Milton
Annual Report 2017

Plain-text annual report

MILTON CORPORATION LIMITED ABN 18 000 041 421 An Australian Listed Investment Company Listed since 1958 ANNUAL REPORT 2017 Profile Milton was established as a private investment company for four shareholders in 1938. It became a public company in 1950 and listed on the Sydney Stock Exchange in 1958. Milton is now an investment company for more than 24,000 shareholders and is listed on the Australian Securities Exchange under the code MLT. Investment philosophy Milton is predominantly a long term investor in companies and trusts listed on the ASX that are well managed, with a profitable history and an expectation of increasing dividends and distributions. Turnover of investments is low and capital gains arising from disposals are reinvested. Milton holds liquid assets such as cash and term deposits and it may invest in hybrid securities as well as real property development through joint ventures. Benefits of an investment in Milton Corporation Limited Shareholders receive fully franked dividends semi-annually – normally March and September. Ordinary fully franked dividends are paid out of profit after tax excluding special investment revenue and costs associated with the acquisition of subsidiaries. Dividends have been paid every year since listing and they have been fully franked since the introduction of franking. Special fully franked dividends may be paid out of special investment revenue. The investment portfolio provides shareholders with exposure to diversified assets Milton’s $2.8 billion equity investment portfolio comprises interests in companies and trusts which are listed on the Australian Securities Exchange and are expected to deliver increased investment revenue over the long term. Consistent application of this investment philosophy over many years has created a portfolio that is not aligned with any securities exchange index. Shareholders have an investment in a low cost, efficiently managed company with total administration costs that represent 0.12% per annum of total assets. Milton’s directors oversee the performance of its executives who are employed by the company to manage the investments for the benefit of shareholders. Contents* Milton’s Objectives Chairman’s Review of the 2017 Financial Year Classification of Investments Five Year Financial Summary Milton Corporation Foundation Listed Investments by Sector Directors’ Report 1 2 5 5 6 7 11 *Corporate Governance Statement is available on the company website www.milton.com.au/governance and is lodged with ASX with this Annual Report. Remuneration Report Auditor’s Independent Declaration Financial Statements Directors’ Declaration Independent Auditor’s Report Directory ASX Information 14 18 19 45 46 51 52 Important dates Final Dividend: - Ex date 10 August 2017 Company Briefing - Melbourne - Payment date 5 September 2017 on 16 October 2017 at 10.30am - DRP application closing date 14 August 2017 at State Library of Victoria Annual General Meeting: 12 October 2017 at 3.00pm - To be held at Sofitel Sydney Wentworth, Company Briefing - Adelaide Level 4, Adelaide Room, on 17 October 2017 at 10.30am 61-101 Phillip Street, Sydney at InterContinental Adelaide Milton has three objectives: Increase fully franked dividends paid to shareholders over time Provide capital growth in the value of the shareholders’ investments Net tangible assets before provision for tax on unrealised capital gains MLT share price Dividend History 10.0 8.0 6.0 s t n e C 4.0 2.0 0.0 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 - Interim Final Special Price History Invest in a diversified portfolio of assets which are predominantly Australian listed companies and trusts 1 Chairman’s Review of the 2017 financial year The net profit after tax for the 2017 financial year was $122.4 million, including special investment revenue of $0.4 million. Underlying profit was $122 million and dividends declared for the year totalled $121.8 million with the increased final dividend of 10 cents per share bringing full year dividends to 18.7 cents per share. Underlying profit excludes special investment revenue which tends to fluctuate from year to year. In 2016, special investment revenue totalled $1.5 million and the year before it was $3 million. It is considered that underlying profit may provide a better guide to the ongoing performance of the company. Ordinary Investment income Underlying profit Special dividends Net profit 1H17 $ m 61.7 60.6 0.2 60.8 1H16 $ m 65.7 67.9 0.7 68.6 Var. % (6.1) (10.7) (78.7) (11.4) 2H17 $ m 63.3 61.4 0.2 61.6 2H16 $ m 59.7 58.5 0.8 59.3 Var. % 6.0 5.0 (73.1) FY 17 $ m 125.0 122.0 0.4 FY16 $ m 125.4 126.4 Var. % (0.3) (3.5) 1.5 (75.6) 3.8 122.4 127.9 (4.3) Underlying profit in the first half of the year was 10.7% lower than the previous corresponding half. This was largely due to a fall in investment income and trading profits. Investment income improved in the second half of the year and lifted the underlying profit to $61.4 million, 5% higher than the previous corresponding half. Over the full year, the ordinary investment income of $125 million, which was derived from the portfolio of Australian listed equities, was marginally lower than the previous year’s income. Dividend cuts, from Top 20 holdings such as BHP Billiton, Woolworths, ANZ Banking Corporation and Rio Tinto, were the main cause of the 6.1% fall in investment income in the first half of the year. In the second half there was an increase in the number of companies that paid higher dividends and the ordinary investment income increased by 6.0% to $63.3 million. Other income including interest, trading profits and joint venture profits amounted to $4.9 million in 2017. With administration expenses of $3.6 million, representing 