LISTED investment company Djerriwarrh has reported a 46 per cent slide in operating profit for the first half of the financial year as investee companies slashed dividends and reduced market volatility cut income option sales income.
Djerriwarrh reported a net operating profit of $20.1 million for the six months to the end of December, compared with $37m in the previous corresponding period.
The main culprit was a $14m reduction in income from sales of put options over stocks in the investment portfolio to just $6.8m, while income from dividends and distributions was also down by $12.8m, to $16m.
Djerriwarrh operates an $800m portfolio composed of large-capitalisation stocks that also have liquid options markets, gaining additional income by selling call options over its holdings.
The seller of a call option receives a premium in return for an agreement to sell a stock at an agreed price on a future date. If the agreed price is above the market price when the option falls due, it will not be exercised and the option seller keeps both the premium and their stock.
However, managing director Ross Barker said the strong rebound in the equity market during the reporting period led to call options being exercised against a number of Djerriwarrh’s holdings, resulting in the sale of $27.4m worth of Commonwealth Bank shares, $23.5m worth of NAB, $15.7m of Westpac, $14m of ANZ Bank and $10.6m of Rio Tinto.
“However, where it was sensible from an investment perspective, quite a number of option positions were also bought back and moved to positions with higher exercise prices,” Mr Barker said.
“That meant we didn’t earn as much as in the prior corresponding period, when the market kept falling and we didn’t need to do anything — the options just lapsed and we kept the premium.”
Mr Barker said the company was “somewhat guarded” about the strength of the recent market recovery and so would increase the proportion of the share portfolio covered by call options during the second half from its current level of 28 per cent.
“We’re guarded about market levels, it’s had a pretty good recovery and there needs to be a period of consolidation while the market decides whether the recovery in earnings that it’s projecting will come through,” he said.
Meanwhile, the company was optimistic on the outlook for investee companies to restore dividend payments, he said.
“With the recovery in earnings that’s projected by the market, it’s our hope that companies will reflect that in their dividend payouts in the next 12 to 18 months.”
Djerriwarrh declared an interim fully franked dividend of 10c per share, unchanged from last year.
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