV stations, coal mining, telecoms – not afraid to look at anything, but it has got to be a good cashflow producing asset.