22 MARCH 2013

WASHINGTON H SOUL PATTINSON & COMPANY (SOL) BRICKWORKS (BKW) CGT is $200m. Not $700m.
Results
On 21 March, Brickworks (BKW) and Soul Patts (SOL) released their interim results for FY13. They are summarised in appendix 1. We have updated our numbers for the new disclosure, and a summary of the assets of the combined group is set out in appendix 2, which reveals the importance of New Hope to the group (43% of group assets), and shows how trivial the brick business has become over the decades (4%).

Recommendations
Stock details Price Shares on issue (m) Market capitalisation (m) 52 week range HGIB valuation Current price Upside / (downside) Stock details Price Shares on issue (m) Market capitalisation (m) 52 week range HGIB valuation Current price Upside / (downside) Analyst details Charlie Green cgreen@hgib.com.au +61 74639 1800 Hunter Green Institutional Broking 143 Russell Street Toowoomba QLD 4350 12 month share price performance
$17
Soul Patts ASX300

BUY
SOL $14.00 239.4 $3,351.5 $12.30 - $14.35 $20.13 $14.00 43.8% BKW $12.88 147.6 $1,900.7 $9.70 - $12.94 $16.07 $12.88 24.8%

CGT is $200m; the reference to $700m is just another red herring

On 21 March, BKW also released an Important letter to the ASX concerning a Review of Brickworks corporate structure, and made a release to the ASX, titled a Review of Brickworks Investment in Washington H Soul Pattinson (the Review). Taken together, we gather that these documents aim to establish why the cross shareholding between BKW and SOL is important, and aim to rebut calls for the dismantling of that cross shareholding. The documents released to the ASX also refer specifically to Hunter Greens recent proposals of a nil premium merger (NPM) between SOL and BKW (on which see our research of 11 February, 2012, titled Nil Premium Merger: Call To Arms). In our material, we identify a CGT obligation of about $200m, in order to achieve the $1b value uplift we know is available for all shareholders. In our view, the $200m odd CGT is a price worth paying. On the other hand, the company asserts that we have failed to fully account for an estimated >$700m in unrealised CGT liability on SOLs investments [in TPM and NHC]. The clear inference the company and its advisors would like shareholders to draw is that is that a nil premium merger wont work, because there will be $700m CGT to pay, not $200m. However, when Robert Webster, presenting the view of the BKW Board at a briefing in Sydney, was challenged to explain the calculation or methodology behind the $700m CGT, he failed to answer the question, asserting that it was commercial-in-confidence. We need to be clear: since the company briefing yesterday the Brickworks advisors have contacted us and confirmed that the reference to the $700m CGT on slide 18 of the Review is merely a reference to what CGT might some day, eventually, never maybe, be trigKey Financials - SOL
Cash NPAT - adjusted EPS DPS Payout ratio Yield AUDm cps cps % %

$16 $15 $14

1H12a
88.7 37.1 17.0 45.8 2.4

1H13a
71.4 29.8 18.0 60.3 2.6

%
-19.5 -19.6 5.9 31.7 -

FY13f
186.6 78.0 49.0 62.8 3.5

$13 $12 Mar $13 $12 $11 $10 $9 Mar Jun Sep Dec Mar

Brickworks ASX300

Key Financials - BKW

Cash NPAT EPS DPS Payout ratio Yield AUDm cps cps % %

1H12a
49.5 33.5 13.5 40.2 2.1

1H13a
56.0 37.9 13.5 35.6 2.1

%
13.1 13.1 0.0 -11.6 -

FY13f
93.3 63.0 41.0 65.1 3.2

Jun

Sep

Dec

Mar

YE 31 July; Source: current Factset consensus

gered in the event that key assets such as New Hope were ever sold. (But consider if they were sold, it would most likely be at a premium price sufficient to cover any CGT; to suggest otherwise is to suggest that SOL would sell its controlling New Hope stake at prevailing market prices, which is just absurd). So the reference in the slides to a $700m CGT liability is misleading, and entirely unrelated to the efficacy of a nil premium merger. (The question and scale of unrealised CGT will in time be relevant to the pre and post tax valuations of a merged entity, but then so will a discussion of SOLs $429m, and BKW $151m, franking credit balances, as well as a host of other matters). As the company has therefore failed to damage our NPM thesis, our view remains as follows: pay $200m CGT (or thereabouts) to achieve a $1b plus uplift in asset backing per share. (In lay terms: take nearly half the shares off the table for a cost of $200m CGT and the asset backing per share just about doubles, less the $200m).

