Djerriwarrh delivers steady interim result
Half yearly results to 31 December 2024
Djerriwarrh continued to deliver on its primary objective of providing shareholders with an enhanced yield, underpinned by a disciplined portfolio management approach, including the strategic management of option positions which contribute to generating additional income. For the six months to 31 December 2024, Djerriwarrh maintained its interim dividend at 7.25 cents per share, fully franked. Based on this and the final dividend paid, the dividend yield on net asset backing is 6.4% grossed up for franking credits. This represents an enhanced yield of 1.9% higher than that available from the S&P/ASX 200 Index.
The net operating result for the period was $21.0 million, a measure of income from investment activities, 4.3% down compared to $21.9 million in the previous corresponding period. Revenue was $18.8 million, down slightly from $19.5 million in the corresponding period last year, while option income contributed $7.5 million.
Portfolio Adjustments and Performance
Djerriwarrh’s portfolio return for the six months including franking was 4.4%, while the S&P/ASX 200 Accumulation Index was 7.6%. Over the 12 months, the portfolio delivered an 8.5% return, while the benchmark return was 12.7%. Performance was impacted by an underweight position in the Banking sector, which produced very strong returns over the calendar year as bank valuations rose to historically high levels.
In the current highly valued market, many option positions were exercised, and a net cash position was maintained throughout the period. A large portion of holdings in Macquarie Group, Commonwealth Bank, Westpac, National Australia Bank and JB Hi Fi were sold following share price strength. While these companies are high quality, their historically high valuations did not warrant reinvestment after the option exercises. Holdings in Mineral Resources, Ramsay Health Care and FINEOS Corporation were fully exited.
“Djerriwarrh was a big buyer of the banks some 18 months ago when they were out of favour and valuations were very attractive. Since then, the banks have been one of the best-performing sectors on the ASX – their share prices have rallied a huge amount and the call options that we have written against the banks have largely been exercised. The end result is that Djerriwarh owns a lot less banks today than we did six, 12 or 18 months ago. We think that is the right position today given where bank valuations are,” commented Brett McNeill, Djerriwarrh’s Portfolio Manager.
“On the other hand, we’ve reinvested the capital from these transactions into high-quality companies, typically large cap, blue chip stocks with healthy fully franked dividend yields and trading at attractive prices.”
Djerriwarrh strategically increased holdings in Rio Tinto and BHP due to their attractive valuations and high fully franked dividend yields. These companies have traditionally been core holdings for our portfolio due to their quality assets, strong management and solid balance sheets.
Other additions to its holdings included Coles Group, Newmont Corporation, CSL, Woolworths Group, Woodside Energy Group, Cochlear, and Transurban Group. Ampol, a vertically integrated energy company, was the sole new holding added during the period. Ampol’s earnings mix and dividend potential aligned with Djerriwarrh’s investment objectives.
Options Strategy and Income Generation
Djerriwarrh’s option strategy and goal remains to write single stock options against companies held in the portfolio to generate additional income, and assist in meeting its enhanced yield objective. The company achieved $7.5 million in option income during the period, with $7.2 million from call options and $0.3 million from put options.
Call option coverage ranged from 40% to 45% for most of the period, focusing on holdings in major banks and Macquarie Group. This generated a good level of option income while managing exposure to the rising share market.
The period ended with a call option coverage of 41%, positioning Djerriwarrh with a good amount of option income premium heading into the second half of the financial year.
“We see current market valuations as pretty high and we’re being patient in terms of how much we want to reinvest. As a result, we’re running a net cash position. We’ve deliberately positioned the portfolio quite conservatively and think this is right for the current market,” Brett added.
Looking ahead
Djerriwarh’s continues to adopt a cautious approach to capital allocation in light of current market valuations. By maintaining a portfolio of quality companies and preserving flexibility through a cash reserve, Djerriwarrh is positioned to respond to emerging opportunities while delivering on its income objectives.
“Businesses are generally in good shape and we like the companies in our portfolio. We’re seeing more extreme valuations across other sectors as well and that makes us cautious, Therefore we need to be careful about when we put money into the market, what we’re buying and the price we are buying it at,” concluded Brett.