Djerriwarrh Investments : Half Yearly Report and Accounts as at 31 December 2021

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RESULTS FOR ANNOUNCEMENT TO THE MARKET

The reporting period is the half-year ended 31 December 2021 with the previous corresponding period being the half-year ended 31 December 2020. The results have been reviewed by the Company's auditors.

Results for announcement to the market

• Profit for the half-year (including unrealised gains or losses on open option positions) was $19.6 million, 142.2% up from $8.1 million in the previous corresponding period.
• Net Operating Result for the half-year was $18.1 million, 54.4% up from $11.8 million in the previous corresponding period. In the opinion of Directors, as this measure excludes the impact of open option positions it is therefore a better measure of the Company's income from investment activities.
• Revenue from operating activities was $15.1 million, 57.2% up from $9.6 million in the previous corresponding period. This includes dividends and distributions received from the Company's investment but excludes trading and option income and capital gains on investments.
• The interim dividend of 6.75 cents per share fully franked, up from 5.25 cents the previous interim period, will be paid on 23 February 2022 to ordinary shareholders on the register on 3 February 2022. There is no conduit foreign income component of the dividend.
• None of the interim dividend is sourced from taxable capital gains, on which the Company has paid or will pay tax. The amount of the pre-tax attributable gain on this portion of the dividend, known as an "LIC capital gain", is therefore nil.
• The final dividend for the 2021 financial year was 5.75 cents per share, fully franked, and it was paid to shareholders on 27 August 2021.
• A Dividend Reinvestment Plan (DRP) and Dividend Substitution Share Plan (DSSP) are available, the price for which will be set at a nil discountto the Volume Weighted Average Price of the Company's shares traded on the ASX and Chi-X automated trading systems over the five trading days from when the shares trade ex-dividend. The last date for the receipt of an election notice for participation in the DRP & DSSP is 5.00 pm (Melbourne time) on 4 February 2022.
• Net tangible assets per share before any provision for deferred tax on the unrealised gains or losses on the long-term investment portfolio as at 31 December 2021 were $3.47 (before allowing for the interim dividend), up from $3.01 (also before allowing for the interim dividend) at the end of the previous corresponding period.

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Strong Lift in Interim Dividend

Half Year Report to 31 December 2021

• Djerriwarrh seeks to provide shareholders with a total return comprising an enhanced level of fully franked income that is higher than is available from the S&P/ASX200 together with long term capital growth, delivered at a low cost. The enhanced yield is achieved through a bias to investing in companies with higher dividend income, produced over the short and long term, as well as using option strategies to generate additional income.
• The interim dividend has been increased to 6.75 cents per share fully franked, up 28.6% from 5.25 cents per share fully franked for the corresponding period last year. The increase was as a result of higher company dividends and improved income from option activities.
• The Portfolio return for the six months to 31 December 2021 including franking was 6.7%, ahead of the S&P/ASX 200 Accumulation Index return including franking of 4.6%. The 12- month portfolio return to 31 December 2021 including franking was 20.6%, whereas the S&P/ASX 200 Accumulation Index return over the corresponding period including franking was 18.7%. In strong markets we would not expect the portfolio to match index returns given call options can detract from capital growth in such markets. In this context this was a strong result, particularly given the increase in income and the interim dividend for the half year.
• At 31 December 2021, the yield on the portfolio (net asset backing) was 5.6%, including franking, whereas the yield on the S&P/ASX 200, including franking, was 3.8%.
  Yield at 31 December 2021 (based on an annualised interim dividend)

• Half Year Profit was $19.6 million, up from $8.1 million in the corresponding period last year. Key components of this result were:
• • income from investments, up to $15.1 million from $9.6 million in the corresponding period last year; and
  • income from option activity was $7.9 million, higher than the corresponding period last year, which $6.1 million.
• Net Operating Result (which excludes the impact of open option positions and is therefore a better measure of the Company's income from its investment activities) was $18.1 million. The figure for the corresponding period last year was $11.8 million.

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Profit and the Interim Dividend

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The level of dividend declared each period is determined by taking into consideration the Net Operating Result (which is made up of the dividends received from the companies that Djerriwarrh invests in, as well as the income generated from option strategies) and a prudent distribution of realised capital gains when available. The Company believes the Net Operating Result, which excludes the valuation impact of open option positions, is a better measure of Djerriwarrh's income from its investment activities.

The Net Operating Result per share for the six months to 31 December 2021 was 7.7 cents per share, up from 5.2 cents per share in the corresponding period last year.

The trend in dividend payments from our portfolio holdings was generally positive during the period as we saw a strong bounce back from the COVID-19 impacted dividend levels of prior periods. We received significantly higher dividends from BHP, Westpac, IAG and National Australia Bank. We also saw solid increases in dividends received from Equity Trustees, ASX and Woolworths from higher dividend rates and our increased holdings in these companies. In contrast, lower dividend income was received from APA Group, Brambles, Woodside Petroleum and Sonic Healthcare, as a result of reduced holdings in these companies (in the case of Sonic Healthcare because of the exercise of call options).

