Chairman's report

 

Salvus reports strong full year performance - Net Asset Value up 38% in year ended 30 June 2007

9 August 2007

Reporting Period: 12 months to 30 June 2007
Previous Reporting Period: 12 months to 30 June 2006

Audited NZ$'000

Current Period; Previous Corresponding Period

TOTAL OPERATING REVENUE 8,378; 1,426

OPERATING SURPLUS (DEFICIT) BEFORE TAXATION 7,719; (454)

OPERATING SURPLUS (DEFICIT) AFTER TAX 7,719; (425)

NET SURPLUS (DEFICIT) FOR THE PERIOD 7,719; (425)

Basic EPS 39.6 cps; (2.1) cps
Diluted EPS 19.4 cps; (1.1) cps
NAV 133.6 cps; 97.1 cps

Final Dividend 4.5 cps; 2.5 cps
Record Date: 12 October 2007
Date Payable: 26 October 2007
Appendix 7 is attached.

Net Asset Value per share up 38% in year ended 30 June 2007

Executive summary:

-$7.7 million net surplus reported
-Net Asset Value (NAV) per share up 38%
-Salvus share price up 33%
-Salvus warrant price up 28%
-Final dividend of 4.5 cents per share declared

The Directors of investment company Salvus Strategic Investments Limited (SSI) are pleased to report a $7.7 million surplus for the 12 months of trading to 30 June 2007. This surplus includes $4.4 million of unrealized gains on investments held. The audited NAV of the portfolio rose 38% over the period compared to a rise of 19% for the benchmark NZX SmallCap Capital Index, resulting in a relative outperformance by the fund of 19%.

Over the reporting period, the SSI share price increased 33% and the warrant price increased 28%. The share price discount to the diluted NAV at balance date was 16%. The diluted NAV describes the effect if all warrants in existence were exercised today at $1.00 per share.

Treasury Share Program:

An on-market share buyback program was implemented in July 2006 to narrow the size of the share price discount to NAV. Over the reporting period, SSI repurchased a total of 1,010,206 ordinary shares under its share buyback program and held them as treasury stock. Of the total shares repurchased 306,421 were re-issued pursuant to the Company's Dividend Reinvestment Plan ("DRP"). At 30 June 2007, 703,785 shares were held as treasury stock at a net holding cost of $0.81 per share.

Subsequent to balance date, our shares have continued to trade at a discount to NAV that the Board of SSI considers being too wide. As a result, the Board resolved to cancel the 703,785 ordinary shares held as treasury stock on 20 July 2007. In addition, the Board has decided to continue the on-market share buyback program that commenced last year. The buyback program will be undertaken in the period commencing on 13 August 2007 and ending on 19 July 2008. The maximum aggregate number of ordinary shares to be acquired is 1,011,122 (although the 5% acquisition limit over any 12 month period means that, at any point in time, the maximum number able to be acquired will be less than that). The board has resolved to only acquire shares under the program, if they are trading at a discount to net asset value at the time.

Dividend:

The Directors have declared a fully imputed final dividend of 4.5 cents per share on top of the interim dividend of 1 cent per share that was paid in April 2007. The full year fully imputed dividend of 5.5 cents per share equates to a gross dividend yield of 8.8% as at 7 August 2007. This dividend reflects the health of the income account and has a record date of 12 October 2007 and a payment date of 26 October 2007.

Shareholders in SSI may elect to receive fully-paid ordinary shares in lieu of cash dividends through participation in the Company's dividend reinvestment plan (DRP). The DRP provides ordinary shareholders with the option of subscribing for fully-paid ordinary shares each time a dividend is paid by SSI. The shares issued under the DRP will rank equally in all respects with all other shares of SSI and will be issued at a discount to the volume weighted average share price calculated on all sales of shares which take place through the New Zealand Stock Exchange in the five trading days prior to the dividend record date. A participation form for the DRP will be mailed to shareholders with the annual report in September.

Tax Changes affecting NZ Portfolio Investment Entities:

Shareholders in SSI may benefit from the recently introduced legislation which changes the way managed funds are taxed. SSI intends to file an election to become a Portfolio Investment Entity ("PIE") effective from 1 October 2007. The Directors believe that these proposed changes may make it possible to produce even better investment outcomes for all of our shareholders. We expect to provide further updates to our shareholders and NZX in the near future once our tax status has been confirmed.

Board Changes:

Subsequent to balance date, Roger Armstrong resigned from the Board of the Company with effect from 2 August 2007 to pursue other interests that could present a conflict with the continuation of his role at SSI. The Board thanks Roger for his contribution to SSI since its listing on NZX. The Board intends to appoint two new Directors during August 2007.

Managers Report:

The portfolio had an excellent 12 month period increasing the NAV per share 38% and outperforming the benchmark index by 19%.

