BKI INVESTMENT COMPANY LIMITED ABN: 23 106 719 868 Annual Report for the year ended 30 June 2021 2021 BKI INVESTMENT COMPANY LIMITED Contents Group Profile Financial Highlights List of Securities as at 30 June 2021 Chair’s Address Portfolio Manager’s Report Directors’ Report Consolidated Income Statement Consolidated Statement of Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Auditor’s Independence Declaration ASX Additional Information Corporate Directory 2 3 4 6 10 13 23 24 25 26 27 28 45 46 49 50 52 1 2021 Annual Report Group Profile BKI Investment Company Limited (“BKI” or “the Group”) is a Listed Investment Company on the Australian Stock Exchange. The Group invests in a diversified portfolio of Australian shares, trusts and interest bearing securities. BKI shares were listed on the Australian Stock Exchange Limited commencing 12 December 2003. Corporate Objectives The Group aims to generate an increasing income stream for distribution to shareholders in the form of fully franked dividends to the extent of available imputation tax credits, through long-term investment in a portfolio of assets that are also able to deliver long term capital growth to shareholders. Investment Strategy The Group is a research driven, long term manager focused on investing in well managed companies with a profitable history, and that offer attractive franked dividend yields and capital growth. Stock selection is bottom up, focusing on the merits of individual companies rather than market and economic trends. Dividend Policy Having respect to prudent business practices, and ensuring the business retains sufficient working capital to allow the achievement of the Group’s Corporate Objectives and Business Strategy, the Group will pay the maximum prudent amount of realised profits after tax for that year to shareholders as fully franked dividends to the extent permitted by the Corporations Act and the Income Tax Assessment Act. Ordinary dividends will be declared by the Board of Directors out of the Company’s Net Operating Result, after tax but before special investment revenue. In circumstances where the Group accumulates sufficient special investment revenue after ensuring the business retains sufficient working capital in accordance with its capital management objectives, the Board will consider declaring special fully franked dividends to the extent permitted by the Corporations Act and the Income Tax Assessment Act. In circumstances where the Group generates sufficient qualifying capital gains, LIC Gains will be distributed to shareholders to the extent permitted by the Corporations Act and the Income Tax Assessment Act. Management The portfolio management and advisory function of BKI is performed by Contact Asset Management Pty Limited (“Contact”). Contact is majority owned by Mr Tom Millner and Mr Will Culbert, the former CEO and Portfolio Manager respectively of BKI, with the remaining 20% owned by Washington H. Soul Pattinson and Company Limited. The BKI Board of Directors and Investment Committee meet regularly to review the portfolio and set the investment strategy of BKI. The Group also engages Corporate & Administrative Services Pty Ltd to provide accounting and group secretarial services. These services are overseen by the BKI Company Secretary, Mr Jaime Pinto. 2 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Financial Highlights Revenue performance Total income – ordinary Special investment revenue Change Jun 2021 $’000 Jun 2020 $’000 down down 14.1% to 85.8% to 40,154 1,022 from from 46,732 7,182 Total income from ordinary activities down 23.6% to 41,176 from 53,914 Profits Operating result after tax – before special investment revenue net of applicable tax Special investment revenue net of applicable tax Net profit from ordinary activities after tax attributable to shareholders Net profit attributable to shareholders Portfolio Total portfolio value (including cash & receivables) down down 14.2% to 86.0% to 35,660 985 from from 41,578 7,044 down down 24.6% to 24.6% to 36,645 36,645 from from 48,622 48,622 up 16.3% to 1,261,368 from 1,084,667 Change Cents Cents Earnings per share (EPS) Basic EPS before special investment revenue and applicable tax Basic EPS after special investment revenue and applicable tax down down 14.8% to 25.0% to 4.83 4.97 Dividends Interim – Ordinary Final – Ordinary Final – Special Full Year Total down up down down 44.8% to 29.3% to 100% to 28.0% to 2.000 3.000 nil 5.000 from from from from from from 5.67 6.63 3.625 2.320 1.000 6.945 10 Year Dividend History (cents per share) 30 June 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Interim Final Special Total 3.20 3.20 – 6.40 3.25 3.40 0.50 7.15 3.45 3.50 – 6.95 3.55 3.65 – 7.20 3.60 3.65 – 7.25 3.60 3.70 – 7.30 3.625 3.700 – 7.325 3.625 3.700 2.500 9.825 3.625 2.320 1.000 6.945 2.000 3.000 – 5.000 All ordinary and special dividends paid by BKI Investment Company Limited (“BKI”) since listing on the Australian Stock Exchange have been fully franked. 10 Year Net Tangible Asset (NTA) History ($ per share) 30 June 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 NTA before tax NTA after tax 1.30 1.26 1.52 1.42 1.63 1.51 1.65 1.53 1.55 1.47 1.61 1.52 1.63 1.54 1.69 1.58 1.47 1.43 1.71 1.59 2021 Annual Report 3 Financial Highlights (continued) List of Securities as at 30 June 2021 Financials Commonwealth Bank of Australia Macquarie Group Limited National Australia Bank Limited ASX Limited Magellan Financial Group Limited Milton Corporation Limited Pendal Group Limited Suncorp Group Limited Equity Trustees Limited Platinum Asset Management Limited E&P Financial Group Limited Materials BHP Group Limited Amcor Limited Fortescue Metals Group Limited Rio Tinto Limited Brickworks Limited Orora Limited Consumer Discretionary Wesfarmers Limited ARB Corporation Limited Harvey Norman Holdings Limited Invocare Limited Consumer Staples Woolworths Group Limited Coles Group Limited Treasury Wine Estates Limited Metcash Limited Endeavour Group Limited (Rights) Industrials Transurban Group Reece Limited Lindsay Australia Limited Brambles Limited IPH Limited Number of securities held Market value $’000 Portfolio weight % 1,093,077 655,172 2,501,904 397,750 383,500 2,103,640 1,320,833 951,408 383,942 1,738,000 5,674,572 2,110,731 1,670,000 922,711 154,441 436,209 1,600,000 1,129,102 945,447 5,036,154 1,638,974 1,428,744 1,129,102 905,155 2,477,151 1,428,744 3,485,952 515,499 17,141,631 500,576 665,000 109,166 102,490 65,600 30,909 20,655 13,253 10,646 10,570 10,520 8,534 4,874 387,217 102,518 25,267 21,536 19,559 10,936 5,328 185,144 66,730 40,834 27,598 18,963 8.65 8.13 5.20 2.45 1.64 1.05 0.84 0.84 0.83 0.68 0.39 30.70 8.13 2.00 1.71 1.55 0.87 0.42 14.68 5.29 3.24 2.19 1.50 154,125 12.22 54,478 19,296 10,572 9,884 8,987 103,217 49,605 12,171 6,428 5,727 5,187 79,118 4.32 1.53 0.84 0.78 0.71 8.18 3.93 0.96 0.51 0.45 0.41 6.26 4 2021 Annual Report BKI INVESTMENT COMPANY LIMITED List of Securities as at 30 June 2021 (continued) Number of securities held Market value $’000 Portfolio weight % Health Care Sonic Healthcare Limited Ramsay Health Care Limited Regis Healthcare Limited Telecommunications TPG Telecom Limited Telstra Corporation Limited Tuas Limited Utilities APA Group Energy Woodside Petroleum Limited New Hope Corporation Limited Property Goodman Group Stockland Total Portfolio Investment portfolio Trading portfolio Total Portfolio Cash and dividends receivable Total Investment Assets 960,899 515,070 1,807,428 5,748,362 8,524,451 2,874,181 7,775,389 1,175,876 12,950,952 945,000 1,225,000 36,899 32,424 3,524 72,847 35,985 32,052 1,854 69,891 69,201 69,201 26,116 22,405 48,521 20,006 5,708 25,714 1,194,994 1,194,994 Nil 1,194,994 66,374 2.93 2.57 0.28 5.78 2.85 2.54 0.15 5.54 5.49 5.49 2.07 1.78 3.85 1.59 0.45 2.04 94.74 94.74 Nil 94.74 5.26 1,261,368 100.00 The Group is a substantial shareholder, in accordance with the Corporations Act 2001, of Lindsay Australia Limited, holding 5.71% of the issued capital as at 30 June 2021. The Group is not a substantial shareholder in any other investee corporation as each equity investment represents less than 5% of the issued capital of the investee corporation. 2021 Annual Report 5 Chair’s Address Dear Shareholders, I am pleased to enclose the 18th Annual Report of BKI Investment Company Limited (BKI) for the year to 30 June 2021. Australia’s performance in controlling the COVID-19 epidemic and economic stimulus packages was of significant benefit to the Australian household and consumer during the last year. The Government’s substantial economic support packages and the banks’ loan deferrals were very well received and placed the economy in a strong position. We were concerned in February, when BKI presented first half results, that the forecast growth in unemployment and the completion of payment deferral programs would create a headwind for the Australian economy. Fortunately, these issues were not as severe as we first thought and did not materially impact the local economy. Result Highlights The severe fluctuations in global share markets we experienced in FY2020 and early in FY2021 dissipated with the backdrop of a stronger global economy. However, many Australian equity investors continued to receive lower dividends than they received 12–18 months ago. These cuts impacted BKI’s results in FY2021, with Ordinary Investment Revenue down 17% to $39.7 million. The result was impacted by lower ordinary dividends received over the last year from New Hope Corporation (down 73% on the previous corresponding period (pcp)), Invocare Limited (down 70% on the pcp), Woodside Petroleum (down 62% on the pcp), Commonwealth Bank (down 42% on the pcp), AGL Energy (down 26% on the pcp) and Transurban Group (down 22% on the pcp). BKI realised $0.3 million from the trading portfolio, after participating in some minor trading positions. BKI’s interest received was only $0.1 million, down 82% on FY2020 due to the extremely low interest rates on offer. BKI’s Net Operating Profit After Tax, before special investment revenue, was $35.7 million, a decrease of 14% over the previous corresponding period. BKI’s basic earnings per share before special investment revenue decreased 15% to 4.83 cents per share. Special Dividend Revenue was lower in FY2021, falling from $7.2 million to $1.0 million. Special Dividends were received from Telstra Corporation, AGL Energy and Rio Tinto Limited. Woolworths Group Limited undertook the demerger of Endeavour Group Limited during the period, but BKI did not recognize the demerger dividend as special dividend income. BKI’s Net Operating Profit After Tax including special investment revenue for FY2021 was $36.6 million, down 25% on the previous corresponding period. BKI’s FY2021 basic earnings per share, including special investment revenue, decreased 25% to 4.97 cents per share from 6.63 cents per share in FY2020. It is pleasing that in the second half of FY2021 BKI recorded an increase of 46% in ordinary EPS excluding special investment revenue over the first half of FY2021, as can be seen in the chart below. In the last six-month period, BKI received increased dividends from major investments including Macquarie Group (up 155% on the pcp), Fortescue (up 71% on the pcp), Rio Tinto (up 48% on the pcp), BHP Group (up 34% on the pcp), National Australia Bank (up 30% on the pcp), Harvey Norman (up 20% on the pcp) and Wesfarmers Limited (up 13% on the pcp). The outlook for dividends received from BKI’s investments should continue to improve in the periods ahead. 6 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Chair’s Address (continued) Ordinary Earnings per Share (EPS) e r a h s r e p s t n e C 4.0 3.0 2.0 1.0 0.0 Dec 2018 Jun 2019 Dec 2019 Jun 2020 Dec 2020 Jun 2021 Dec 2021 Ordinary EPS Dividends The BKI Board declared a final ordinary dividend of 3.00cps, taking total dividends paid for the FY2021 year to 5.00cps, down 28% on last year. This is again disappointing; however, the Board and Management remain very proud that the Company has now paid out over $780 million or $1.14 per share in Dividends and Franking Credits to Shareholders since listing. The current BKI grossed up dividend yield is 4.4%, based on the 2.00cps FY2021 interim dividend and 3.00cps FY2021 final dividend, a tax rate of 30% and the share price of $1.62 as at 30 June 2021. Dividend Key Dates The last trading date to be eligible for the FY2021 Final Dividend is Thursday 5 August 2021. Key dates for the fully franked Final Dividend are as follows: Event Last trading date to be eligible for the Final Dividend Ex-Dividend Date Record Date DRP Nomination Payment Date Dividend Reinvestment Plan (DRP) Date Thursday 5 August 2021 Friday 6 August 2021 Monday 9 August 2021 Tuesday 10 August 2021 Thursday 26 August 2021 The BKI Board confirmed that BKI’s Dividend Reinvestment Plan (DRP) will be maintained, offering shareholders the opportunity to acquire further ordinary shares in BKI. The DRP will not be offered at a discount. The last day to nominate for participation in the DRP is Tuesday 10 August 2021. 