Features of a NPM
Our revised calculations for the workings of a NPM are contained in appendix 3. Crucially, following a NPM, the overall high asset quality, and their value, will no longer be clouded by the cross shares, and the post merger shares should trade at least in line with these asset values because of the open register, and transparency, of the merged company, allied with the high quality of the main underlying assets of the merged group (not to mention the $580m in franking credits). Further, the underlying businesses (such as the New Hope investment, the land banks, the brick business, the TPM investment, the share portfolio) have not been disturbed at all, except for a modest cash payment to the ATO. Also, the cash dividends which currently flow within the group should at least be maintained (e.g. there is no reason for the NHC dividends to change at all). But payments of dividends per share to the genuine, look through, non cross share shareholders, will actually increase substantially, owing to the same pot of earnings available for dividends, spread across just over half as many issued shares. And there is nothing in our NPM plans which call for existing control to be disturbed at all.

Conclusion - NPM is the fairest way forward

The holy grail for BKW and SOL shareholders remains the dismantling the anachronistic cross shareholding. While the short term prospects of this have diminished with yesterdays misleading attempts to rebut its efficacy, the medium to longer term prospects remain intact. Crucially, our arguments have substantial commercial merit (unlike those of the Brickworks Board), and as the wider shareholder base becomes increasingly more educated about the benefits of a NPM, then the prospects of such a restructure improve. We also note that, while ever the cross share structure is preserved, it amounts to a corporate gerrymander by the Millner family, which, through its control of the board of SOL, allows it to control $4.1b of net assets, although its family shareholding is valued at just $367m. Finally, we know that many assets in the group are high quality (e.g. NHC, TPM), and that even under the current corporate structure, the companies have reasonable defensive characteristics. Moreover, we know that the true value for each company is at least 30% higher than their current share prices, and we retain a Buy recommendation on each of them.

Hunter Green Institutional Broking, AFSL 235259

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APPENDIX 1 - BKW / SOL 2013 INTERIM RESULT SUMMARIES

BKW - 1H13 result summary

Building Products EBIT Land and Development EBIT Investments EBIT Unallocated costs Total EBIT Interest expense MTM valuation of sw aps Adjusted NPBT Income tax Adjusted NPAT Signification items Reported NPAT

1H12a
$14.4 $13.3 $41.7 -$3.5 $65.9 -$10.8 -$2.8 $52.3 -$2.9 $49.5 $4.6 $54.1

1H13a
$14.0 $37.3 $28.8 -$3.6 $76.5 -$10.5 $0.6 $66.6 -$10.7 $56.0 $0.1 $56.1

% change
-2.8% 180.5% -30.9% 2.9% 16.1% -2.8% -121.4% 27.3% 269.0% 13.1% -97.8% 3.7%

SOL - 1H13 result summary

contribution from: New Hope Corporation TPG Telecom Brickw orks Ampcontrol API BKI Investment Company Apex Healthcare Berhad Pitt Capital Partners Ruralco Holdings Clover Exco Resources CopperChem Total net profit from associates

1H12a

1H13a

% change

$60.3 $15.0 $1.5 $2.9 $2.2 $1.2 $0.7 $1.1 $0.7 $13.0 -$13.5 $85.1

$41.1 $21.1 $9.6 $4.0 $2.9 $2.5 $1.4 $0.9 $0.9 $0.7 $0.4 -$16.1 $69.4

-31.8% 40.7% 540.0% 0.0% 13.6% 16.7% 28.6% -18.2% 0.0% -96.9% nm -18.4%

Hunter Green Institutional Broking, AFSL 235259

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APPENDIX 2 - SUMMARY OF BKW/SOL COMBINED ASSETS

BKW Development Land 2% BKW Trust net assets (50/50 JV with GMG) 6%

BKW Building Products business 4%

BKW Operational Land 8%

Total SOL unlisted investments 6% Total other SOL listed associates 5%

New Hope Corporation 43%

Total SOL listed share portfolio 11%

TPG Telecom 15%

Source: HGIB using current market values for listed assets, the most recently reported values for some unlisted assets and HGIB estimates of value for the BKW Building and Products business.