0.12% of average total assets for the year, the company is one of the lowest cost operators in the LIC sector. Milton is able to achieve this as it is internally managed and is not attempting to profit from the provision of fund management services. All executives are investors in Milton and their interests are aligned with shareholders. The payment of increasing ordinary fully franked dividends over time is one of Milton’s key objectives and this year the full year dividend was increased to 18.7 cents per share, even though the company’s earnings per share were marginally lower than the previous year. Before declaring the increased dividend, directors considered the results for the 2017 financial year as well as the company’s prospects for increased dividend income in 2018 after taking into account internal earnings and dividend forecasts. This demonstrates one of the advantages of Milton’s corporate structure. Milton has a strong balance sheet and profit reserves to support the dividend should the need arise and it has sufficient franking credits to ensure all dividends will be fully franked, at least for the foreseeable future. Ordinary fully franked full year dividends have been increased every year since 2010 with the 2017 dividend of 18.7 cents per share being 31.7% higher than the 2010 full year dividend of 14.2 cents per share. Another key objective is to provide growth in the value of the shareholders’ investments. Over the 2017 financial year, Milton’s Net Tangible Asset backing before provision for tax on unrealised capital gains (NTA), increased by 6.9% to $2.9 billion. The resultant NTA per share increased to $4.51 from $4.22 and the share price also increased to $4.51 from $4.28 With Milton paying out more than 90% of its profits and with long term investments in Australian listed companies representing more than 90% of the total assets, the movement in the NTA largely reflects the change in the underlying market values of the investments. Over the last five years, cash and other assets have remained reasonably constant whilst the value of the investments has increased to $2.8 billion from $2.2 billion. $5 $4 $3 $2 $1 $0 2 Total assets per share 2013 2014 investments 2015 2016 2017 Cash & other assets The composition of the equity portfolio reflects the emphasis Milton has always placed on investing in companies that pay dividends as Milton aims to fund its dividend payments from the dividend income that it receives. Consequently, the portfolio is not aligned with any index and its investment performance may differ from that of any index, particularly over short term periods. Milton’s track record indicates that its investment returns, net of all administration expenses and tax, have exceeded the index returns, as measured by the Accumulation Return of the All Ordinaries Index (XAOAI), over the longer term periods. One indicator of investment performance, net of expenses and tax, that is commonly used by LICs is the Total Portfolio Return (TPR), which combines the change in value of the NTA per share and dividends paid in the period. The TPR for 2017 was 11.5% which was marginally below Index return of 13.1%. Over the longer term periods of 10 and 15 years the TPR has exceeded that of the accumulation return of the Index. Milton’s relative performance is actually better than shown in the graph here as its TPR is calculated after administration expenses and tax have been deducted whilst the XAOAI is not. 14% 12% 10% 8% 6% 4% 2% 0% Comparative investment performance 1 Year 10 Yrs (pa) 15 Yrs (pa) MLT TPR XAOAI The company’s third objective is to invest in a diversified portfolio of Australian listed companies and trusts. At 30 June 2017 the portfolio comprised investments in 91 companies and trusts with a combined value of $2.8 billion, which represented 94% of its total assets. Details of each investment held at 30 June 2017 are shown on pages 7 to 10 and the classification of investments by sector is shown in the table on page 5. As the equity market as a whole continued to increase in value over the year there were limited opportunities to increase investments in the portfolio. Nevertheless, Milton’s portfolio management team continued to monitor the performance of the companies currently held by Milton and they sought to identify opportunities to bring additional companies into the portfolio. During the year Janus Henderson, Charter Hall Group, Charter Hall Long Wale REIT and Growthpoint Properties Australia were added to the portfolio and positions were increased in 26 other companies and trusts with a total of $56 million being invested. This investment was partly funded by disposals amounting to $44 million of which $10 million was takeover related. The rapid advancement in technologies is challenging the business models of many traditional companies and this will create both opportunities and threats for them. Many companies are already adopting new technologies to reduce costs and analyse available data more effectively to identify new revenue streams. Others are coming to terms with new competitors and adapting their business models to enable them to compete. One of the important roles of our portfolio managers is to visit companies, attend management briefings and meet with executives and directors of these companies to help them assess the potential winners and losers. I am delighted that Justine Jarvinen joined the board and the investment committee in August 2017. As well as having a background in investment analysis, Justine has significant experience in identifying disruptive technologies and developing strategies to capitalise on new technologies. Mr John Church, who has been a director of Milton since 1986, will retire at the conclusion of the annual general meeting in October 2017. John has made an outstanding contribution to the company and played a valuable role in guiding the company as it grew its asset base from $70 million to nearly $3 billion. Milton has benefitted from John’s deep knowledge of Australian corporate history through his input at the Investment Committee of which he has been a member since its formation in 1999. Milton entered into an agreement in July 2017 to acquire all of the shares of a private investment company with an investment portfolio valued at approximately $18 million. The terms of the agreement are similar to those of previous similar transactions and will result in Milton issuing its shares on an ex-dividend basis as consideration in the latter half of August 2017. 