Of the listed core holdings, the most significant contributors to performance over the period were:

- Abano Healthcare Limited (Abano): relative outperformance +189%. Abano had an exceptional 12 months for a number of reasons. In October, Masthead Portfolios acquired a 19.9% stake in the company at a significant premium to where the shares were trading. The company then announced positive earnings projections for the financial years ending 2007, 2008 and 2009 and declared that it will pay a maiden dividend at the end of the 2007 financial year. To complete a fantastic 12 months, the company announced a first half result that exceeded their earlier projections and analyst forecasts, and subsequently revised up their projections further for the full year.

The company announced new acquisitions in the Radiology, Dental and Audiology sectors over the year which is consistent with its strategy of further increasing exposure to the private healthcare market. While Abano has undergone a significant re-rating over the past 12 months, the company continues to trade at a discount to a selection of broader healthcare company comparatives.

- Energy World Corporation Limited: relative outperformance +52%. Energy World Corporation has been a very strong performer for the portfolio since we acquired our initial holding in February 2007. The share price reacted positively to the news that the company signed a memorandum of understanding (MOU) with a large Chinese state owned energy company to supply upwards of 5 million tons of LNG per annum over a 15-20 year period. The company also announced that it had signed a MOU with Arc Energy Ltd (ASX:ARQ) to develop an LNG business in Western Australia and also announced plans to further expand its power generation capacity to meet existing demand for power in South Sulawasi, Indonesia. According to our analysis, the full value of these projects is not fully reflected in the share price and the commercialization of additional gas discoveries through LNG could provide significant upside to the share price.

- Methven Limited: relative outperformance +32%. Methven was another strong performer over the period. The company announced better than expected interim and full year results primarily on the back of stronger than expected sales growth in Australia. Methven continues to invest in design, brand and new market opportunities and these strategies are beginning to produce positive results for its shareholders.

On 5 July 2007, Methven announced that it had entered into a conditional agreement to buy one of the UK's largest independent tap and showerware suppliers, Deva Tap Company Ltd ("Deva") for an enterprise value of NZ$59 million. We believe there are a number of significant benefits that will result from the acquisition including Methven's proprietary products gaining access to the Deva distribution channels and the potential to leverage the respective sourcing and supplier relationships in China.

- Mainfrieght Limited: relative outperformance +15%. Mainfreight outperformed after it announced better than expected interim and full year results primarily on the back of stronger than expected contributions from its International Freight Forwarding and Australian Domestic divisions. The company also increased its full year dividend and declared a special dividend of 28 cents per share as a result of funds received from the divestment of Hirepool.

The main underperformers over the year were:

- Provenco Limited: relative underperformance -42%. Provenco underperformed after announcing an earnings downgrade. This was a result of the high New Zealand dollar and some delays in the domestic and international order book for their payment solutions technology. We therefore expect a recovery in earnings next financial year.

- Dorchester Pacific Limited: relative underperformance -36%. Dorchester Pacific underperformed after announcing a lower net profit after tax for the financial year ended 31 March 2007. The result was in line with prior market guidance and reflected several write-downs and one-off provisions. The company has recently announced a share repurchase scheme supporting our belief that the shares are undervalued. We also expect the benefits from the strategic partnership with St Laurence to be realised in the 2008 financial year and beyond.

- Hallenstein Glasson Limited (HLG): relative underperformance -30%. HLG underperformed after advising the market that trading conditions in both New Zealand and Australia had been difficult in the first half of the financial year primarily due to unseasonal weather conditions in key summer months. The company also announced that its Chief Executive Officer had resigned. We believe that the current share price fully reflects these risks and should be supported going forward by a very attractive dividend yield.

Portfolio changes:

The most substantial change to the investment portfolio over the period was the divestment of our 13% stake in Tru-Test Corporation Ltd (Tru-Test) to Livestock Improvement Corporation Limited (LIC) for a consideration of NZ$2.00 per share. The investment in Tru-Test was made as part of our strategy to seek investments at attractive valuations with good long term capital growth opportunities and sustainable dividend yields. However, the offer from LIC presented SSI with an attractive liquidity event at a time when the outlook for long term capital growth was considered by the Manager to be weaker than when SSI first invested. The investment in Tru-Test realized a 40% total return for SSI shareholders, an outcome which exceeded our initial return expectations.

Elsewhere, we accepted the Bacardi takeover offer for 42 Below and added to core holdings Abano and Methven. New holdings in Energy World Corporation, Dorchester Pacific and Wellington Drive Technologies Limited were added to the portfolio over the year.