There was an improvement in the amount of option income generated for the half year, $7.9 million versus $6.1 million in the corresponding period last year.

There were no realised capital gains distributed during the half year.

An interim dividend of 6.75 cents per share fully franked has been declared, up from 5.25 cents per share fully franked in the corresponding period last year, and ahead of the final dividend declared in respect of the 2020/21 financial year of 5.75 cents per share, fully franked.

Based on the annualised amount of the interim dividend, the dividend yield on our current asset backing would be 3.9% and grossed up for franking credits would be 5.6% (assuming a shareholder can take full advantage of the franking credits). Based on the net asset backing and including franking this represents an enhanced yield of 1.8% percentage points higher than that available from the S&P/ASX 200 Index.

Option Activity

A key feature of the improved performance of the portfolio and generation of option income has been the management of the option positions through the half.

Call option coverage at the beginning of the period was 39%, which was maintained through July and August. After the market (as measured by the S&P/ASX 200 Index) fell from its mid-August high, our option positions profited as we made the decision to close out a significant number of these positions that were due to expire over September to December. Call options in companies such as ANZ, CSL, Commonwealth Bank, Transurban, Westpac, JB Hi-Fi, Netwealth and Woolworths were closed out with share prices lower on average, which enabled us to retain significant option income. As a result, we ended the year with lower than usual call option coverage in this group of companies.

During November and December, we started increasing our option coverage in selected companies including BHP, Rio Tinto, ASX, AUB Group, SCA Property Group and BWP Trust. In contrast we decided not to have any call option coverage in companies such as Cochlear, Domino's Pizza Enterprises, Auckland Airport and Pinnacle Investment Management as we perceive these companies to have relatively more attractive capital growth potential.

Overall, call option coverage of the portfolio at calendar year end was 28%, slightly lower than our normal range of 30% to 40%.

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In addition to our call option writing activities, we generated additional income through writing put options in companies including Coles, CSL, Woolworths and Transurban.

In terms of our overall option strategy to generate additional income, our goal remains to write specific single stock options against companies held in the portfolio, rather than setting an overall target for option coverage for the portfolio. This is done in order for Djerriwarrh to meet its enhanced yield objective, but only to a level where long term capital growth is not overly compromised.

The level of option income generated each period will largely be a result of our option coverage levels, option premium prices (largely dependent on market volatility levels and interest rates) and the exercise prices at which we write the options.

Portfolio Returns

The continued focus on strengthening the overall quality of the companies within the portfolio, while maintaining a suitable balance between short term income yield and long-term growth has seen Djerriwarrh's total portfolio return outperform its benchmark index. For the six months to 31 December 2021, Djerriwarrh's total portfolio return was 6.7% when including franking, ahead of the S&P/ASX 200 Accumulation Index return including franking of 4.6%.

The more significant contributors (including dividends and option income) to Djerriwarrh's portfolio performance over the six-month period were Sydney Airport, Mainfreight, Macquarie Group, ASX and Carsales.com.

For the year to 31 December 2021, the total portfolio return including franking was 20.6%. The S&P/ASX 200 Accumulation Index including franking was 18.7% over the same period (see attached performance table).

Portfolio Adjustments

The use of option strategies means there will always be a necessary level of rotation in the portfolio as we get exercised on some holdings.

In the period we were exercised on a number of companies held in the portfolio because of share price strength. This included ASX, Macquarie Group, Carsales.com, Telstra, Woolworths, Sydney Airport and Goodman Group. In some cases, we were able to replace our holdings by subsequently buying back in at lower share prices, for example Macquarie Group. For the other companies listed above we are left with lower holdings although we may look to rebuild these positions over time when suitable opportunities arise.

We were also active sellers of our remaining holdings in APA Group, Alumina, Orica and Origin Energy, and we reduced our positions in companies such as Brambles and Woodside Petroleum.

Some of the capital realised from these sales was re-allocated into a number of other companies. This is a continuation of our portfolio strategy where we aim to maintain a diversified portfolio of high- quality companies that can deliver Djerriwarrh the appropriate balance between income and growth.

As a result, we added to a number of our key portfolio holdings at prices where we saw long term value. These major purchases included BHP, Wesfarmers, Coles, Commonwealth Bank, Westpac, Ramsay Health Care, Auckland Airport, Equity Trustees and CSL. We also actively added four new companies to the portfolio. JB Hi-Fi and SCA Property Group were purchased primarily for their attractive dividend yields. Cochlear and Domino's Pizza were purchased for their attractive long term growth profile.

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