3 As a long term investor, Milton attempts to look through the short term noise of the almost daily release of contradictory financial indicators and focus more on the expected performance of our investments through the cycle. The upcoming reporting season, which commences in August, will provide further insights into the way in which the management teams of our investments are positioning their businesses in the current conditions and for the longer term. At present the Australian equity market appears to be reasonably fully valued with many companies having modest earnings growth expectations but their shares are trading on historically high multiples. With its closed end corporate structure, Milton is not forced to invest in these conditions and can be patient. However, Milton is well positioned to make sound long term investments at more reasonable prices if opportunities arise. A further update on market conditions will be provided at Milton’s Annual General Meeting to be held on 12 October 2017. R. D. MILLNER Chairman Sydney, 3 August 2017 4 Five Year Financial Summary Underlying operating profit after tax(1) ($million) 122.0 126.4 125.0 117.4 Underlying earnings per share (cents) 18.7 19.5 19.6 18.8 2017 2016 2015 2014 2013 108.5 17.8 Profit after tax ($million) Earnings per share (cents) Administration costs as % of average total assets Interim dividend (cents per share) Final dividend (cents per share)(2) Full year ordinary dividend (cents per share) Special dividend (cents per share) Net assets(2) at 30 June ($million) Net asset backing per share pre-tax(2) at 30 June($) Net asset backing per share post-tax(3) at 30 June($) Last sale price at 30 June ($) All Ordinaries Index at 30 June Ten year Total Shareholder Return (% per annum) Five year Total Shareholder Return (% per annum) Shares on issue (million) Number of shareholders 122.4 127.9 128.0 120.3 111.2 18.8 0.12 8.7 10.0 18.7 - 19.8 0.13 8.7 9.9 18.6 - 20.1 0.12 8.5 9.9 18.4 0.4 19.3 0.13 8.2 9.4 17.6 0.4 18.3 0.14 7.8 8.6 16.4 0.5 2,939 2,746 2,811 2,746 2,375 4.51 3.99 4.51 5764 4.7 12.9 4.22 3.79 4.28 5310 5.3 11.4 4.39 3.90 4.50 4.35 3.86 4.54 3.89 3.52 3.68 5451 5382 4775 8.0 12.1 10.2 14.5 8.3 4.0 651.9 649.9 640.2 630.8 610.5 24,726 23,729 22,514 21,055 19,309 (1) Underlying operating profit after tax excludes special investment revenue and costs associated with the acquisition of subsidiaries. (2) Before provision for tax on unrealised capital gains and before providing for the ordinary final and special dividends. (3) After provision for tax on unrealised capital gains and before providing for the ordinary final and special dividends. Classification of Investments by Sector The following asset classification table shows the composition of Milton’s assets by sector. Opening position $ million Additions Disposals $ million $ million Change in value $ million Closing position $ million Income Weighting $ million % Classification(1) Banks Consumer staples Materials Diversified financials Energy Insurance Healthcare Real estate Telecommunications Utilities Retailing Transport Commercial services Capital goods Consumer services Media Other shares 879.2 249.9 217.5 178.2 202.3 122.5 101.5 79.1 127.6 70.2 104.6 77.8 55.8 40.2 36.3 13.8 11.9 - - 4.0 11.4 6.1 3.3 3.3 17.8 1.8 0.4 1.4 1.3 2.1 - 0.8 1.3 0.8 (2.0) - (3.1) (15.1) (1.8) (6.4) - (2.2) - - - - (2.0) (5.5) (5.0) - 88.3 6.7 36.4 45.4 (0.8) 24.9 17.5 (6.9) (41.8) 16.6 (24.1) 1.1 11.8 5.0 4.5 (1.1) (0.6) 965.5 256.6 254.8 219.9 205.8 144.3 122.3 87.8 87.6 87.2 81.9 80.2 67.7 39.7 36.6 14.0 12.1 Total listed investments 2,568.4 55.8 (43.1) 182.9 2,764.0 Liquids(2) Property joint ventures Other assets Total 153.6 20.6 5.2 2,747.8 149.0 22.9 5.3 2,941.2 130.2 (1) (2) Investments are grouped according to their asset classes using the Global Industry Classification Standard (“GICS”) codes. Liquids include cash, term deposits, hybrid securities and dividends receivable. 5 57.3 9.9 8.7 10.5 6.2 6.5 2.0 4.3 5.2 2.9 3.4 3.2 1.6 1.1 1.3 0.5 0.4 125 2.7 1.2 1.3 32.8 8.7 8.6 7.5 7.0 4.9 4.2 3.0 3.0 3.0 2.8 2.7 2.3 1.3 1.2 0.5 0.4 93.9 5.1 0.8 0.2 100 Milton Corporation Foundation (ABN 95 051 921 133) The Foundation was established in 1988 to support charitable organisations, particularly those which direct assistance to persons that are disadvantaged in the community. The objective is to create a vehicle with sufficient capital that can make regular meaningful donations from the earnings derived from its investments. Contributions from Milton, shareholders and others over the years have helped to grow the Foundation’s total assets at 30 June 2017 to $2.1 million. The Foundation’s assets can now support annual distributions of $110,000 and in 2017 fourteen organisations received much needed support from the Milton Foundation. The Foundation has provided $2.1 million of assistance to the community since its establishment. The Foundation is a deductible gift recipient registered with the Australian Charities and Not-for-profits Commission (ACNC) and donations of $2 or