Portfolio composition:

At balance date, the portfolio was 82% invested and consisted of 16 holdings. The largest five holdings (which accounted for 53% of net assets) included Abano Healthcare, Methven, Energy World Corporation, Hallenstein Glasson and Dorchester Pacific. Other core holdings include Mainfreight, Pod, Wellington Drive Technologies, Taylors and Rakon.

The investment rationale for the largest five holdings is as follows:

- Abano Healthcare (ABA) 17% (portfolio weighting at balance date) - The group operates businesses in four key sectors of the healthcare and medical services industry: Rehabilitation, Diagnostics, Dental and Audiology. The most significant value lies with the Audiology business which contributes approximately 70% of group operating profit. ABA is transforming itself into a profitable and growth-orientated healthcare player. Confirmation of this earnings momentum was reflected in its better than expected half year result and the significantly revised earnings projections for 2007, 2008 and 2009. While ABA has undergone a significant re-rating over the past 12 months, the company continues to trade at a discount to a selection of broader healthcare company comparatives.

- Methven 16% - Methven is involved in the design, manufacture and supply of quality tap and showerware in New Zealand, Australia, USA and the UK. The company generates very high returns for a manufacturer and its senior management are substantial shareholders in a business that has successfully expanded into Australia and is entering other international markets using its innovative SatinJet shower technology as the flagship.

The recent acquisition of Deva should result in a number of significant benefits accruing to the company including Methven's proprietary products gaining access to new distribution channels and the potential to leverage the respective sourcing and supplier relationships in China. In our opinion, Methven is currently making the transition from a domestic value proposition to an international growth company.

Elsewhere, we expect the company to be a major beneficiary of the R&D tax credit regime announced in the last Budget, given the significant resource the company commits to R&D each year.

- Energy World Corporation (EWC) 7% - Energy World Corporation owns and operates gas, LNG and power generation assets in Indonesia and Australia. There is a significant and growing market for LNG throughout Southeast Asia, and to this end the company plans to utilize their large Indonesian gas reserves to exploit this growing demand. This investment was also made in the context of supportive macro factors such as renewed strength in energy prices and the environmentally-friendly nature of LNG.

- Hallenstein Glasson Limited 6.4% - Hallenstein Glasson has an established presence in New Zealand and is undertaking an expansion into Australia. The company is a beneficiary of a stronger NZD and is supported by a very strong balance sheet and an attractive dividend yield, both in absolute terms and relative to its listed peers.

- Dorchester Pacific Limited 6% - SSI acquired its holding in Dorchester Pacific during the sale of Bridgecorp's stake in the company. The acquisition was made on the basis of the long-term profitability that we believe Dorchester is capable of and the fact that this was not reflected in the share price at the time of purchase. We were also attracted to the conservative nature of the balance sheet both from the point of view of cash reserves and provisioning for bad debts. The company has a new CEO who has already made a judicious purchase of a 25% stake in St Laurence Group. We believe that this has positioned Dorchester very well for any future consolidation in the sector. The poor sentiment in the sector after the collapse of Bridgecorp has resulted in downward pressure on the share price, but the company has initiated a share repurchase scheme which will be value accretive to shareholders as Dorchester shares are currently trading below their net asset value.

Positive Outlook:

The future outlook for the portfolio is positive. Our large holdings are performing well and we believe that they have further upside potential. In our opinion, Methven is making the transition from a domestic value proposition to an international growth company and Abano is starting to generate sustainable earnings momentum. The commercialization of additional gas discoveries through LNG could also provide significant upside to the Energy World Corporation share price. The rapid appreciation in share prices for these large core holdings has been justified by an equally impressive improvement in fundamentals. Thus, these holdings still retain their value characteristics. This is particularly relevant in the context of a New Zealand equity market which we regard as very fully valued.

The cash weighting of the portfolio at balance date was 18%. This cash war chest is timely given that the best value opportunities tend to emerge in a weaker market. We are currently examining a number of listed and unlisted investment opportunities in order to find new investments with good long term return profiles for our shareholders.

Overall, we believe that our trend of strong absolute and also relative gains against the market will continue so we remain very optimistic about the future performance of SSI. The proposed changes to the way managed funds are taxed should also make it possible to produce even better investment outcomes for our shareholders.

We are grateful for the support of our shareholders. SSI regularly updates its shareholders with monthly and quarterly reports in between interim and annual reports. Shareholders who wish to receive this information by e-mail should register on our website www.salvus.co.nz.

KEY STATISTICS AT A GLANCE
As at 30 June 2007

Net Asset Value per share $1.336
Shares on issue 19,518,657
Warrants on issue 20,209,600
Warrants are exercisable on 31 March 2008

Portfolio summary (% net assets):

Top 5 holdings 53%
Cash 18%

Number of holdings: 16

Contact:
Andrew Couch 021 443035
Simon Wilson 021 711041