2021 Annual Report 7 Chair’s Address (continued) To learn more about the DRP and access a DRP form to download and complete, use the following link: https://bkilimited.com.au/dividend-information/ The last trading day to be eligible for BKI’s fully franked dividends is Thursday 5 August 2021. The DRP price will be calculated using the average of the daily volume weighted average sale price of BKI’s shares sold in the ordinary course of trading on the ASX during the 5 trading days after, but not including, the Record Date (Monday 9 August 2021). Management Expense Ratio (MER) BKI’s MER as at 30 June 2021 was 0.17%. BKI’s MER continues to compare very favourably to other externally managed LICs, ETFs and managed funds in the domestic market that provide a similar broad-based exposure to Australian equities. The Board and Portfolio Managers are shareholders in BKI. We invest for the long term and do not charge excessive external portfolio management fees or any performance fees. Our focus is on creating wealth for all shareholders by keeping costs low, increasing fully franked dividends and generating capital growth over the long-term. BKI has no debt and thus shareholder returns are not diluted by the interest payable on such a facility. Top 25 Investments Stock Commonwealth Bank BHP Group Macquarie Group APA Group Wesfarmers Limited National Australia Bank Woolworths Group Limited Transurban Group ARB Corporation Sonic Healthcare TPG Telecom Limited Ramsay HealthCare Telstra Corporation ASX Limited 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Harvey Norman Holdings 16 Woodside Petroleum 17 18 New Hope Corporation 19 Fortescue Metals Group 20 Magellan Financial Group 21 Goodman Group Limited 22 Rio Tinto Limited 23 Coles Group 24 25 Milton Corporation Invocare Limited Amcor Cash and cash equivalents % of Total Portfolio 8.7% 8.1% 8.1% 5.5% 5.3% 5.2% 4.3% 3.9% 3.2% 2.9% 2.9% 2.6% 2.5% 2.5% 2.2% 2.1% 2.0% 1.8% 1.7% 1.6% 1.6% 1.6% 1.5% 1.5% 1.1% 5.3% Total of Top 25 including cash and cash equivalents 89.7% 8 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Chair’s Address (continued) Outlook The global stimulus packages distributed during 2020 were a lifeline for many countries, businesses and individuals. Many of these packages continued into 2021 and are only just now rolling off. Few initially appreciated the impact these handouts would have, but Australia’s economy is well placed due to their implementation. The phasing out of payment deferral programs was well handled and the unemployment number is tracking better than expectations. Retail sales numbers are encouraging and regional tourism continues to grow. The continual growth in commodity prices ensures Australia’s current trade balance remains positive. However, while the initial results of stimulus packages and handouts have been positive, the secondary effects of flooding the economy with cash have been extraordinary. An increasing challenge of the demand surge is the resulting pressure on the supply response - we are all experiencing capacity challenges, price rises and a significant wait time due to a global supply chain bursting at the seams. This impact on the economy may outweigh the positives of inflation. There is such a significant demand for goods and services, that we are now seeing substantial shortages in supply which is concerning to us. There are shortages in labour across many industries, a shortage in manufacturing, in shipping and in containers themselves. The system is extremely stretched. The behaviour of consumers will continue to be influenced by low rates, the rate of the vaccination roll-out and the easing of travel restrictions. Many countries outside Australia are in a good place, with a relatively fast vaccine rollout and large parts of their economies opening up. This should mean that consumers will continue to spend, and their economies will recover quickly. However, Australia has experienced a poor vaccine rollout and we are now seeing the emergence of additional lockdowns which may mean our economic recovery slows compared to other developed nations. Despite a slow vaccine rollout, ongoing lockdowns and travel restrictions, as well as some serious supply chain issues, we believe that Australia is currently in a very fortunate economic position and the outlook for dividends received from BKI’s investments should continue to improve in the years ahead. BKI continues to be well positioned with a portfolio of high-quality dividend paying stocks. BKI has available cash and no debt. We will continue to ensure BKI achieves its objective of investing for the long term in profitable, high yielding and well managed companies. Robert Millner Chairman 2021 Annual Report 9 Portfolio Manager’s Report Dear Shareholders, Contact Asset Management, as the Investment Manager of BKI Investment Company, is pleased to include our report for FY2021. Market Commentary Strength in global markets continued in financial year 2021, led by technology heavy markets in the US. The NASDAQ climbed by 45.2% and the S&P500 increased by 40.8%. Jobs data in the US remains extremely robust and markets continue to assume that the US Fed will not rush to taper its stimulus program any time soon. While inflationary fears remain a concern, investors continue to take advantage of cheap money. Global bond yields continued to retrace from previously elevated levels, with the US 10-year government bond yield finishing the financial year at 1.44% and Australian 10-year yield at 1.51%. Commodity prices continued to rise, with Iron Ore closing at $US215.50/Mt, while Oil finished the year at $US75.13$/bbl. Interestingly, gold prices finished flat as inflationary expectations retraced. The Australian Dollar finally tracked below US$0.77, a level it had traded at for some months, closing the year at $0.75. Australia’s S&P/ASX 300 Accumulation Index increased by 28.5% in FY2021. Corporate activity continues to ramp up and upbeat household confidence is driving the market higher. Consensus expectations for the August reporting season continue to be revised higher. Retail sales have continued to deliver stronger than expected numbers during the year. The most recent underlying inflation rate of 1.1% continues to remain below the RBA’s target range of between 2% and 3%. Employment numbers are also ahead of expectations and the unemployment rate continued to fall during the past year. With employment already above pre-COVID levels, we believe the rate could decline to around 4.5% by the end of calendar 2021. Domestically, the Reserve Bank of Australia (RBA) continues to hold the cash rate at an historic low of 0.10%, noting its no-rate- hike stance until 2024 at the earliest because sustaining the economic expansion means “ensuring that demand continues to be supported for as long as spare capacity remains”. The RBA is also continuing its quantitative easing program (QE) to purchase bonds with maturities of around 5 to 10 years in order to control the yield curve and further support economic recovery. Late in June 2021, many parts of Australia were placed under lockdown as the COVID Delta strain continued to spread. The number of cases linked to Sydney’s Bondi cluster was the main area of concern and State Governments were again quick to shut borders regardless of the economic impact. Early in July 2021 the Federal Government announced a four-part plan to return to normal, much of which seems to be tied to vaccination rates. The market seemingly looked through a lot of the lockdown news, albeit there were a few stock-specific reactions. Valuation multiples for the Australian market have settled around 18 times FY21 earnings as market moves are matched by earnings upgrades. The dividend yield for the S&P/ASX 300 index is also now more compelling and is back above 3.5%. Portfolio Movements We made $83 million worth of sales in the first half of this financial year, including exiting positions in Westpac Banking Corporation, Sydney Airports, IAG Limited, SEEK Limited and selling a small parcel of New Hope Corporation. These sales were prompted by the significant reduction in dividends received from these companies during the period. BKI realised a further $81 million worth of sales in the second half of the financial year, including exiting the positions in AGL Energy Limited, Lend Lease, NAB Convertible Notes and Inghams Group, as well as slightly trimming positions in Commonwealth Bank and Transurban Group. 10 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Portfolio Manager’s Report (continued) These divestments allowed BKI to reinvest capital into other positions within the portfolio to offset further declines in Ordinary Income. BKI invested $95 million during the first half and $65 million during the second half of FY2021. The largest investments over the year were APA Group, Transurban Group, Fortescue Metals, Rio Tinto Limited, Commonwealth Bank, National Australia Bank, BHP Group, Amcor, Harvey Norman Holdings and Equity Trustees. A new position was established in Metcash Limited in the second half of the year, and BKI also now has a holding in Endeavour Group Limited following its demerger from Woolworths Group Limited in June 2021. As at the end of June 2021, there were 42 stocks within the BKI Portfolio, with the Top 25 holdings and cash accounting for 89.7% of the total Portfolio. The Investment Portfolio (including cash) was valued at $1.3 billion, with the cash position of $66 million representing 5.3%. Performance For the year to 30 June 2021, the S&P/ASX 300 Accumulation Index return was 28.5%. BKI’s Total Shareholder Return was 21.4%. BKI’s Total Shareholder Returns including franking credits for the year to 30 June 2021 was 23.3%. BKI Total Shareholder Returns (TSR) Including Franking Credits as at 30 June 2021 25.0% 20.0% 15.0% 23.3% 10.0% 5.0% 0% 9.4% 7.4% 10.2% 8.5% 1 Year 3 Yrs pa 5 Yrs pa 10 Yrs pa 15 Yrs pa BKI Total Shareholder Returns – 100% Franked BKI’s Net Portfolio Return (after all operating expenses, provisions and payment of both income and capital gains tax and the reinvestment of dividends) for the year to 30 June 2021 was 20.1%. BKI’s Pre-Tax Net Tangible Assets per share as at 30 June 2021 was $1.71, up from $1.47 last year. 2021 Annual Report 11 Portfolio Manager’s Report (continued) BKI’s Premium/Discount as at 30 June 2021 $1.90 $1.80 $1.70 $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 40% 30% 20% 10% 0% -10% -20% Dec ‘03 Dec ‘04 Dec ‘05 Dec ‘06 Dec ‘07 Dec ‘08 Dec ‘09 Dec ‘10 Dec ‘11 Dec ‘12 Dec ‘13 Dec ‘14 Dec ‘15 Dec ‘16 Dec ‘17 Dec ‘18 Dec ‘19 Dec ‘20 Dec ‘21 Prem/Disc % Prem/Disc Trend BKI Share Price Pre Tax NTA Investment Team During the year we appointed Jakov Males as Senior Investment Analyst at Contact Asset Management. Jakov has over 20 years asset management experience as an Analyst and Portfolio Manager. Jakov was most recently Head of Australian Equities at UBS Asset Management for 12 years. He was previously Head of Equities at Allianz Global. We believe that Jakov will be a great fit for Contact Asset Management, and he brings significant experience to our business. We remain committed to investing for better outcomes for all BKI Shareholders. Our focus is on earnings growth and dividend payments – not generating excessive fees. Research and Ratings BKI was once again well endorsed by various investment product research and ratings companies during the year. BKI currently has a Recommended rating from LONSEC, a Recommended-Plus rating from Independent Investment Research (IIR) and a Neutral rating from Morningstar. Tom Millner and Will Culbert Contact Asset Management 12 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Directors’ Report The Directors of BKI Investment Company Limited (“the Company”, or “BKI”) present the following report on the Company and its controlled entities (“the Group”) for the year to 30 June 2021. 