more are tax deductible. Shareholders can support the Foundation by either: Forwarding a cheque to: The Trustees Milton Corporation Foundation or BSB: 082-067 PO Box R1836 Royal Exchange NSW 1225. Direct deposit into the bank account: Account Name: Milton Corporation Foundation Account No: 038263869 J F Church Chairman of Trustees Sydney, 3 August 2017 6 LISTED INVESTMENTS BY SECTOR AT 30 JUNE 2017 Holding Fair Value $'000 3,369,647 2,000 433,570 7,306,078 5,709,708 3,109,948 444,992 4,757,857 10,451,306 2,835,886 1,321,512 3,636,921 2,041,793 3,234,567 1,655,184 803,229 1,610,689 188,987 1,094,512 583,618 452,368 367,014 1,466,434 362,290 161,862 1,194,085 2,835,533 2,903,973 96,776 203 2,229 83,655 63,264 257,535 2,158 140,786 318,869 965,475 15,966 21,422 84,668 14,190 44,605 11,487 6,113 5,492 3,916 3,130 36,925 6,867 254,781 35,175 13,535 3,431 793 15,714 113,762 74,167 256,577 Banks Australia & New Zealand Banking Group Limited - ordinary shares - capital notes 2 Auswide Bank Limited Bank of Queensland Limited Bendigo and Adelaide Bank Limited Commonwealth Bank of Australia MyState Limited National Australia Bank Limited Westpac Banking Corporation Materials Adelaide Brighton Limited Amcor Limited BHP Billiton Limited Boral Limited Brickworks Limited Dulux Group Limited Fletcher Building Limited Incitec Pivot Limited Orica Limited Orora Limited Rio Tinto Limited Sims Metal Management Limited Consumer Staples Blackmores Limited Coca-Cola Amatil Limited Graincorp Limited Select Harvests Limited Treasury Wine Estates Limited Wesfarmers Limited Woolworths Limited 7 LISTED INVESTMENTS BY SECTOR AT 30 JUNE 2017 Diversified Financials Argo Investments Limited ASX Limited BKI Investment Company Limited BT Investment Management Limited Carlton Investments Limited Challenger Limited EQT Holdings Limited IOOF Holdings Limited Janus Henderson Group Macquarie Group Limited Perpetual Limited Energy Caltex Limited New Hope Corporation Limited Origin Energy Limited Santos Limited Washington H. Soul Pattinson & Company Limited Woodside Petroleum Limited Worley Parsons Limited Insurance AMP Limited AUB Group Limited Insurance Australia Group Limited QBE Insurance Group Limited Suncorp Group Limited Telecommunication Telstra Corporation Limited TPG Telecom Limited Retailing A.P. Eagers Limited ARB Corporation Limited Automotive Holdings Group Limited Premier Investments Limited 8 Holding 985,766 548,965 1,223,866 658,643 356,778 380,000 500,697 1,716,464 111,500 652,990 1,231,982 330,000 1,290,107 702,174 1,683,469 9,174,640 930,842 245,112 2,121,110 1,044,795 5,847,282 2,618,375 3,314,232 14,971,253 4,068,949 5,833,107 911,065 3,376,366 590,321 Fair Value $’000 7,561 29,430 1,983 7,495 11,238 5,069 8,867 16,821 4,839 57,790 68,831 219,924 10,431 1,974 4,817 5,101 152,941 27,804 2,750 205,818 11,009 13,572 39,645 30,920 49,117 144,263 64,376 23,193 87,569 48,765 14,313 11,311 7,479 81,868 LISTED INVESTMENTS BY SECTOR AT 30 JUNE 2017 Commercial Services ALS Limited Brambles Limited McMillan Shakespeare Limited Healthcare Cochlear Limited CSL Limited Ramsay Health Care Limited Regis Healthcare Limited Sonic Healthcare Limited Real Estate Aveo Group BWP Trust Charter Hall Group Charter Hall Long WALE REIT Finbar Group Limited Goodman Group Growthpoint Properties Australia Lendlease Group Scentre Group Stockland Group Vicinity Centres Westfield Corporation Utilities AGL Energy Limited APA Group Transport Lindsay Australia Limited Qube Holdings Limited Sydney Airport Transurban Group Capital Goods CIMIC Group Limited Reece Limited 9 Holding 6,079,431 1,431,966 629,538 33,800 592,198 189,783 1,576,076 624,425 858,282 1,584,008 1,247,000 933,000 2,782,249 1,291,376 403,010 702,539 1,799,474 3,154,940 6,453,335 861,000 2,697,869 2,005,833 12,843,330 5,794,164 2,609,629 3,512,975 791,239 214,124 Fair Value $’000 45,292 13,953 8,436 67,681 5,254 81,741 13,968 6,194 15,123 122,280 2,386 4,720 6,859 3,853 2,226 10,163 1,265 11,697 7,288 13,819 16,585 6,914 87,775 68,796 18,393 87,189 4,816 15,239 18,502 41,629 80,186 30,732 8,993 39,725 LISTED INVESTMENTS BY SECTOR AT 30 JUNE 2017 Consumer Services Flight Centre Travel Group Limited InvoCare Limited Tatts Group Limited Media Event Hospitality & Entertainment Seven Group Holdings Limited – TELYS4 preference shares Information Technology Carsales.com Limited Automobiles & Components Schaffer Corporation Limited Holding 80,300 1,950,914 1,159,306 1,010,921 7,000 995,000 68,999 Fair Value $’000 3,075 28,678 4,846 36,599 13,516 525 14,041 11,462 11,462 483 483 Total Listed Investments by Sector 2,763,696 10 Directors’ Report For the year ended 30 June 2017 The directors present their report together with the financial statements of the consolidated entity (“Milton”) consisting of Milton Corporation Limited and its subsidiaries for the financial year ended 30 June 2017 and the independent auditor’s report thereon. Directors The directors of Milton at any time during or since the end of the financial year are: Robert D. Millner FAICD Independent non-executive chairman. Director of Milton Corporation Limited since 1998 and appointed chairman in 2002. Chairman of the Investment and Remuneration Committees. Extensive experience in the investment industry. Other current directorships: Director of Australian Pharmaceutical Industries Limited since 2000, Chairman of BKI Investment Company Limited since 2003, Director of Brickworks Limited since 1997 and appointed chairman in 1999, Director of New Hope Corporation Limited since 1995 and appointed chairman in 1998, Director of TPG Telecom Limited since 2000, Director of Washington H. Soul Pattinson & Company Limited since 1984 and appointed chairman in 1998. Former directorships in the last three years: Hunter Hall Global Value Limited from April