Hunter Green Institutional Broking, AFSL 235259

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APPENDIX 3 - CALCULATIONS FOR BKW (Bidco) NIL PREMIUM MERGER WITH SOL (100% SCRIP)
Item # 1 2 3 4 5 6 7 8 Calculation Total SOL shares currently on issue Total SOL shares already owned by BKW Total SOL shares owned by non-BKW shareholders Total BKW shares currently on issue Total BKW shares already owned by SOL Total BKW shares owned by non-SOL shareholders BKW shares are currently valued by the market at SOL shares are currently valued by the market at Nil premium merger calculations (100% scrip) BKW would issue 1 BKW share for every Total BKW shares currently on issue Total new BKW shares issued to fund merger Total BKW shares on issue following merger Following the bid BKW cancels Total BKW shares on issue post merger Assets of merged group New Hope Corporation TPG Telecom Total SOL listed share portfolio Total other SOL listed associates Total SOL unlisted investments Other SOL net assets Total SOL (pre-bid) net assets BKW Building Products business BKW Operational Land BKW Development Land BKW Trust net assets (50/50 JV with GMG) Other BKW net assets Total BKW (pre-bid) net assets Total BKW (post-bid) net assets CGT payable on cancelled BKW shares (see item 13) Estimated cost base of BKW shares currently held by SOL Deemed disposal price Profit on each share disposed Total capital gains tax payable at 30% CGT rate BKW net assets following merger and CGT payment Post-merger BKW NAV per share Pre-merger a SOL share was valued by the market at Each SOL share will be converted to Post-merger an equivalent SOL share will have an NAV of 239.395 m 102.258 m (42.7%) 137.137 m (57.3%) 147.818 m 65.645 m (44.4%) 82.173 m (55.6%) $12.70 per share $13.91 per share

9 10 11 12 13 14

0.91 SOL shares it does not already own 147.818 m 150.203 m 298.021 m 65.645 m BKW shares previously owned by SOL 232.376 m

=7/8

=6/9 = 10 + 11

= 12 - 13

15 16 17 18 19 20 21 22 23 24 25 26 27 28

$1,908.431 $639.224 $511.091 $239.583 $283.508 $161.500 $3,743.338 $168.000 $348.000 $74.000 $252.400 -$535.253 $307.147

m (current market price) m (current market price) m (current estimated market value) m (BKI, RHL, API, CLV, KUL:APER) m (CopperChem, Exco, Souls Private Equity, KH Foods) m (net cash and net DTLs at 31 January 2013) m m (HGIB March 2013 estimate) m (BKW 31 January 2013 valuation) m (BKW 31 January 2013 valuation) m (BKW 31 January 2013 valuation) m (BKW 31 January 2013 Balance Sheet) m = 21 + 27

$4,050.485 m

29 30 31 32 33 34 35 36 37

$3.000 per share $12.700 (current market price) $9.700 $191.027 m $3,859.458 $16.61 30.8% higher than the current BKW share price $13.91 per share 1.10 BKW shares $18.19 30.8% higher than the current SOL share price

= 30 - 29 = 13 * 31 * 30% = 28 - 32 = 33 / 14

=8/7

38 39 40 41

The upside to both BKW and SOL shareholders is Which across pre-merger values is a Which across pre-merger values is a And a total value uplift of

30.8% $587.093 m value uplift for external SOL shareholders $321.186 m value uplift for external BKW shareholders $908.278 m

= 34 / 7 = 37 / 8 = (37 - 8) * 3 = (34 - 7) * 6 = 39 + 40

Hunter Green Institutional Broking, AFSL 235259

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Investment Controlled Entities