1. Directors The following persons were Directors since the start of the financial year and up to the date of this report: Robert Dobson Millner, FAICD – Non-Executive Director and Chair Mr Millner was appointed Non-executive Chair upon the Company’s formation in October 2003. Mr Millner has extensive experience in the investment industry, and is currently a Director of the following listed companies: p Washington H Soul Pattinson and Company Limited (appointed 1984, Chair since 1998) p New Hope Corporation Limited (appointed 1995, Chair since 1998) p Brickworks Limited (appointed 1997, Chair since 1999) p Milton Corporation Limited (appointed 1998, Chair since 2002) p Apex Healthcare Berhad (appointed 2000) p TPG Telecom Limited (appointed July 2020) p Tuas Limited (appointed May 2020) Below is a list of former listed company directorships held by Mr Millner in the past three years: p Australian Pharmaceutical Industries Limited (appointed 2000, resigned July 2020) p TPG Corporation Limited (appointed 2000, resigned July 2020) Special Responsibilities: p Chair of the Board p Chair of the Investment Committee p Member of the Remuneration Committee David Capp Hall, AM, FCA, FAICD – Independent Non-Executive Director Mr Hall was appointed a Non-executive Director and Chair of the Audit & Risk Committee upon the Company’s formation in October 2003. Mr Hall is a Chartered Accountant with extensive experience in corporate management, finance and as a Company Director. Special Responsibilities: p Chair of the Audit & Risk Committee p Member of the Remuneration Committee p Chair of the Nomination Committee Ian Thomas Huntley, BA – Independent Non-Executive Director Mr Huntley joined the Board as a Non-executive Director in February 2009. After a career in financial journalism, Mr Huntley acquired “Your Money Weekly” newsletter in 1973. Over the following 33 years, Mr Huntley built the Your Money Weekly newsletter into one of Australia’s best known investment advisory publications. He and partners sold the business to Morningstar Inc of the USA in mid 2006. Special Responsibilities: p Member of the Investment Committee p Member of the Remuneration Committee p Member of the Audit & Risk Committee 2021 Annual Report 13 Directors’ Report (continued) 1. Directors (continued) Alexander James Payne, B.Comm, Dip Cm, FCPA, FCIS, FCIM – Non-Executive Director Mr Payne was appointed a Non-executive Director upon the Company’s formation in October 2003 and has been a member of the Audit & Risk Committee since then. Mr Payne was Chief Financial Officer of Brickworks Limited for 13 years and has considerable experience in finance and investment. Special Responsibilities: p Member of the Audit & Risk Committee p Member of the Investment Committee p Chair of the Remuneration Committee p Member of the Nomination Committee 2. Key Management Personnel Jaime Pinto, BComm, CA, AGIA – Company Secretary Mr Pinto was appointed Company Secretary in November 2011. He is a Chartered Accountant with extensive experience in both professional practice and in senior commercial roles across a broad range of industries. 3. Meetings of Directors Summarised below are the numbers of Board meetings and Committee meetings held during the year to 30 June 2021, and the numbers of meetings attended by each Director. Board Investment Audit & Risk Remuneration Nomination1 Attended Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended Eligible to attend RD Millner AJ Payne DC Hall IT Huntley 7 7 7 7 7 7 7 7 14 14 – 14 14 14 – 14 – 2 2 2 – 2 2 2 2 2 2 2 2 2 2 2 1 1 – 1 1 1 – 1 1 The sole meeting of the Nomination Committee was held in July 2020. Mr DC Hall was not a member of the Committee at this time as he was scheduled for re- election as a Director under the Company’s Director rotation policy. Subsequent to being re-elected as a Director at the 2020 AGM, Mr Hall was reappointed to the Nomination Committee, and Mr RD Millner and Mr IT Huntley DC resigned from the Committee as they are due for re-election as Directors at the 2021 AGM. 4. Principal Activities Principal activities of the Group are that of a Listed Investment Company (LIC) primarily focused on long term investment in ASX listed securities. There were no significant changes in the nature of those activities during the year. 5. Operating Results BKI’s Total Ordinary Revenue from its investment portfolio was $39.7m, 12.6% lower than the $45.4m generated in 2020, driving a 14.2% decrease in Net Operating Result before special investment revenue to $35.7m, from $41.6m in 2020. Basic and diluted earnings per share before special dividend revenue was down 14.8% to 4.83 cents per share. The result was impacted by lower ordinary dividends received over the last year from New Hope Corporation (down 73% on the previous corresponding period (pcp)), Invocare Limited (down 70% on the pcp), Woodside Petroleum (down 62% on the pcp), Commonwealth Bank (down 42% on the pcp), AGL Energy (down 26% on the pcp) and Transurban Group (down 22% on the pcp). BKI realised $0.3 million from the trading portfolio, after participating in some minor trading positions. BKI’s interest received was only $0.1 million, down 82% on FY2020 due to the extremely low interest rates on offer. 14 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Directors’ Report (continued) 5. Operating Results (continued) Special Dividend Revenue was lower in FY2021, falling from $7.2 million to $1.0 million. Special Dividends were received from Telstra Corporation, AGL Energy and Rio Tinto Limited. Woolworths Group Limited undertook a demerger of Endeavour Group Limited during the period, but BKI did not recognise the demerger dividend as special investment revenue. BKI’s Net Operating Profit After Tax, including special investment revenue for FY2021 was $36.6 million, down 25% on the previous corresponding period. BKI’s FY2021 basic earnings per share, including special investment revenue, decreased 25% to 4.97 cents per share from 6.63 cents per share in FY2020. Total Shareholder Return including franking credits for the year to 30 June 2021 was 23.3%, compared to the S&P/ASX 300 Accumulation Index, which returned 28.5% over the same period. BKI’s Total Shareholder Return including Franking Credits for 15 years was 8.5% per annum compared to the S&P/ASX 300 Accumulation Index, which returned 8.6%. BKI’s Net Portfolio Return (after all operating expenses, provision and payment of both income and capital gains tax and the reinvestment of dividends) for the year to 30 June 2021 was 20.1%. 6. Review of Operations BKI was able to maintain its MER at 0.17% for the year (2020: 0.17%) as operating expenses were held steady at $2.0m (2020: $2.0m), with all cost categories in line with the previous year. BKI made a number of changes to the portfolio during FY2021. We executed $83 million worth of sales in the first half of this financial year, including exiting positions in Westpac Banking Corporation, Sydney Airports, IAG Limited, SEEK Limited and selling a small parcel of New Hope Corporation. These sales were prompted by the significant reduction in dividends received from these companies during the period. BKI realised a further $81 million worth of sales in the second half of the financial year, including exiting the positions in AGL Energy Limited, Lend Lease, NAB Convertible Notes and Inghams Group, as well as slightly trimming positions in Commonwealth Bank and Transurban Group. These divestments allowed BKI to reinvest capital into other positions within the portfolio to offset further declines in Ordinary Income. BKI invested $95 million during the first half and $65 million during the second half of FY2021. The largest investments over the year were APA Group, Transurban Group, Fortescue Metals, Rio Tinto Limited, Commonwealth Bank, National Australia Bank, BHP Group, Amcor, Harvey Norman Holdings and Equity Trustees. A new position was established in Metcash Limited in the second half of the year, and BKI also now has a holding in Endeavour Group Limited following its demerger from Woolworths Group Limited in June 2021. 7. Financial Position Net assets of the Group increased during the financial year to $1,172.4m (2020: $1,047.9m), primarily driven by a positive revaluation of the investment portfolio. 8. Employees The Group had no employees as at 30 June 2021 (2020: nil). 9. Significant Changes in the State of Affairs Other than as stated in this Directors’ Report and in the accompanying Financial Report, there were no significant changes in the state of affairs of the Group during the reporting year. 10. Likely Developments and Expected Results The operations of the Group will continue with planned long term investments in Australian equities and fixed interest securities. The Group will continue its strategy of investing for the long term in a portfolio of assets to deliver shareholders an increasing income stream and long term capital growth. The success of this strategy will be strongly influenced by the performance of the underlying investee companies, their share price movements, and capital management and income distribution policies. The performance of these companies will be influenced by general economic and market conditions such as economic growth rates, interest rates and inflation. Performance could also be influenced by regulatory change. These external conditions are difficult to predict and not within the control of the Group, making it difficult to forecast the future results of the Group. 2021 Annual Report 15 Directors’ Report (continued) 10. Likely Developments and Expected Results (continued) The advent of the COVID-19 economic crisis created significant social and economic upheaval in FY2020, causing heightened economic uncertainty across all industries globally, and resulting in extreme fluctuations in global sharemarkets. The social, economic and financial impacts of COVID-19 continued in FY2021. The extent of future impacts will be influenced by both medical advances to address the underlying pandemic, as well as further changes in government policy and regulations in order to address these impacts. All of these changes will potentially impact the intention and/or ability of companies to generate returns and pay dividends, including those companies in which BKI invests. However, BKI is a research driven, long term manager focusing on investing in well managed, profitable companies, focusing on the merits of individual companies rather than market and economic trends. BKI will continue to implement prudent business practice to allow the achievement of the Group’s Corporate Objectives and Business Strategy. 11. Significant Events after Balance Date The Directors are not aware of any matter or circumstance that has arisen since the end of the year to the date of this report that has significantly affected or may significantly affect: i. the operations of the Company and the entities that it controls; ii. the results of those operations; or iii. the state of affairs of the Group in subsequent years. 12. Dividends There were two dividend payments made during the year to 30 June 2021: p On 27 August 2020, a final ordinary dividend of 2.32 cents per share and a final special dividend of 1.00 cents per share (both fully franked) totalling $24.4 million was paid out of retained profits at 30 June 2020. p On 25 February 2021, an interim ordinary dividend of 2.00 cents per share (fully franked) totalling $14.8 million was paid out of retained profits at 31 December 2020. In addition, the Directors declared a final ordinary dividend of 3.00 cents per share fully franked at 30%, payable on 26 August 2021. At 30 June 2021 there are $14,541,470 of franking credits available to the Group (2020: $16,040,832) assuming receipt of franked dividends receivable at 30 June 2021, payment of expected income tax in respect of the 2021 tax year, and after allowing for payment of the final, fully franked dividend in August 2021. 13. Environmental Regulations The Group’s operations are not materially affected by environmental regulations. 14. Directors’ and Officers’ Indemnity The Constitution of the Company provides indemnity against liability and legal costs incurred by Directors and Officers to the extent permitted by the Corporations Act 2001. During the year to 30 June 2021, the Group paid premiums in respect of an insurance contract to insure each of the officers against all liabilities and expenses arising as a result of work performed in their respective capacities. The Directors have not included details of the nature of liabilities covered or the amount of premium paid in respect of the insurance contract as such disclosure is prohibited under the terms of the contract. 15. Proceedings on Behalf of the Group No person has applied for leave of the Court to bring proceedings on behalf of the Group or intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the Group for all or any part of those proceedings. The Group was not a party to any such proceedings during the year. 16 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Directors’ Report (continued) 16. Non-audit Services During the year ended 30 June 2020 and the year ended 30 June 2021 MGI Sydney did not provide any non-audit services to the Group, nor did the Group pay any fees for such services. 17. Auditor’s Independence Declaration The Auditor’s Independence Declaration for the year to 30 June 2021 is on page 49. 