to June 2017 John F. Church FCSA, F Fin, FAICD Independent non-executive director. Director of Milton Corporation Limited since 1986. Member of the Investment Committee. A Solicitor and Notary Public and over 44 years’ experience in the investment industry. Graeme L. Crampton B.Ec, FCA, FAICD Independent non-executive director. Director of Milton Corporation Limited since 2009. Chairman of the Audit & Risk Committee and a member of the Remuneration Committee. A Chartered Accountant and former partner of a major firm of Chartered Accountants for more than 33 years and has extensive experience in the investment industry. Kevin J. Eley CA, F Fin, FAICD Independent non-executive director. Director of Milton Corporation Limited since 2011. Member of the Investment and Audit & Risk Committees. A Chartered Accountant and has extensive experience in the investment industry. Other current directorships: Director of Equity Trustees Limited since 2011 and HGL Limited since 1985. Director of Pengana Capital Group Limited since 2017 (formerly Hunter Hall International Limited from 2015 to 2017). Former directorships in the last three years: PO Valley Energy Limited from 2012 to April 2016 Kresta Holdings Limited from 2011 to February 2014. Francis G. Gooch B.Bus, CPA Managing director. Managing Director of Milton Corporation Limited since 2004 and chief executive since 1999. Member of the Investment Committee. A Certified Practising Accountant and over 32 years’ experience in the finance and investment industries. Other current directorships: Director of Hunter Hall Global Value Limited since June 2017 Ms. Justine E. Jarvinen BE(Chem), F Fin, GAICD Independent non-executive director. Appointed a non-executive director of Milton effective from 3 August 2017. Member of the Investment Committee. An Engineer with experience in equity markets and strategy development Ian A. Pollard BA (Macq), MA (Oxon), D Phil (IMC), FIAA, FAICD Independent non-executive director. Director of Milton Corporation Limited since 1998. Member of the Audit & Risk and Remuneration Committees. An Actuary and over 40 years of involvement in the investment industry. Other current directorships: Director and Chairman of Billabong International Limited since 2012 and Director of SCA Property Group since 2012. 11 Directors’ meetings The number of directors’ meetings (including meetings of committees of directors) and the number of meetings attended by each of the directors of Milton during the financial year were: Director Directors’ Meetings Investment Committee Meetings R.D. Millner J.F. Church G.L. Crampton K.J. Eley F.G. Gooch I.A. Pollard A 7 7 7 7 7 7 B 7 7 7 7 7 7 A 17 16 * 18 19 * B 19 19 * 19 19 * Audit & Risk Committee Meetings Nomination Committee Meetings Remuneration Committee Meetings A * * 4 4 * 4 B * * 4 4 * 4 A 2 - 2 2 2 2 B 2 - 2 2 2 2 A 1 * 1 * * 1 B 1 * 1 * * 1 A - Number of meetings attended. B - Number of meetings held during the time the director held office or was a member of the committee during the year. * - Not a member of the relevant committee. Principal activities The principal activity of Milton is investment. Milton invests in companies and trusts, real property development, fixed interest securities, and liquid assets such as cash and term deposits. There has been no significant change in the nature of this activity during the financial year. Operating and financial review The consolidated profit after income tax of Milton for the year was $122.4 million (2016: $127.9 million). Milton is in a sound financial position with net assets after provision for tax on unrealised capital gains at 30 June 2017 of $2.6 billion (2016: $2.5 billion) and no debt. The operating and financial reviews are contained in the Chairman’s Review which begins on page 2. Significant changes in the state of affairs There were no significant changes in the state of affairs of Milton during the past financial year other than as disclosed in the financial statements. Dividends Dividends paid or declared by Milton to members since the end of the previous financial year were: Declared and paid during the year - Final 2016 ordinary fully franked - Interim 2017 ordinary fully franked Declared after end of year and not provided for Cents per share Total amount $’000 Date of payment 9.9 8.7 64,342 56,638 2 September 2016 2 March 2017 - Final 2017 ordinary fully franked 10.0 65,196 5 September 2017 No LIC capital gain was included in the above dividends. All the dividends paid by Milton since franking was introduced in 1987 have been fully franked. Events subsequent to reporting date Apart from the information contained in note 25 to the financial statements, no matter or circumstance has arisen since the end of the financial year that has or may significantly affect the operations, results or state of affairs of Milton in subsequent financial years. 12 Likely developments Milton will continue its investment activities consistent with its objective of generating increasing revenue for distribution to its shareholders from its diversified portfolio of assets. The performance of Milton’s investments is subject to and influenced by many external factors and therefore it is not appropriate to predict the future results of the investments and Milton’s performance. The Chairman’s Review commencing on page 2 of the Annual Report contains information relating to Milton’s past performance, operations and outlook. Environmental regulations There are no significant environmental regulations that apply directly to Milton. Directors’ relevant interests No director has or has had any interest in a contract entered into since the last Directors’ Report or any contract or proposed contract with Milton or any subsidiary or any related entity other than as disclosed in note 18 to the financial statements. The relevant interest of each director in the capital of Milton at the date of this report is as follows: Director R.D. Millner J.F. Church G.L. Crampton K.J. Eley F.G. Gooch J.E. Jarvinen I.A. Pollard No. of Shares 12,977,632 28,508,673 169,172 110,879 992,100 Nil 91,129 Indemnification and insurance of directors, officers and auditors Neither Milton nor any related entity has indemnified or agreed to indemnify, paid or agreed to pay any insurance premium which would be prohibited under Section 199A or Section 199B of the Corporations Act 2001 during or since the financial year ended 30 June 2017. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability and legal expenses insurance contracts as such disclosure is prohibited under the terms of the contracts. Secretary Mr Nishantha Seneviratne MBA, ACMA, CGMA, CPA, AICM, AGIA, ACIS was appointed secretary and Chief Financial Officer in December 2012. Mr. Seneviratne joined Milton as the senior accountant in March 2010 and also held the position of assistant company secretary from March 2012. Prior to joining Milton, he has held a number of senior finance roles with private companies for over 6 years as Finance Controller/Manager and has over 4 years’ experience in corporate finance and credit in the banking and financial services sector. He is also an associate member of the Governance Institute of Australia (GIA) and Institute of Chartered Secretaries and Administrators (ICSA). Non-audit services During the year, Pitcher Partners, Milton’s auditor, has performed certain non-audit services in addition to its statutory duties. Details of the amounts paid to the auditors and related practices of the auditor are disclosed in note 20 to the consolidated financial statements. The board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: - All non-audit services were subject to the corporate governance procedures adopted by Milton and have been reviewed and approved by the Audit & Risk Committee to ensure they do not impact on the integrity and objectivity of the auditor, and - The non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement APES110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for Milton, acting as an advocate for Milton or jointly sharing risks and rewards. The auditor’s independence declaration as required under Section 307C of the Corporations Act 2001 is set out on page 18. 13 Remuneration Report This report, which is audited, details the policy for determining the remuneration of directors and executives and provides specific details of their remuneration. Remuneration of non-executive directors Non-executive directors are paid base fees, committee fees and superannuation contributions. Fees are not linked to Milton’s performance and no bonuses are paid or options issued. Each year the base fees and committee fees are determined by the board of directors who take into account the demands made on directors and the remuneration of non executive directors of comparable Australian companies. Base fees and committee fees (including superannuation contributions) Chairman base fee Director base fee Chairman of the Audit & Risk Committee fee Member of the Audit & Risk Committee fee Member of the Investment Committee fee 2017 $ 137,507 68,753 6,084 3,449 6084 2016 $ 134,811 67,405 5,965 3,381 5,965 The total remuneration paid to non-executive directors in 2017 was $443,754 (2016: $435,053). In October 2011 shareholders approved an increase in the maximum non-executive directors’ total remuneration to $700,000. Non-executive directors, who were appointed before 30 June 2003, are entitled to retirement benefits in accordance with a shareholder approved scheme. In June 2003 the board resolved to cap retirement benefits for all directors at the amounts provided as at 30 June 2003. The total balance provided at 30 June 2017 is $190,905 (2016: $190,905). Remuneration of executives Executive remuneration is a key element of the staff retention strategy which is designed to attract and retain appropriately qualified and experienced professionals who share Milton’s goals and values and will seek to deliver superior long term returns to its shareholders. The remuneration of the managing director and senior executives is reviewed annually by the Remuneration Committee which then makes recommendations to the board for its consideration and approval. In formulating its recommendations, the Remuneration Committee considers: • the short term and long term performance of the Company as measured by dividend growth and total returns. • the contribution of the managing director and the senior executives to this performance, • market trends in remuneration in terms of both quantum and structure and • the remuneration of key management personnel of other listed investment companies with similar long term investment philosophies and objectives. Executive remuneration includes a component known as the Total Employment Cost Package (TECP), and it may include a cash bonus component and an equity component. The TECP includes cash salary, company contributions to superannuation and it may include non monetary benefits such as the provision of a motor vehicle and car parking. No executive is entitled to a guaranteed bonus however the board may award a cash bonus to reward an executive’s outstanding contribution to the achievement of Milton’s objectives. The board will consider qualitative measures such as contribution to the investment process, participation in board discussions, timeliness and accuracy of reports and staff development when assessing executive performance. In determining the amount of any bonus the board has regard to quantitative measures such as underlying operating earnings per share, dividends per share and total returns relative to the market as a whole. Average cash bonus paid was 10.5% of TECP for 2017. The equity component of the remuneration package encourages executives to have an investment in Milton to align their interests with shareholders. The equity component is delivered through participation in the Senior Staff Share Plan (“SSSP”), which was approved by shareholders at Milton’s Annual General Meeting on 9 October 2001 (refer note 19b to the financial statements). 