New Hope Corporation NHC BKW TPM BKI RHL API KUL:APER CLV MLT BHP CBA NAB TLS PPT SFW WES ELD ALQ BXB QHL CMV PAG MQG RUM LAU ASW CBD AQR PLY DTQ $18.83 $37.48 $64.45 $27.36 $4.60 $38.84 $0.59 $37.60 $0.13 $46.90 $8.11 $0.16 $0.05 $1.19 $38.50 $0.25 $0.22 $0.76 $0.03 $0.12 $0.45 $0.07 $18.95 $33.49 $68.65 $30.35 $4.54 $40.83 $0.62 $40.30 $0.13 $10.11 $8.22 $0.15 $0.04 $1.24 $35.72 $0.21 $0.19 $0.68 $0.02 $0.28 $0.36 $0.05 $2,305 $178,253 $110,470 $71,088 $56,492 $1,714 $452 $46,633 $56 $3,443 $12,795 $47 $8 $329 $12,115 $44 $40 $29 $9 $46 $13 $7 6.7 1.4 0.6 0.8 3.8 0.5 31.4 0.4 45.4 1.3 1.6 63.2 29.8 7.9 0.2 28.7 36.1 4.3 62.5 16.1 2.0 12.7 5.5% 0.0% 0.0% 0.0% 0.0% 1.3% 4.3% 0.0% 10.1% 0.4% 0.1% 19.5% 12.4% 3.0% 0.1% 13.8% 16.6% 10.1% 13.1% 9.5% 5.4% 10.2% $12.62 $2.73 $1.46 $3.30 $0.46 $1.28 $0.52 $825.2 $564.6 $14.2 $42.8 $54.7 $29.1 $24.3 $506.0 $126.5 $52.6 $40.8 $22.2 $17.5 $20.6 $18.5 $13.6 $5.7 $12.6 $12.6 $10.1 $1.4 $9.3 $8.7 $7.0 $8.0 $3.3 $1.7 $1.9 $0.9 $0.9 $110.6 $12.88 $3.07 $1.46 $3.32 $0.46 $1.28 $0.59 $1,904 $2,437 $649 $183 $225 $96 $97 65.6 213.8 58.0 13.0 120.2 22.7 47.2 44.4% 26.9% 13.0% 23.6% 24.6% 30.3% 28.6% $845.5 $656.3 $84.4 $43.0 $55.3 $29.1 $27.6 $510.3 $127.3 $47.0 $43.4 $24.6 $17.2 $21.6 $19.5 $14.5 $5.7 $13.5 $12.8 $9.2 $1.0 $9.7 $8.1 $6.0 $6.7 $2.9 $1.2 $4.4 $0.7 $0.7 $112.4 $4.25 $2,106.3 $3.86 $3,206 495.7 59.7% $1,913.4 45.9% 20.3% 15.8% 2.0% 1.0% 1.3% 0.7% 0.7% 12.3% 3.1% 1.1% 1.0% 0.6% 0.4% 0.5% 0.5% 0.3% 0.1% 0.3% 0.3% 0.2% 0.0% 0.2% 0.2% 0.1% 0.2% 0.1% 0.0% 0.1% 0.0% 0.0%

Stock Code % held

Jan 31 2013 share price Market Cap (AUDm) Current Value As % of listed investments shares owned by SOL

Jan 31 2013 market value

Mar 21 2013 share price

Notes / comments

Coal miner and port ow ner

Listed Associates
Brickw orks TPG Telecom BKI Investments Ruralco Holdings Aust Pharmaceutical Industries Apex Healthcare Berhad Clover Corporation

Building products and land development Telecommunications and internet provider Investment company Rural supplies and services Pharmaceutical w holesaler Pharmaceutical manufacturer and distributor Refinement and processing of natural oil

Listed Investment Portfolio - including:

Milton BHP Billiton Commonw ealth Bank National Australia Bank Telstra Perpetual SFG Australia Wesfarmers Elders ALQ Brambles Quickstep Holdings CMA Corporation PrimeAg Australia Macquarie Group RUM Jungle Resources Lindsay Australia Advanced Share Registry CBD Energy Aussie Q Resources Polymetals Mining Drill Torque Other

APPENDIX 4 - SOL STANDALONE SOTP VALUATION

Total Listed Investment Value Unlisted

CopperChem Exco Resources Souls Private Equity KH Roberts Group Total assessed asset value less net debt estimate add non-NHC term deposits less net deferred tax estimate - reported

$4,167.1

$4,165.0

$95.5 $6.8 $84.5 $1.6 $4,355 -$37 $293 -$93

93.4% 100.0% 100.0% 49.0%

$95.5 $101.9 $84.5 $1.6 $4,448 -$37 $293 -$95

Cloncurry copper producer Copper and gold explorer Investment company Manufacturer of flavours, essences and colours