18. Beneficial and Relevant Interest of Directors and Other Key Management Personnel in Shares As at the date of this report, details of Directors and Other Key Management Personnel who hold shares for their own benefit or who have an interest in holdings through a third party and the total number of such shares held are listed as follows: Name RD Millner DC Hall AJ Payne IT Huntley J Pinto Number of Shares 9,874,304 2,499,444 430,000 11,224,980 130,568 19. Corporate Governance Statement BKI’s Corporate Governance Statement can be found on the Company’s website at the following address: http://bkilimited.com.au/about-us/corporate-governance/#cgs Remuneration Report 20. Remuneration Report (Audited) This remuneration report outlines the Director and Executive remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report, Key Management Personnel of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly. The Company has externalised its investment management function to Contact Asset Management Pty Limited, and currently has no employees. In addition to the Directors, the only individual classified as Key Management Personnel is Mr Jaime Pinto, the Company Secretary, and there are no Other Key Executives. Remuneration Policy The Board is responsible for determining and reviewing remuneration arrangements, including performance incentives, for the Directors themselves and the Company Secretary. It is the Group’s objective to provide maximum shareholder benefit from the retention of a high quality Board and Executive team by remunerating Directors and Key Management Personnel fairly and appropriately with reference to relevant employment market conditions, their performance, experience and expertise. 2021 Annual Report 17 Directors’ Report (continued) 20. Remuneration Report (Audited) (continued) Elements of Director and Key Management Personnel (KMP) remuneration The Board’s policies for determining the nature and amount of remuneration for Key Management Personnel of the Group is as follows: p The Director Remuneration Policy and Executive Remuneration Policy are developed by the Remuneration Committee and approved by the Board. Professional advice is sought from independent external consultants if deemed appropriate. p All Key Management Personnel are eligible to receive a base fee, or salary and superannuation, combined with performance incentives if deemed appropriate by the Board. p Performance incentives are only paid once predetermined key performance indicators have been met. p Incentives paid in the form of shares are intended to align the interests of the Key Management Personnel with those of the shareholders. p The Remuneration Committee reviews the remuneration packages of Key Management Personnel annually by reference to the Group’s performance, KMP performance and comparable information from industry sectors. The performance of Key Management Personnel is assessed annually by the Board. Assessment of performance incentives offered is conducted annually, based on the growth of shareholder and portfolio returns. The Board may exercise discretion in relation to approving incentives and can recommend changes to the Remuneration Committee’s recommendations. Any changes must be justified by reference to measurable performance criteria. The policies are designed to attract the highest calibre of KMP and reward them for performance results leading to long-term growth in shareholder wealth. All remuneration paid to Key Management Personnel is valued at the cost to the Group and expensed. The Board’s policy is to remunerate Non-Executive Directors at market rates for time, commitment and responsibilities. The Remuneration Committee determines payments to the Non-Executive Directors and reviews their remuneration annually, based on market practice, duties and accountability. Independent external advice is sought when required. The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval by shareholders at the Annual General Meeting. Performance-based Remuneration BKI previously established the BKI Executive Incentive Scheme to form part of the remuneration packages of the Group’s executive team. The aims of the BKI Incentive Scheme are: 1. To promote superior performance at BKI over both the short and more importantly, long term. 2. To ensure remuneration is fair and reasonable market remuneration to reward staff. 3. To promote long term staff retention and alignment. As at 1 July 2020 and as at the date of this report the only participant in the BKI Executive Incentive Scheme was Mr Jaime Pinto. In July 2021 the Remuneration Committee resolved to cease making any new grants under the BKI Incentive Scheme until further notice. However, grants that have not yet lapsed will remain on foot, and will be tested against vesting criteria in accordance with the terms of the BKI Incentive Scheme until all grants have either vested or lapsed. To achieve the objectives of BKI, the BKI Executive Incentive Scheme is required to include several components with separate measurement criteria. Short Term Incentive The Short Term Incentive is determined by reference to BKI’s annual Total Portfolio Return compared to the S&P ASX 300 Accumulation Index. BKI’s Total Portfolio Returns are measured by the change in pre tax NTA and are after all operating expenses, payment of both income and capital gains tax and the reinvestment of dividends. Short Term Incentives that vest are paid by way of BKI shares purchased on market by the Company. For FY2021 the Short Term Incentive for the Company Secretary was set at 15,000 BKI shares. 18 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Directors’ Report (continued) 20. Remuneration Report (Audited) (continued) 100% of the Short Term Incentive is based on the Total Portfolio Returns as follows: BKI Total Portfolio Return Compared to S&P/ASX 300 Acc Index % of Eligible Bonus Less than Index Equal to Index Plus 1% Plus 2% Plus 3% Plus 4% Plus 5% or more 0% 100% 110% 120% 130% 140% 150% The Short Term Incentive is subject to discretionary Board adjustment for the achievement of improved Management Expense Ratio and promotion of BKI. The following table summarises performance for the year to 30 June 2021 against the Short Term Incentive measurement criteria: 1 Year BKI Total Portfolio Return S&P/ASX 300 Acc Index over 1 Year Over / (Under) Performance % Entitlement to Eligible Bonus 20.1% 28.5% (8.4)% Nil The vesting criteria for the 2021 Financial Year Short Term Incentives were therefore not satisfied, and the Company did not award any short term incentives in respect of 2021 Financial Year Short Term incentives. Long Term Incentive The Long Term Incentive is determined by reference to annual Total Shareholder Returns; compared to the S&P/ASX 300 Accumulation Index. Total Shareholder Returns are based on the change in BKI Share Price and include the reinvestment of dividends. For the year ended 30 June 2021, the Company Secretary’s Long Term Incentive was set at 25,000 BKI shares. All outstanding Long Term Incentives granted are to be awarded to participants after 4 years provided that BKI’s 4 year Total Shareholder Returns exceed the S&P/ASX 300 Accumulation Index over the same period. Should that test fail on the day, it is to be retested in Year 5. Long Term Incentives that vest are to be paid by way of BKI shares purchased on market by the Company. The Company accrues as an expense the appropriate portion of the future cost of all Long Term Incentives issued. Once an incentive has lapsed or it is probable that the incentive will not vest, the Company reverses prior year accruals previously recognised in respect of that Long Term Incentive. The net positive or negative expense is included in the disclosed remuneration of the Company Secretary. During the 2021 Financial Year the following outstanding Long Term Incentives granted by the Company became eligible for vesting: Incentive issue Issue date Number of rights granted Value of initial grant Initial vesting date Number of rights vested Number of rights yet to vest/ lapse Expiry date J Pinto 2018 01/07/2017 25,000 $41,385 30/06/2021 30/06/2022 Nil – 2021 Annual Report 19 Directors’ Report (continued) 20. Remuneration Report (Audited) (continued) The table below summarises the performance for the relevant four year period against the Long Term Incentive measurement criteria: Period 4 year BKI total shareholder return S&P/ASX 300 accumulation index over 4 years Over/ (Under) performance % Entitlement to eligible bonus 1/07/2017 to 30/06/2021 4.9% 10.6% (5.7)% Nil Based on the above performance the vesting criteria for Long Term Incentives issued on 1 July 2017 were not satisfied. In accordance with the terms of the Long Term Incentive Scheme, these incentives will be retested as at 30 June 2022. During the 2021 Financial Year the following outstanding Long Term Incentives granted by the Company became eligible for retesting: Incentive issue Issue date Number of rights granted Value of initial grant Initial vesting date Number of rights vested Number of rights yet to vest/ lapse Expiry date J Pinto 2017 01/07/2016 24,030 $37,800 30/06/2020 30/06/2021 Nil – The table below summarises the performance for the relevant five year period against the Long Term Incentive measurement criteria: Period 5 year BKI total shareholder return S&P/ASX 300 accumulation index over 5 years Over/ (Under) performance % Entitlement to eligible bonus 1/07/2016 to 30/06/2021 5.3% 11.3% (6.0)% Nil Based on the above performance the vesting criteria for Long Term Incentives issued on 1 July 2016 were not satisfied. In accordance with the terms of the Long Term Incentive Scheme, these incentives lapsed as at 30 June 2021. No outstanding Long Term Incentives granted by the Company became eligible for vesting between 1 July 2021 and the date of this report. The following table summarises movements in Long Term Incentives granted by the Company that have not vested or lapsed as at the date of this report: Incentive issue Issue date Number of rights granted Value of initial grant Initial vesting date Expiry date Number of rights vested/ lapsed Number of rights yet to vest/ lapse J Pinto 2018 01/07/2017 25,000 $41,385 30/06/2021 30/06/2022 J Pinto 2019 01/07/2018 25,000 $38,040 30/06/2022 30/06/2023 J Pinto 2020 01/07/2019 25,000 $38,678 30/06/2023 30/06/2024 J Pinto 2021 01/07/2020 25,000 $35,943 30/06/2024 30/06/2025 – – – – 25,000 25,000 25,000 25,000 Incentives granted under the BKI Executive Incentive Scheme do not carry an entitlement to receive dividends. 20 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Directors’ Report (continued) 20. Remuneration Report (Audited) (continued) Remuneration Details for the Year to 30 June 2021 The following disclosures detail the remuneration of the Directors and the highest remunerated Executives of the Group. The names and positions held of group Directors and Other Key Management Personnel in office at any time during the financial year are: Name RD Millner DC Hall AM AJ Payne IT Huntley JP Pinto1 Position Non-Executive Chair Non-Executive Director Non-Executive Director Non-Executive Director Company Secretary1 1 Services provided under contract through Corporate & Administrative Services Pty Limited Details of the nature and amount of each Non–Executive Director’s and Other Key Management Personnel’s emoluments from the Parent and its controlled entities in respect of the year to 30 June are as follows: Directors: 2020 RD Millner DC Hall AJ Payne IT Huntley Total 2021 RD Millner DC Hall AJ Payne IT Huntley Total Primary fee $ Superannuation $ 69,041 53,379 43,562 43,562 6,559 5,071 4,138 4,138 Total $ 75,600 58,450 47,700 47,700 209,544 19,906 229,450 69,041 53,379 43,562 43,562 6,559 5,071 4,138 4,138 75,600 58,450 47,700 47,700 209,544 19,906 229,450 The combined annual payment to all Non-Executive Directors is capped at $300,000 until shareholders, by ordinary resolution, approve some other fixed sum amount. This amount is to be divided among the Directors as they may determine. 