14 In accordance with the terms of the SSSP, the directors determine the maximum number of shares for which the executive may apply. All SSSP shares are acquired on the market and held on behalf of the executives by the trustee of the SSSP. The price offered to the executive shall be at a discount of one cent per share to the market value of the shares. Executives are required to hold the SSSP shares for a minimum period of three years however the benefit to the executive is increased through long term ownership to the extent dividends are paid and the Milton share price appreciates. Milton provides an interest free loan to the executives to fund the acquisition of each parcel of SSSP shares. Each loan is repaid by the application of the after tax proceeds from the dividends paid on the SSSP shares. The opportunity cost to Milton of providing the loan is the notional interest. The Remuneration Committee includes this cost when it reviews each executive’s TECP. SSSP shares may not be sold, transferred, mortgaged or otherwise dealt with by the executive for a period of three years from the date of issue or until the executive ceases employment with Milton. If the executive’s employment ceases, the executive may within 30 days repay the loan and direct the trustee to transfer the shares to the executive or, provided the value of the shares is greater than the loan outstanding, direct the trustee to sell the shares, repay the loan and distribute the balance to the executive. Otherwise the trustee will sell the shares when so directed by Milton and apply the proceeds to the repayment of the loan. The board considers that the SSSP is appropriately designed to encourage long term ownership of shares by executives, which then aligns their interests with that of Milton’s predominantly long term shareholder base. Executives, other than the managing director, may participate in the Employee Share Plan (“ESP”) which provides for a bonus of up to $1,000 to be paid in the form of Milton shares (refer note 19a to the financial statements). Eligible executives are provided with life, total and permanent disablement and salary continuance insurance. The overall level of executive reward takes into account the performance of Milton over a number of years. Key performance indicators for Milton over five years are tabled below. Key performance indicators Profitability 2017 2016 2015 2014 2013 Underlying operating profit ($million) 122.0 126.4 125.0 117.4 108.5 (Decline) growth in underlying operating profit (%) Underlying earnings per share (cents) (Decline) growth in underlying earnings per share (%) Dividend Full year ordinary dividend (cents per share) Growth in full year ordinary dividend (%) Special dividend (cents per share) Capital Net asset backing per share pre-tax(1) at 30 June($) Growth (decline) in net asset backing per share (%) (3.5) 18.7 (4.1) 18.7 0.5 - 4.51 6.9 1.1 19.5 (0.4) 18.6 1.1 - 4.22 (3.8) 6.5 19.6 4.3 18.4 4.6 0.4 4.39 0.9 8.2 18.8 5.5 17.6 7.3 0.4 4.35 11.9 5.7 17.8 5.5 16.4 5.1 0.5 3.89 18.4 Net assets(1) at 30 June ($million) 2,939 2,746 2,811 2,746 2,375 Total Return Ten year Total Shareholder Return Ten year Total Portfolio Return Ten year accumulation return of the All Ordinaries Index 4.7 4.2 3.5 5.3 5.6 4.9 8.0 7.3 7.0 10.2 9.2 8.8 8.3 9.3 9.2 (1) Before provision for tax on unrealised capital gains and before providing for the ordinary final dividend. At Milton’s 2016 Annual General Meeting, shareholders supported the remuneration report for the 2016 financial year with 89.3% of the proxies in favour of the resolution to approve the report. The resolution to approve the remuneration report was passed by a show of hands at the Annual General Meeting held in October 2016. 15 Details of remuneration Amounts of remuneration Details of the remuneration of each non-executive director of Milton Corporation Limited, the managing director and specified executives of Milton for the years ended 30 June 2016 and 2017 are set out in the following tables. Non-executive directors of Milton Corporation Limited R.D. Millner Chairman J.F. Church Director G.L. Crampton Director K.J. Eley Director I.A. Pollard Director Total remuneration 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Short Term Benefits Fees $ 131,133 128,563 68,344 67,005 50,837 49,370 71,494 70,092 65,938 64,645 387,746 379,675 Post Employment Superannuation Total paid Retirement Provision(1) $ 12,458 12,213 6,493 6,365 24,000 24,000 6,792 6,659 6,294 6,141 56,007 55,378 $ 143,591 140,776 74,837 73,370 74,837 73,370 78,286 76,751 72,202 70,786 443,753 435,053 $ 55,905 55,905 90,000 90,000 - - - - 45,000 45,000 190,905 190,905 (1) The directors’ retirement benefits have been capped at the balance provided at 30 June 2003. Managing director and executives of Milton Corporation Limited and its subsidiaries Short Term Benefits Salary Cash bonus (1) $ $ Non monetary benefits (2) Post Employ- ment Super- annuation $ $ $ Other long term benefits (3) Share based payments Total (4) $ $ F.G. Gooch Managing director D.N. Seneviratne CFO, secretary Total remuneration 2017 536,805 65,000 2016 522,980 72,000 2017 169,863 20,179 2016 165,297 22,132 2017 706,668 85,179 2016 688,277 94,132 4,508 4,508 - - 4,508 4,508 30,020 13,525 134,814 784,672 30,020 13,794 129,714 773,016 16,958 