Removes NHC cash from SOL Balance Sheet Removes NHC term deposits Nets out consolidated NHC DTA's and DTL's

SOTP
Shares on issue Valuation - NAV per share Current SOL share price Upside / (downside) to valuation

$4,519
239.4 $18.87 $14.00 35%

$4,610
239.4 $19.26 $14.00 38%

Hunter Green Institutional Broking, AFSL 235259

Listed Investment Company (LIC) Metals and mining Bank Bank Telecommunications Ow ns 12.4% of SOL and 12.0% BKW Financial planning Diversified operations Rural and automotive Laboratory testing Pooling solutions and logistics Manufacture of composite products Recycling Cropping Investment bank Explorer - uranium, potash, phosphate Truck fleet and rural supplier Share registry based in Perth Renew able energy Mineral explorer Base and precious metal producer Contract drilling Assumed to move in line w ith ASX200

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Investment

Jan 31 2013 share price Market Cap (AUDm) shares owned by BKW

Jan 31 2013 market value

$1,401 $1,401 $1,243 $1,243 $14.00 $3,341 102.3

Jan 31 2013 BKW BS value

Mar 21 2013 share price

% held

Current Valuation (AUDm)

Notes

Listed securities
Washington H Soul Pattinson

SOL
$13.70

42.9%

$1,432

Total listed securities

Building Products & Property BKW Book value (AUDm) Total value (AUDm)

$1,432

After tax BKW share value (AUDm) (AUDm)

Valuation (AUDm)

Building Products segment

Building Products (8x FY13f EBIT of $28m) Unallocated Expenses (estimated at $7m pa)

$224 -$56

(1)

Total operating businesses Operational Land

NSW VIC QLD WA SA & TAS 465ha 567ha 763ha 1,792ha 272ha 3,859 ha $52 $22 $20 $34 $7 $135

$168

Total Operational Land Development Land

$166 $24 $28 $117 $13 $348

(1) (1) (1) (1) (1)

APPENDIX 5 - BKW STANDALONE SOTP VALUATION

NSW VIC QLD WA

157ha 332ha 169ha 169ha

$14 $27 $4 $5 $50

$20 $27 $22 $5

(1) (1) (1) (1)

Total Development Land Trust assets (50/50 JV with GMG)

Total trust assets Trust borrow ings

$74

Total equity in Trusts Total BKW assets (excluding SOL)

add surplus cash estimate less gross debt (commercial bills) less deferred tax liabilities (reported) less deferred tax liabilities (on land valuation uplift)

$505

50%

$252

(1)

$842 $11 -$299 -$177 -$71

(1) (1) (1) (1)

Total other balance sheet items SOTP

Shares on issue HGIB SOTP valuation Current BKW share price Upside / (downside) to valuation (1) As at 31 Jan 2013 - sourced from 1H13 results

-$535

$1,739

147.6 $11.78 $12.88

-9%

Hunter Green Institutional Broking, AFSL 235259

$837 -$333

50% 50%

$419 -$166

(1) (1)

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DISCLAIMER & DISCLOSURE

This report was produced by Hunter Green Institutional Broking Pty Ltd (HGIB), holder of an Australian Financial Services License Number 235259. DISCLAIMER: The information and opinions contained in this report have been obtained from sources believed to be reliable, but no representation or warranty, express, or implied, is made that such information is accurate or complete and it should not be relied upon as such. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, and are subject to change without notice. This report is not, and should not be construed as, an offer document or an offer or solicitation to buy or sell any investments. Except to the extent that liability cannot be excluded, HGIB does not accept any liability for any direct or consequential loss arising from any use of material contained in this report. DISCLOSURE: HGIB and/or persons connected with it may effect or have effected a transaction for their own account in the investments referred to in the material contained in this report or any related investment before the material is published to any HGIB clients. On the date of this report, HGIB, persons connected with it and their respective directors and/or representatives and/or employees may have a long or short position in any of the investments mentioned in this report and may purchase and/or sell the investments at any time in the open market or otherwise, in each case either as principal or as agent. Additionally, HGIB within the previous twelve months may have acted as an investment/commercial banker or may have provided significant advice or investment services to the companies or in relation to the investments mentioned in this report. Specifically, the author of this report owns BKW shares.

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