2021 Annual Report 21 Directors’ Report (continued) 20. Remuneration Report (Audited) (continued) Other Key Management Personnel: Fixed remuneration Salary Super- annuation Total $ – – – – $ – – – – $ – – – – Share based performance related remuneration STI $ – – – – LTI $ 2,752 2,752 9,601 9,601 Total $ 2,752 2,752 9,601 9,601 Total Remuneration $ 2,752 2,752 9,601 9,601 2020 J Pinto Total 2021 J Pinto Total The value included in the preceding table for share based performance related remuneration (STI and LTI) is the portion of the estimated value of the performance rights which has been allocated as an expense in each relevant reporting period. It does not reflect the value of rights to BKI shares (if any) vested during that period. The relative proportions of Total Remuneration that are fixed or linked to performance are as follows: Fixed remuneration Performance-related – STI Performance-related – LTI J Pinto 2021 0% 2020 0% 2021 0% 2020 0% 2021 100% 2020 100% There were no retirement allowances provided for the retirement of Non-Executive Directors or Other Key Management Personnel. Contract of Employment Mr J Pinto provides Company Secretarial services under contract through Corporate & Administrative Services Pty Limited. This is an open ended contract with a notice period of one month required to terminate. This report is made in accordance with a resolution of the Directors. Robert D Millner Director Sydney 20 July 2021 22 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Consolidated Income Statement for the year ended 30 June 2021 Ordinary revenue from investment portfolio Revenue from bank deposits Other income Other gains Income from operating activities before special investment revenue Operating expenses Operating result before income tax expense and special investment revenue Special investment revenue Operating result before income tax expense Income tax expense Net operating profit Profit for the year attributable to members of the Company Basic and diluted earnings per share before special investment revenue (net of applicable tax) Basic and diluted earnings per share after special investment revenue (net of applicable tax) Note 2(a) 2(c) 2(d) 2(e) 3 2(b) 4(a) Note 6 6 2021 $’000 39,738 109 2 305 40,154 (1,979) 38,175 1,022 39,197 (2,552) 36,645 36,645 2021 Cents 4.83 4.97 2020 $’000 45,368 614 2 748 46,732 (2,034) 44,698 7,182 51,880 (3,258) 48,622 48,622 2020 Cents 5.67 6.63 This Income Statement should be read in conjunction with the accompanying notes 2021 Annual Report 23 Consolidated Statement of Other Comprehensive Income for the year ended 30 June 2021 Profit for the year attributable to members of the Company 36,645 48,622 Note 2021 $’000 2020 $’000 Other comprehensive income Unrealised gains/(losses) on investment portfolio Deferred tax (expense)/benefit on unrealised gains/losses on investment portfolio Realised gains/(losses) on investment portfolio Tax (expense)/benefit relating to realised gains/losses on investment portfolio Total other comprehensive income Total comprehensive income/(loss) 141,324 (128,339) (42,397) 32,903 38,502 (18,963) 4(a) (9,871) 5,689 121,959 158,604 (103,111) (54,489) This Statement of Other Comprehensive income should be read in conjunction with the accompanying notes 24 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Consolidated Statement of Financial Position as at 30 June 2021 Current assets Cash and cash equivalents Trade and other receivables Prepayments Total current assets Non-current assets Investment portfolio Property, plant & equipment Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Revaluation reserve Realised capital gains reserve Retained profits Total equity Note 7 8 9 10 11 12 13 14 15 16 2021 $’000 40,606 36,105 52 76,763 2020 $’000 48,290 11,079 45 59,414 1,194,994 1 15,601 1,025,474 1 25,744 1,210,596 1,051,219 1,287,359 1,110,633 10,363 1,190 11,553 103,414 103,414 114,967 312 2,438 2,750 59,976 59,976 62,726 1,172,392 1,047,907 929,185 229,584 (29,144) 42,767 924,130 130,657 (52,176) 45,296 1,172,392 1,047,907 This Statement of Financial Position should be read in conjunction with the accompanying notes 2021 Annual Report 25 Consolidated Statement of Changes in Equity for the year ended 30 June 2021 Share capital $’000 Revaluation reserve $’000 Realised capital gains reserve $’000 Retained profits $’000 Total equity $’000 Total equity at 1 July 2019 916,233 220,494 (38,902) 57,603 1,155,428 Issue of shares, net of issue costs 7,897 Dividends paid or provided for Unrealised loss on revaluation of investment portfolio Provision for tax on unrealised loss on revaluation of investment portfolio Net operating profit for the year Net realised loss through other comprehensive income – – – – – – – (128,339) 38,502 – – Total equity at 30 June 2020 924,130 130,657 – – – – – – 7,897 (60,929) (60,929) – – 48,622 (128,339) 38,502 48,622 (13,274) (52,176) – (13,274) 45,296 1,047,907 Total equity at 1 July 2020 924,130 130,657 (52,176) 45,296 1,047,907 Issue of shares, net of issue costs 5,055 Dividends paid or provided for Unrealised gain on revaluation of investment portfolio Provision for tax on unrealised gain on revaluation of investment portfolio Net operating profit for the year Net realised gain through other comprehensive income – – – – – – – 141,324 (42,397) – – – – – – – – 5,055 (39,174) (39,174) – – 141,324 (42,397) 36,645 36,645 23,032 – 23,032 Total equity at 30 June 2021 929,185 229,584 (29,144) 42,767 1,172,392 This Statement of Changes in Equity should be read in conjunction with the accompanying notes 26 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Consolidated Cash Flow Statement for the year ended 30 June 2021 Note Cash flows from operating activities Dividends and distributions received Other receipts in the course of operations Payments to suppliers and employees Proceeds from sale of trading portfolio Payments for trading portfolio Interest received Income tax paid Net cash inflow from operating activities 17(a) Cash flows from investing activities Proceeds from sale of investment portfolio Payments for investment portfolio Capital returns received from investment portfolio Net cash outflow from investing activities Cash flows from financing activities Proceeds from issues of ordinary shares less issue costs Dividends paid Net cash outflow from financing activities Net decrease in cash held Cash at the beginning of the year Cash at the end of the year 5(b) 7 This Cash Flow Statement should be read in conjunction with the accompanying notes 2021 $’000 41,996 2 (1,703) 42,925 (42,620) 109 (2,628) 38,081 2020 $’000 50,727 2 (2,045) 5,409 (4,662) 729 (1,234) 48,926 135,990 (147,630) – 90,732 (127,711) 527 (11,640) (36,452) (21) (34,104) (34,125) (7,684) 48,290 40,606 (26) (53,014) (53,040) (40,566) 88,856 48,290 2021 Annual Report 27 Notes to the Financial Statements for the year ended 30 June 2021 1. Summary of Significant Accounting Policies The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers the parent entity of BKI Investment Company Limited and its controlled entities, with information relating to BKI Investment Company Limited as an individual parent entity summarised in Note 22. BKI Investment Company Limited is a listed public company, incorporated and domiciled in Australia. The financial report complies with all International Financial Reporting Standards (IFRS) in their entirety. The following is a summary of the material accounting policies adopted by the Group in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. Basis of Preparation The accounting policies set out below have been consistently applied to all years presented. The Group has attempted to improve the transparency of its reporting by adopting ‘plain English’ where possible. Key ‘plain English’ phrases and their equivalent AASB terminology are as follows: Phrase AASB Terminology Market Value Fair Value for Actively Traded Securities Cash Cash and Cash Equivalents Share Capital Contributed Equity Reporting Basis and Conventions The financial report has been prepared on an accruals basis and is based on historical costs modified by the revaluation of selected non-current assets, financial assets and financial liabilities for which the fair value basis of accounting has been applied. Accounting Policies a. Principles of Consolidation A controlled entity is any entity BKI Investment Company Limited has the power to control the financial and operating policies of so as to obtain benefits from its activities. A list of controlled entities is contained in Note 21(i) to the financial statements. All controlled entities have a June financial year-end. All inter-company balances and transactions between entities in the Group, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistencies with those policies applied by the parent entity. Where controlled entities have entered or left the Group during the year, their operating results have been included/ excluded from the date control was obtained or until the date control ceased. Minority equity interests in the equity and results of the entities that are controlled are shown as a separate item in the consolidated financial report. 28 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) b. Income Tax The charge for current income tax expense is based on the profit for the year adjusted for any non-assessable or disallowed items. It is calculated using the tax rates that have been enacted or are substantially enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be available against which deductible temporary differences can be utilised. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the group will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. BKI Investment Company Limited and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. Each entity in the group recognises its own current and deferred tax liabilities, except for any deferred tax balances resulting from unused tax losses and tax credits, which are immediately assumed by the parent entity. The current tax liability of each group entity is then subsequently assumed by the parent entity. The group notified the Australian Tax Office that it had formed an income tax consolidated group to apply from 12 December 2003. The tax consolidated group has entered a tax sharing agreement whereby each entity in the group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the tax consolidated group. c. Financial Instruments Recognition Financial instruments are initially measured at cost on trade date, which includes transaction costs, when the related contractual rights or obligations exist. Subsequent to initial recognition these instruments are measured as set out below. The Group has two portfolios of securities, the investment portfolio and the trading portfolio. The investment portfolio relates to holdings of securities which the Directors intend to retain on a long-term basis and the trading portfolio comprises securities held for short term trading purposes. Securities within the investment portfolio are classified as ‘financial assets measured at fair value through other comprehensive income’, and are designated as such upon initial recognition. Securities held within the trading portfolio are classified as ‘mandatorily measured at fair value through profit or loss’ in accordance with AASB 9. Valuation of investment portfolio Listed securities are initially brought to account at market value, which is the cost of acquisition, and are re-valued to market values continuously. Movements in carrying values of securities are recognised as Other Comprehensive Income and taken to the Revaluation Reserve. Where disposal of an investment occurs, any revaluation increment or decrement relating to it is transferred from the Revaluation Reserve to the Realised Capital Gains Reserve. Valuation of trading portfolio Listed securities are initially brought to account at market value, which is the cost of acquisition, and are re-valued to market values continuously. Movements in carrying values of securities in the trading portfolio are taken to Profit or Loss through the Income Statement. Fair value Fair value is determined based on last sale price for all quoted investments. 2021 Annual Report 29 Notes to the Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) d. Employee Benefits Share incentives Share incentives are provided under the Short and Long Term Incentive Plans (the Plans). The incentives awarded under the Plans are based on the performance of the Group over differing periods specified within the rules of the Plans. The Plans are settled in shares, but based on a cash amount. Expenses are recognised over the assessment period based on the amount expected to be payable under the Plans, resulting in a provision for incentive payable being built up on the balance sheet over the assessment period. In the event that the executive does not complete the period of service, or the vesting criteria are not satisfied within the required period, the cumulative expense is reversed. e. Revenue Sale of investments occurs when the control of the right to equity has passed to the buyer. Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. Dividend and distribution revenue is recognised when the right to receive a dividend or distribution has been established. All revenue is stated net of the amount of goods and services tax (GST). f. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of 12 months or less, and bank overdrafts. g. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. h. Segment Reporting Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision- maker. The Board has been identified as the chief operating decision-maker, as it is responsible for allocating resources and assessing performance of the operating segments. The Group operates solely in the securities industry in Australia and has no reportable segments. i. Comparative Figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. Where a retrospective restatement of items in the statement of financial position has occurred, presentation of the statement as at the beginning of the earliest comparative period has been included. j. Rounding of Amounts The parent has applied the relief available to it under ASIC Corporations Instrument (Rounding in Financial / Directors’ Reports) 2016/191 and accordingly, amounts in the financial report and Directors’ report have been rounded off to the nearest $1,000. k. Critical Accounting Estimates and Judgments Deferred Tax Balances The preparation of this financial report requires the use of certain critical estimates based on historical knowledge and best available current information. This requires the Directors and management to exercise their judgement in the process of applying the Group’s accounting policies. The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. In accordance with AASB 112: Income Taxes deferred tax liabilities have been recognised for Capital Gains Tax on unrealised gains in the investment portfolio at the current tax rate of 30%. 30 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) As the Group does not intend to dispose of the portfolio, this tax liability may not be crystallised at the amount disclosed in Note 12. In addition, the tax liability that arises on disposal of those securities may be impacted by changes in tax legislation relating to treatment of capital gains and the rate of taxation applicable to such gains at the time of disposal. Apart from this, there are no other key assumptions or sources of estimation uncertainty that have a risk of causing a material adjustment to the carrying amount of certain assets and liabilities within the next reporting period. l. New or amended Accounting Standards and Interpretations adopted The Company has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. There are no new Accounting Standards and Interpretations issued by the AASB that have become effective in the current accounting period and that are applicable to the Company. m. Australian Accounting Standards not yet effective The Group has not applied any Australian Accounting Standards or UIG interpretations that have been issued as at balance date but are not yet operative for the year ended 30 June 2021 (“the inoperative standards”). The Group only intends to adopt the inoperative standards at the date at which their adoption becomes mandatory. 2. Revenues (a) Ordinary revenue from investment portfolio Fully franked dividends Unfranked dividends Trust distributions Total ordinary revenue from investment portfolio (b) Special investment revenue Fully franked dividends Unfranked dividends Total special investment revenue (c) Revenue from bank deposits Interest received (d) Other income Other income (e) Other gains Net realised gain on sale of investments held for trading Total income 2021 Annual Report 2021 $’000 28,437 4,777 6,524 39,738 899 123 1,022 109 2 305 41,176 2020 $’000 34,206 4,606 6,556 45,368 6,724 458 7,182 614 2 748 53,914 31 Notes to the Financial Statements (continued) 3. Operating expenses Administration expenses Employment expenses Investment Management Professional fees Total operating expenses 4. Tax expense (a) Reconciliation of income tax expense The aggregated amount of income tax expense attributable to the year differs from the amounts prima facie payable on profits from ordinary activities. The difference is reconciled as follows: Operating result before income tax expense, including special investment revenue Tax calculated at 30% (2020: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: – Franked dividends and distributions received – Prior year over provision Net income tax expense on operating profit before net gains on investments Net realised gains/(losses) on investment portfolio Tax calculated at 30% (2020: 30%) Total tax expense (b) The components of tax expense comprise Current tax Deferred tax Prior year over provision Total tax expense 2021 $’000 414 239 1,167 159 1,979 39,197 11,759 (8,801) (406) 2,552 32,903 9,871 12,423 2,300 10,529 (406) 12,423 2020 $’000 454 232 1,188 160 2,034 51,880 15,564 (12,279) (27) 3,258 (18,963) (5,689) (2,431) 3,356 (5,760) (27) (2,431) 32 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 5. Dividends (a) Dividends paid during the year Final ordinary dividend for the year ended 30 June 2020 of 2.32 cents per share (2019: 3.70 cents per share) fully franked at the tax rate of 30%, paid on 27 August 2020 2021 $’000 2020 $’000 17,065 27,036 Final special dividend for the year ended 30 June 2020 of 1.00 cents per share (2019: 1.00 cents per share) fully franked at the tax rate of 30%, paid on 27 August 2020 7,355 7,306 Interim ordinary dividend for the year ended 30 June 2021 of 2.000 cents per share (2020: 3.625 cents per share) fully franked at the tax rate of 30%, paid on 25 February 2021 Total dividends paid (b) Reconciliation of total dividends paid to dividends paid in cash Total dividends paid Less: Dividends reinvested in shares via DRP Dividends paid in cash (c) Franking account balance Balance of the franking account after allowing for tax payable in respect of the current year’s profits and the receipt of dividends recognised as receivables Estimated impact on the franking account of dividends declared but not recognised as a liability at the end of the financial year (refer below) Net imputation credits available for future dividends Maximum fully franked dividends payable from available franking credits at the tax rate of 30% (2020: 30%) 14,754 39,174 39,174 (5,069) 34,105 26,587 60,929 60,929 (7,915) 53,014 24,043 26,506 (9,501) 14,542 (10,465) 16,041 33,931 37,429 (d) Dividends declared after balance date Since the end of the year the Directors have declared a final ordinary dividend for the year ended 30 June 2021 of 3.00 cents per share fully franked at the tax rate of 30% (2020: final ordinary dividend of 2.32 cents per share and a special dividend of 1.00 cents per share, both fully franked at the tax rate of 30%), payable on 26 August 2021, but not recognised as a liability at the year end. 2021 Annual Report 33 Notes to the Financial Statements (continued) 6. Earnings per share (a) Calculation of earnings Net operating profit Earnings used in calculating basic and diluted earnings per share after special investment revenue Less: Special investment revenue Add: Tax expense attributable to special investment revenue Earnings used in calculating basic and diluted earnings per share before special investment revenue 2021 $’000 2020 $’000 36,645 48,622 36,645 (1,022) 37 48,622 (7,182) 138 35,660 41,578 No. ’000 No. ’000 b) Number of shares Weighted average number of ordinary shares used in calculating basic and diluted earnings per share, before and after special investment revenue 737,798 733,696 c) Earnings per share Basic and diluted earnings per share before special investment revenue Basic and diluted earnings per share after special investment revenue 4.83 4.97 5.67 6.63 Cents Cents 7. Cash and cash equivalents Cash at bank 8. Trade and other receivables Dividends and distributions receivable Capital returns receivable Outstanding settlements on share sales Other 2021 $’000 40,606 40,606 7,465 – 28,316 324 36,105 2020 $’000 48,290 48,290 10,655 248 – 176 11,079 34 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 9. Financial Assets – Equity Portfolio Investment portfolio – non-current Listed securities at fair value available for sale Total investment portfolio Fair Value Measurement 2021 $’000 2020 $’000 1,194,994 1,025,474 1,194,994 1,025,474 BKI measures the fair value of its trading portfolio and investment portfolio with reference to the following fair value measurement hierarchy mandated by accounting standards: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and Level 3: inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). Both the trading portfolio and investment portfolio are classified as Level 1, and are measured in accordance with the policy outlined in Note 1.c. 10. Deferred tax assets The deferred tax asset balance comprises the following timing differences and unused tax losses: Transaction costs on equity issues Accrued expenses Realised capital tax losses Total Movements in deferred tax assets 257 39 15,305 15,601 510 34 25,200 25,744 Credited/ (charged) to statement of comprehensive income $’000 Credited/ (charged) to equity $’000 (276) 2 5,780 5,506 (259) 5 (9,895) (10,149) 8 – – 8 6 – – 6 Opening balance $’000 778 32 19,420 20,230 510 34 25,200 25,744 Closing balance $’000 510 34 25,200 25,744 257 39 15,305 15,601 35 Transaction costs on equity issues Accrued expenses Realised capital tax losses Balance as at 30 June 2020 Transaction costs on equity issues Accrued expenses Realised capital tax losses Balance as at 30 June 2021 2021 Annual Report Notes to the Financial Statements (continued) 11. Current tax liabilities Provision for income tax 12. Deferred tax liabilities The deferred tax asset balance comprises the following timing differences: Revaluation of investments held Unfranked dividends receivable and interest receivable Total Movements in deferred tax liabilities 2021 $’000 1,190 2020 $’000 2,438 101,911 1,503 103,414 58,853 1,123 59,976 (Credited)/ charged to statement of comprehensive income $’000 (Credited)/ charged to equity $’000 Closing balance $’000 – (37,610) 58,853 (254) (254) – 380 380 – (37,610) 43,058 – 1,123 59,976 101,911 1,503 43,058 103,414 Opening balance $’000 96,463 1,377 97,840 58,853 1,123 59,976 Revaluation of investment portfolio Unfranked dividends receivable and interest receivable Balance as at 30 June 2020 Revaluation of investment portfolio Unfranked dividends receivable and interest receivable Balance as at 30 June 2021 36 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 13. Share Capital (a) Issued and paid-up capital 2021 $’000 2020 $’000 739,002,595 ordinary shares fully paid (2020: 735,513,845) 929,185 924,130 (b) Movement in ordinary shares Beginning of financial year Issued during the year: – dividend reinvestment plan Gross funds raised – less net transaction costs 2021 2020 Number of shares $’000 Number of shares $’000 735,513,845 924,130 730,688,257 916,233 3,488,750 5,069 4,825,588 5,069 (14) 7,915 7,915 (18) End of financial year 739,002,595 929,185 735,513,845 924,130 The Parent does not have an authorised share capital and the ordinary shares on issue have no par value. Holders of ordinary shares participate in dividends and the proceeds on a winding up of the parent entity in proportion to the number of shares held. At shareholders’ meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. (c) Capital Management The Group’s objective in managing capital is to provide shareholders with attractive investment returns through access to a steady stream of fully franked dividends and enhancement of capital invested, with goals of paying an enhanced level of fully franked dividends and providing attractive total returns over the medium to long term. The Group recognises that its capital will fluctuate in accordance with market conditions, and in order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid, issue new shares from time-to-time or return capital to shareholders. The Group’s capital consists of shareholders’ equity plus net debt. The movement in equity is shown in the Consolidated Statement of Changes in Equity. At 30 June 2021 net debt was $Nil (2020: $Nil). (d) Acquisition of controlled entities The Company did not acquire shares in any unlisted investment companies during the 2020FY or 2021FY. 2021 Annual Report 37 Notes to the Financial Statements (continued) 14. Revaluation reserve The revaluation reserve is used to record increments and decrements on the revaluation of the investment portfolio, net of applicable income tax. Balance at the beginning of the year Gross revaluation of investment portfolio Deferred provision for tax on unrealised gains/losses Balance at the end of the year 15. Realised capital gains reserve The realised capital gains reserve records net gains and losses after applicable income tax arising from the disposal of securities in the investment portfolio. Balance at the beginning of the year Net gains/(losses) on investment portfolio transferred from statement of Comprehensive income Balance at the end of the year 16. Retained profits Balance at the beginning of the year Net profit attributable to members of the Company Dividends provided for or paid Balance at the end of the year 2021 $’000 2020 $’000 130,657 141,324 (42,397) 229,584 220,494 (128,339) 38,502 130,657 (52,176) (38,902) 23,032 (29,144) (13,274) (52,176) 45,296 36,645 (39,174) 42,767 57,603 48,622 (60,929) 45,296 38 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 17. Notes to the statement of cash flows (a) Reconciliation of cash flow from operating activities to net operating profit Net operating profit Non cash items: – Non-cash dividend income Increase in prepayments Changes in assets and liabilities, net of effects from consolidation of subsidiaries: – Decrease/(increase) in trade and other operating receivables – – Decrease in deferred tax assets – – – Increase payables (Decrease)/increase in current tax liabilities Increase in deferred tax liabilities 2021 $’000 2020 $’000 36,645 48,622 (1,954) 3,291 (7) 400 37 (1,249) 918 – (1,666) (22) 380 5 1,166 441 Net cash inflow from operating activities 38,081 48,926 (b) Non-cash financing and investing activities (i) Dividend reinvestment plan Under the terms of the dividend reinvestment plan, $5,069,000 (2020: $7,915,000) of dividends were paid via the issue of 3,488,750 shares (2020: 4,825,588). 