Fair value upgrade for this ASX income player

Esther Holloway | Morningstar

Soul Patts’ first-half fiscal 2026 underlying net profit after tax of AUD 304 million was 7% higher than the prior year, mostly on gains from property contributions, partly offset by lower contributions from its large shareholding in New Hope. Shares were flat on the day.

Why it matters

A lot has changed in the equities market since Jan. 31, the company’s fiscal 2026 half-year. About one-third of its listed holdings are exposed to energy, where thermal coal prices were subdued. But this has since reversed with higher thermal coal prices, as the Middle East conflict causes supply issues.

• New Hope’s share price of AUD 4.51 at the fiscal 2026 half year was about 7% lower than a year earlier. However, our valuation of AUD 5.70 is 26% higher, supported in the near term by a stronger thermal coal price due to Middle East conflict and the effective closure of the Strait of Hormuz.
• The credit business is now about 12% of the portfolio, from 10% a year ago. Although private credit carries inherent risk, we have no evidence of stress in its loan book. We believe most loans are to Australian corporates and commercial property, reducing risk.

The bottom line

We raise our fair value estimate for no-moat Soul Patts by 10% to AUD 38.50 per share. The upgrade is due to higher appraised values for its unlisted assets, about two-thirds of its portfolio. This includes private companies, real estate, property, and the credit business. Shares are fairly valued.

• An interim dividend of AUD 0.48 per share was declared, a 9% increase from the prior year. We assume a dividend CAGR of 7% over the five years to fiscal 2030, defending its record of 123 years of consecutive dividend payments and growing dividends since 1998.

Between the lines

We have taken a closer look at our dividend estimates and explicitly modelled on each of Soul Patts’ subportfolios. Against this, our prior dividend growth assumptions appear too aggressive, and we have trimmed them by an average of 8% annually.

Long-term allocator built on structural strengths

Soul Patts, is a value-style-oriented investment house with approximately AUD 14.5 billion in net equity value. Its approach to increasing shareholder value is somewhat distinct from many fund managers and capital allocators, benefiting from advantages in its corporate structure, investment style, and from a relatively unconstrained investment mandate.

Soul Patts allocates capital largely in Australian equity markets—both public and private—where it thinks its reputation as a long-term passive allocator of capital provides it with advantages. This reputation has been built over decades and is supported by a cross-shareholding with Brickworks, a unique corporate structure in Australian equity markets that partially shields Soul Patts from the vagaries of the equity markets. As a result, the firm has greater flexibility to allocate capital, including the ability to invest in a contrarian manner and with long time horizons. Soul Patts’ structure provides further advantages. Constraints imposed by the requirement to fund redemptions in bear markets, and/or the need to “index hug” in bull markets are less of a concern, as often is the case for mutual fund structures. While these attributes are advantageous, they don’t guarantee past successes will be replicated.

Soul Patts provides capital on a long-term and passive basis, differing from private equity firms that are actively involved in management and strategy of investee enterprises. The firm’s investment horizon also differs from private equity, with Soul Patts preferring to take very long-term buy-and-hold positions. While it often seeks investment opportunities that begin their lives in private equity markets, Soul Patts likes to float its investments in public markets in due course, while still retaining a significant stake in the business.

The 2021 acquisition of investment management company Milton changed the group’s portfolio composition. In 2020, 80% of net asset value was in three holdings: TPG Telecom, Brickworks, and New Hope Corporation. As of 2026, about one-third of the portfolio is listed companies, including large shareholdings in New Hope and TPG Telecom.

Bulls say

• Soul Patts total returns to shareholders have exceeded the comparable All Ordinaries Accumulation Index for the past 20 years.
• The merger with Brickworks diversifies earnings, with more exposure to building products and industrial property.
• Consistent with its track record, we expect Soul Patts to increase dividends each year regardless of investment performance.

Bears say

• Soul Patts’ past successes are no guarantee that future capital allocation will be as value accretive.
• The New Hope investment is bold, considering the significant carbon risk that thermal coal faces.
• Brickworks’ industrial business is exposed to headwinds, including a decline in demand for brick products, increased operating costs, and cyclicality in housing construction.

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