18. Management of Financial Risk The risks associated with the holding of financial instruments such as investments, cash, bank bills and borrowings include market risk, credit risk and liquidity risk. The Board has approved the policies and procedures that have been established to manage these risks. The effectiveness of these policies and procedures is reviewed by the Audit & Risk Committee. a. Financial instruments’ terms, conditions and accounting policies The Group’s accounting policies are included in Note 1, while the terms and conditions of each class of financial asset, financial liability and equity instrument, both recognised and unrecognised at the balance date, are included under the appropriate note for that instrument. b. Net fair values The carrying amounts of financial instruments in the balance sheets approximate their net fair value determined in accordance with the accounting policies disclosed in Note 1 to the accounts. c. Credit risk The risk that a financial loss will occur because a counterparty to a financial instrument fails to discharge an obligation is known as credit risk. The credit risk on the Group’s financial assets, excluding investments, is the carrying amount of those assets. The Group’s principal credit risk exposures arise from the investment in liquid assets, such as cash and bank bills, and income receivable. Cash and bank bills are reviewed monthly by the Board to ensure cash is only placed with pre-approved financial institutions with low risk profiles (primarily “Big 4” banks) and that the spread of cash and bank bills between banks is within agreed limits. Income receivable is comprised of accrued interest and dividends and distributions which were brought to account on the date the shares or units traded ex-dividend. There are no financial instruments overdue or considered to be impaired. 2021 Annual Report 39 Notes to the Financial Statements (continued) 18. Management of Financial Risk (continued) d. Market risk Market risk is the risk that changes in market prices will affect the fair value of a financial instrument. The Group is a long term investor in companies and trusts and is therefore exposed to market risk through the movement of the share/unit prices of the companies and trusts in which it is invested. The market value of the portfolio changes continuously because the market value of individual companies within the portfolio fluctuates throughout the day. The change in the market value of the portfolio is recognised through the Revaluation Reserve. Listed Investments represent 93% (2020: 92%) of total assets. As at 30 June 2021, a 5% movement in the market value of the BKI portfolio would result in: p a 5% movement in the net assets of BKI before provision for tax on unrealised capital gains (2020: 5%); and p A movement of 8.1 cents per share in the net asset backing before provision for tax on unrealised capital gains (2020: 7.0 cents). The performance of the companies within the portfolio, both individually and as a whole, is monitored by the Investment Committee and the Board. BKI seeks to reduce market risk at the investment portfolio level by ensuring that it is not, in the opinion of the Investment Committee, overly exposed to one Group or one sector of the market. At 30 June 2021 and 30 June 2020, the spread of investments was in the following sectors: Financials Materials Consumer discretionary Consumer staples Industrials Health care Telecommunications services Utilities Energy Property Total investments Cash and dividends receivable Percentage of total investment (%) Amount ($’000) 2021 2020 2021 2020 30.70 14.68 12.22 8.18 6.26 5.78 5.54 5.49 3.85 2.04 94.74 5.26 29.86 8.97 9.08 8.15 10.51 6.09 7.02 7.86 4.62 2.38 94.54 5.46 387,217 185,144 154,125 103,217 79,118 72,847 69,891 69,201 48,520 25,714 323,885 97,225 98,526 88,467 113,984 66,051 76,196 85,260 49,961 25,920 1,194,994 66,374 1,025,474 59,193 Total portfolio 100.00 100.00 1,261,368 1,084,667 40 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 18. Management of Financial Risk (continued) Securities representing over 5% of the investment portfolio at 30 June 2021 or 30 June 2020 were: Commonwealth Bank BHP Group Macquarie Group APA Group Wesfarmers National Australia Bank Transurban Group Percentage of total investment (%) Amount ($’000) 2021 2020 2021 2020 8.7 8.1 8.1 5.5 5.3 5.2 3.9 6.6 6.4 7.2 5.9 4.7 3.6 5.3 109,166 102,518 102,490 69,201 66,730 65,600 49,605 71,504 68,954 77,703 64,225 50,618 39,102 56,966 The relative weightings of the individual securities and relevant market sectors are reviewed at each meeting of the Investment Committee and the Board, and risk can be managed by reducing exposure where necessary. There are no set parameters as to a minimum or maximum amount of the portfolio that can be invested in a single company or sector. e. Interest Rate Risk The Group is not materially exposed to interest rate risk. All cash investments are short term (up to 1 year) for a fixed rate, except for cash in operating bank accounts which are at-call and attract variable rates. The Group has no financial liability as at 30 June 2021 (2020: Nil). f. Foreign Currency Risk The Group is not exposed to foreign currency risk as all investments are quoted in Australian dollars. g. Liquidity risk Liquidity risk is the risk that the Group is unable to meet financial obligations as they fall due. The Group has no borrowings, and sufficient cash reserves to fund core operations at current levels for more than 10 years. The Group’s other major cash outflows are the purchase of securities and dividends paid to shareholders and the level of both of these is fully controllable by the Board. Furthermore, the majority of the assets of the Group are in the form of readily tradeable securities which can be sold on-market if necessary. h. Capital risk management The Group invests its equity in a diversified portfolio of assets that aim to generate a growing income stream for distribution to shareholders in the form of fully franked dividends. The capital base is managed to ensure there are funds available for investment as opportunities arise. Capital is increased annually through the issue of shares under the Dividend Reinvestment Plan. Other means of increasing capital include Rights Issues, Share Placements and Share Purchase Plans. 2021 Annual Report 41 Notes to the Financial Statements (continued) 19. Key Management Personnel Remuneration The names and positions held of Group Directors and Other Key Management Personnel in office at any time during the financial year are: Name RD Millner DC Hall AM AJ Payne IT Huntley JP Pinto Position Non-Executive Chair Non-Executive Director Non-Executive Director Non-Executive Director Company Secretary1 1 Services provided under contract through Corporate & Administrative Services Pty Limited Details of the nature and amount of each Non–Executive Director’s and Other Key Management Personnel’s emoluments from the Group in respect of the year to 30 June 2021 have been included in the Remuneration Report section of the Directors’ Report. The combined annual payment to all Non-Executive Directors is capped at $300,000 until shareholders, by ordinary resolution, approve some other fixed sum amount. This amount is to be divided amongst the Directors as the Board may determine. These fees exclude any additional fee for any service-based agreement which may be agreed from time to time and the reimbursement of out of pocket expenses. No such payments were made in FY2021 (2020: nil). 20. Superannuation Commitments The Group contributes superannuation payments on behalf of Directors and employees in accordance with relevant legislation. Superannuation funds are nominated by the individual Directors and employees and are independent of the Group. 21. Related Party Transactions Related parties of the Group fall into the following categories: (i) Controlled Entities At 30 June 2021, subsidiaries of the Parent were: Brickworks Securities Pty Limited Huntley Investment Company Pty Limited BKI Sub Pty Limited Pacific Strategic Investments Pty Limited Country of incorporation Percentage Owned (%) 2021 2020 Australia Australia Australia Australia 100 100 100 100 100 100 100 100 There were no transactions between the Parent and controlled entities in FY2021 or FY2020. There are loan balances due from the Parent to controlled entities. No interest is charged on the loan balance by the controlled entities and no repayment period is fixed for the loan. 42 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Notes to the Financial Statements (continued) 21. Related Party Transactions (continued) (ii) Directors/Officers Related Entities Persons who were Directors/Officers of BKI Investment Company Limited for the year ended 30 June 2021 were: Directors: RD Millner DC Hall, AM AJ Payne IT Huntley Company Secretary: JP Pinto1 1 Services provided under contract through Corporate & Administrative Services Pty Limited Corporate & Administrative Services Pty Limited Corporate & Administrative Services Pty Limited (CAS), an entity in which Mr RD Millner has an indirect interest, provides the Group with administration, company secretarial and accounting services, including preparation of all financial accounts. Fees paid to CAS for services provided to the Parent and controlled entities for the year to 30 June 2021 were $122,100 (2020: $122,100, including GST) and are at standard market rates. As at 30 June 2021 the Group owed $nil to CAS (2020: $nil). Contact Asset Management Pty Limited Contact Asset Management Pty Limited (Contact) is the Investment Manager of the Group. Contact is an entity in which Mr RD Millner has an indirect interest. Fees payable to Contact for services provided to the Parent and controlled entities for the year to 30 June 2021 were $1,252,911 including GST (2020: $1,275,159) and are at standard market rates. As at 30 June 2021 the Group owed $116,588 to Contact (2020: $99,461). (iii) Transactions in securities Share Holdings Aggregate number of listed securities of the Company held by Key Management Personnel (KMP) or their related entities: Balance as at 1 July Granted as compensation Net other changes Balance as at 30 June Net movements post balance date Balance as at date of Annual Report 2021 RD Millner DC Hall AJ Payne IT Huntley J Pinto Total 2020 RD Millner DC Hall AJ Payne IT Huntley J Pinto Total 9,857,446 2,471,337 430,000 11,224,980 125,916 24,109,679 8,810,842 2,460,607 414,056 11,224,980 119,761 23,030,246 – – – – – – – – – – – – 16,858 28,107 – – 4,652 9,874,304 2,499,444 430,000 11,224,980 130,568 49,617 24,159,296 1,046,604 10,730 15,944 – 6,155 9,857,446 2,471,337 430,000 11,224,980 125,916 1,079,433 24,109,679 Directors acquired shares through the Dividend Reinvestment Plan, and/or on-market purchase. Other Key Management Personnel acquired shares through the Dividend Reinvestment Plan. All KMP or their associated entities, being shareholders, are entitled to receive dividends. 2021 Annual Report – – – – – – – – – – – – 9,874,304 2,499,444 430,000 11,224,980 130,568 24,159,296 9,857,446 2,471,337 430,000 11,224,980 125,916 24,109,679 43 Notes to the Financial Statements (continued) 22. Parent company information Information relating to the parent entity of the Group, BKI Investment Company Limited: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Issued capital Reserves Total shareholders’ equity Net operating profit Total other comprehensive income 2021 $’000 2020 $’000 76,763 1,411,948 1,488,711 11,474 312,806 324,280 929,185 235,246 1,164,431 36,644 121,959 59,413 1,252,571 1,311,984 2,670 269,368 272,038 924,130 115,817 1,039,947 48,622 (103,111) The parent company has no contingent liabilities as at 30 June 2021. 23. Capital and Leasing Commitments The Group has no capital and leasing commitments as at 30 June 2021. 24. Auditor’s Remuneration During the financial year the following fees were paid or payable for services provided to the Group by the auditor of the Group: Auditing the financial report of the Parent and the controlled entities Total remuneration for audit and other assurance services Other non-audit services Total remuneration of the auditor from the Group 25. Contingent Liabilities The Group has no contingent liabilities as at 30 June 2021. 26. Authorisation The financial report was authorised for issue on 20 July 2021 by the Board of Directors. 28 28 – 28 27 27 – 27 44 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Directors’ Declaration The Directors of BKI Investment Company Limited declare that: 1. the financial statements and notes, as set out on pages 23 to 44, are in accordance with the Corporations Act 2001 and: a. comply with Accounting Standards and the Corporations Regulations; b. comply with International Financial Reporting Standards, as stated in Note 1 to the financial statements; and c. give a true and fair view of the financial position as at 30 June 2021 and of the performance for the year ended on that date of the consolidated entity. 2. in the Directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. 3. this declaration has been made after receiving the declaration required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2021. This declaration is made in accordance with a resolution of the Board of Directors. Robert D Millner Director Sydney 20 July 2021 2021 Annual Report 45 Independent Auditor’s Report to the Members of BKI Investment Company Limited MGI Sydney Assurance Services Pty Limited Level 5, 6 O’Connell Street Sydney NSW 2000 Tel: +61 2 9230 9200 PO Box H258 Australia Square Sydney NSW 1215 ABN 24 160 063 525 www.mgisyd.com.au Report on the Audit of the Financial Report Opinion We have audited the accompanying financial report of BKI Investment Company Limited and Controlled Entities (the consolidated entity), which comprises the consolidated statement of financial position as at 30 June 2021, the consolidated income statement, consolidated statement of other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and the directors’ declaration of the consolidated entity comprising BKI Investment Company Limited and the entities it controlled at the year’s end or from time to time during the year. In our opinion, the accompanying financial report of BKI Investment Company Limited and its Controlled Entities, is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2021 and of its performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. c) the financial report also complies with the International Financial Reporting Standards as disclosed in Note 1. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of BKI Investment Company Limited in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of BKI Investment Company Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. MGI refers to one or more of the independent member firms of MGI Worldwide. MGI Worldwide is a network of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the member firms of MGI Worldwide. Liability limited by a scheme approved under Professional Standards Legislation. Chartered Accountants and Taxation Advisors 46 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Independent Auditor’s Report (continued) Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter How Our Audit Addressed the Key Audit Matter Valuation and Existence of Investments The investment portfolio at 30 June 2021 comprised of listed equity investments of $1,194.99 million. We tested the valuation of a representative sample of listed investments by vouching the share prices to external market information to ensure they are fairly stated. We focused on the valuation and existence of investments because investments represent the principal element of the net asset value disclosed on the Consolidated Statement of Financial Position in the financial report. We agreed the existence of a representative sample of listed investments by confirming shareholdings with share registries. No material differences were identified. Revenue from Investments ASAs presume there are risks of fraud in revenue recognition unless rebutted. We focused on the cut-off, accuracy and completeness of dividend revenue and dividend receivables. We assessed the accounting policy for revenue recognition for compliance with the accounting standards and performed testing to ensure that revenue had been accounted for in accordance with the accounting policy. We found that the accounting policies implemented were in accordance with the accounting standards, and that revenue has been accounted for in accordance with the accounting policy. We tested the accuracy and completeness of dividend revenue by agreeing the dividends and distributions of a representative sample of investments to supporting documentation obtained from share registries. We tested the cut-off and completeness of dividend revenue and dividend receivables by checking the dividend details of a representative sample of investments from external market information and ensured that dividends that were declared before, but payable after, the reporting date were recorded. No material differences were identified. Other Information The directors of BKI Investment Company Limited are responsible for the other information. The other information comprises the information in the annual report for the year ended 30 June 2021, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 2021 Annual Report 47 Independent Auditor’s Report (continued) Responsibilities of the Directors for the Financial Report The directors of BKI Investment Company Limited are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements, the financial statements comply with International Financial Reporting Standards. In preparing the financial report, the directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial reports. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Opinion on the Remuneration Report We have audited the Remuneration Report included on pages 17 to 22 of the directors’ report for the year ended 30 June 2021. In our opinion, the Remuneration Report of BKI Investment Company Limited for the year ended 30 June 2021, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of BKI Investment Company Limited are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Matters relating to the electronic presentation of the audited financial report This auditor’s report relates to the financial report of BKI Investment Company Limited and Controlled Entities for the year ended 30 June 2021 included on BKI Investment Company Limited’s web site. The directors of the Company are responsible for the integrity of BKI Investment Company Limited’s web site. We have not been engaged to report on the integrity of this web site. The auditor’s report refers only to the financial report named above. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report to confirm the information included in the audited financial report presented on this web site. MGI Sydney Assurance Services Pty Limited Chartered Accountants Clayton Lawrence Director Sydney, 20 July 2021 48 2021 Annual Report BKI INVESTMENT COMPANY LIMITED Auditor’s Independence Declaration MGI Sydney Assurance Services Pty Limited Level 5, 6 O’Connell Street Sydney NSW 2000 Tel: +61 2 9230 9200 PO Box H258 Australia Square Sydney NSW 1215 ABN 24 160 063 525 www.mgisyd.com.au BKI INVESTMENT COMPANY LIMITED AND CONTROLLED ENTITIES ABN: 23 106 719 868 AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF BKI INVESTMENT COMPANY LIMITED AND CONTROLLED ENTITIES As lead auditor for the audit of BKI Investment Company Ltd and Controlled Entities for the year ended 30 June 2021, I declare that, to the best of my knowledge and belief, there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. Name of Firm: MGI Sydney Assurance Services Pty Limited Chartered Accountants Name of Auditor: Clayton Lawrence Director Address: Level 5, 6 O’Connell Street, Sydney NSW 2000 Dated this: 20th day of July 2021 MGI refers to one or more of the independent member firms of MGI Worldwide. MGI Worldwide is a network of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the member firms of MGI Worldwide. Liability limited by a scheme approved under Professional Standards Legislation. Chartered Accountants and Taxation Advisors 2021 Annual Report 49 ASX Additional Information 1) Equity Holders At 30 June 2021 there were 18,076 holders of ordinary shares in the capital of the Parent. These holders were distributed as follow: Number of shares held 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total 1,545 2,774 2,641 9,933 1,183 18,076 Holding less than a marketable parcel of 308 shares 658 The 20 largest holdings of the Parent’s shares as at 30 June 2021 are listed below: Name Washington H Soul Pattinson and Company Limited Huntley Group Investments Pty Ltd HSBC Custody Nominees (Australia) Limited J S Millner Holdings Pty Limited Jeanneau Cloud Nine Pty Limited BNP Paribas Nominees Pty Limited GM Pty Limited I R McDonald Pty Limited Netwealth Investments Limited John E Gill Trading Pty Limited Nibot Pty Limited Donald Cant Pty Limited Estate of Francis Albert Robertson Snow Foundation Limited JP Morgan Nominees Australia Pty Limited K C Perks Investments Pty Ltd Fennybentley Pty Limited T N Phillips Investments Pty Limited T G Millner Holdings Pty Limited Mr Timothy Frank Robertson Number of shares held 63,311,002 8,523,274 6,851,408 5,816,300 4,169,612 3,338,345 3,300,414 3,000,000 2,878,387 2,284,877 2,251,845 2,198,698 2,136,110 2,092,700 2,047,259 2,004,233 1,700,000 1,637,357 1,605,708 1,591,852 % 8.57 1.15 0.93 0.79 0.56 0.45 0.45 0.41 0.39 0.31 0.30 0.30 0.29 0.28 0.28 0.27 0.23 0.22 0.22 0.22 50 2021 Annual Report BKI INVESTMENT COMPANY LIMITED ASX Additional Information (continued) 1) Equity Holders (continued) Votes of Members Article 5.12 of the Company’s Constitution provides: a) Subject to this Constitution and any rights or restrictions attached to a class of Shares, on a show of hands at a meeting of Members, every Eligible Member present has one vote. b) Subject to this Constitution and any rights or restrictions attached to a class of Shares, on a poll at a meeting of Members, every Eligible Member present has: (i) one vote for each fully paid up Share (whether the issue price of the Share was paid up or credited or both) that the Eligible Member holds; and (ii) a fraction of one vote for each partly paid up Share that the Eligible Member holds. The fraction is equal to the proportion which the amount paid up on that Share (excluding amounts credited) is to the total amounts paid up and payable (excluding amounts credited) on that Share. 2) Substantial Shareholders As at 30 June 2021 the name and holding of each substantial shareholder as disclosed in a notice received by the Parent is listed below. The number of shares held and percentage ownership do not necessarily reflect the current ownership levels of these shareholders, as any subsequent movements of less than 1% would not need to be disclosed to ASX or the Company: Substantial Shareholder Washington H Soul Pattinson & Company Limited1 Brickworks Limited2 Shares Held % 62,405,057 62,405,057 8.60% 8.60% 1 Details included on substantial shareholder notice dated 26 June 2018. 2 Details included on substantial shareholder notice dated 27 June 2018. Shares held by Brickworks Limited represent a technical relevant interest as a result of Brickworks Limited’s shareholding in Washington H Soul Pattinson & Company Limited. 3) Other Information: p There is no current on-market buy-back in place. p There were 113 (2020: 150) transactions in securities undertaken by the Group and the total brokerage paid or accrued during the year was $553,659 (2020: $427,873). 4) Management Expense Ratio: The Management Expense Ratio (“MER”) is the operating expenses of the Group for the financial year, as shown in the income statement, expressed as a percentage of the average total assets of the Group for the financial year. The table below summarises the MER for each financial year ended 30 June. 2004 0.69 2013 0.19 2005 0.71 2014 0.17 2006 0.56 2015 0.18 2007 0.46 2016 0.16 2008 0.46 2017 0.15 2009 0.31 2018 0.16 2010 0.19 2019 0.17 2011 0.18 2020 0.17 2012 0.18 2021 0.17 2021 Annual Report 51 Auditor MGI Sydney Assurance Services Pty Ltd Level 5, 6 O’Connell Street Sydney NSW 2000 Share Registry Advanced Share Registry Services Limited 110 Stirling Highway Nedlands, WA 6009 Telephone: (08) 9389 8033 Australian Stock Exchange Code Ordinary Shares: BKI Website www.bkilimited.com.au Corporate Directory Directors Robert Dobson Millner Non-Executive Chair David Capp Hall AM Independent Non-Executive Director Alexander James Payne Non-Executive Director Ian Thomas Huntley Independent Non-Executive Director Investment Manager Contact Asset Management Pty Limited Thomas Charles Dobson Millner Portfolio Manager William Anthony Culbert Portfolio Manager Company Secretaries Jaime Perry Pinto Larina Tcherkezian (Alternate) Registered Office Level 14, 151 Clarence Street Sydney NSW 2000 Telephone: (02) 9210 7000 (02) 9210 7099 Facsimile: Postal Address: GPO Box 5015 Sydney NSW 2001 52 2021 Annual Report Produced by APM Graphics Management > 1800 806 930 ABN: 23 106 719 868 Level 14, 151 Clarence Street Sydney NSW 2000