16,571 3,298 3,240 25,533 235,831 20,645 227,885 46,978 16,823 160,347 1,020,503 46,591 17,034 150,359 1,000,901 (1) Represents 100% of cash bonus paid or payable which vested in the year. (2) Non-monetary benefits include the provision of a motor vehicle, parking, the cost of life, total & permanent disablement insurance and salary continuance insurance provided through nominated superannuation funds. (3) Other long term benefits comprise changes in long service leave provisions. (4) Represents the notional value of interest on loans provided to acquire shares in Milton under the Senior Staff Share Plan. The relative proportions of total remuneration of above key management personnel that are fixed or related to performance are as follows: F.G. Gooch D.N. Seneviratne Fixed remuneration Performance-related - STI Performance-related - LTI 2017 74.5% 80.6% 2016 73.9% 81.3% 2017 8.3% 8.6% 2016 9.3% 9.7% 2017 17.2% 10.8% 2016 16.8% 9.0% There are no fixed term employment contracts between Milton and its employees. Employment may be terminated with four weeks’ notice by either Milton or the employee. There are no provisions for any termination payments other than for unpaid annual and long service leave. 16 Share based compensation, Senior Staff Share Plan equity holdings and loans The movements during the reporting period are as follows: Executives’ shareholdings in relation to the Senior Staff Share Plan - Number of shares held F.G. Gooch Managing director D.N. Seneviratne CFO, secretary Opening Balance 885,000 825,000 102,500 77,500 2017 2016 2017 2016 Received as Remuneration Closing Balance 60,000 60,000 25,000 25,000 945,000 885,000 127,500 102,500 Loans in relation to the Senior Staff Share Plan Details regarding loans outstanding at the reporting date to specified directors and specified executives, are as follows: F.G. Gooch Managing director D.N. Seneviratne CFO, secretary Opening Balance $ 2017 2,296,561 2016 2017 2016 2,155,246 380,645 284,938 Net change $ 132,581 141,315 91,323 95,707 Closing Balance $ Highest balance in the period $ 2,429,142 2,552,875 2,296,561 2,352,657 471,968 487,442 380,645 387,142 Notional Interest (1) $ 134,814 129,714 25,533 20,645 (1) The notional interest has been included under “Share Based Payment” in the remuneration of the managing director and the executive disclosed on page 16. Notional interest is based on the applicable FBT benchmark interest rate, which for the year averaged 5.52% (2016: 5.65%). Apart from the loan balances shown above, there were no loans outstanding to key management personnel. Terms and conditions of the loans are referred to in note 19b to the financial statements. Share holdings of key management personnel and their related parties – Number of shares held Opening Balance Received as Remuneration Other Acquisitions 2017 2016 2017 2016 1,189,940 60,000 1,129,857 60,000 103,907 78,907 25,000 25,000 85 83 - - Closing Balance 1,250,025 1,189,940 128,907 103,907 F.G. Gooch Managing director D.N. Seneviratne CFO, secretary Rounding off The company is of a kind referred to in ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191, and in accordance with that legislative instrument, amounts in the Directors’ Report and financial report have been rounded off to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the directors. R. D. MILLNER Chairman Sydney, 3 August 2017 17 AUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF MILTON CORPORATION LIMITED ABN 18 000 041 421 In relation to the independent audit for the year ended 30 June 2017, to the best of my knowledge and belief there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001; and b) no contraventions of any applicable code of professional conduct. This declaration is in respect of Milton Corporation Limited and the entities it controlled during the year. M A ALEXANDER Partner 3 August 2017 An independent New South Wales Partnership. ABN 17 795 780 962. Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation An independent New South Wales Partnership. ABN 17 795 780 962. Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation 18 FINANCIAL STATEMENTS CONTENTS Financial Statements Page No. Consolidated Income Statement 20 Consolidated Statement of Comprehensive Income 21 Consolidated Statement of Financial Position 22 Consolidated Statement of Changes in Equity 23 Consolidated Statement of Cash flows 24 Notes to the financial statements Key Numbers: 1. Revenue 25 2. Tax 26 3. Earnings Per Share 28 4. Dividends Paid 28 5. Franking Account 29 6. Listed Investment Company Capital Gain Account 29 Assets: 7. Investments in Equity Instruments 30 8. Investment in Joint Venture Entities 31 9. Cash 32 10. Receivables 32 11. Other Financial Assets 32 Capital Management: 12. Share Capital 33 13. Reserves 33 Risk: 14. Critical accounting estimates, judgements and assumptions 34 15. Management of Financial Risk 34 16. Capital risk management 35 Group Structure: 17. Subsidiaries 36 Other Information: 18. Related Party Transactions 37 19. Share Based Payments 38 20. Auditor’s Remuneration 39 21. Parent Entity Disclosures 39 22. Summary of other accounting policies 40 23. Cash flow information 41 24. Contingent Liabilities 41 25. Events subsequent to reporting date 41 26. Holdings at Fair Value through Other Comprehensive Income at 30 June 2017 42 19 Milton Corporation Limited Consolidated income statement for the year ended 30 June 2017 Note 2017 $'000 2016 $'000 Ordinary dividends and distributions 1a 125,026 125,450 Interest Net gains on trading portfolio Other revenue Operating Revenue 1c 2,726 1d 346 577 3,016 3,748 520 128,675 132,734 Share of net profits of joint ventures – equity accounted 8a 1,204 Special dividends and distributions Income from operating activities Administration expenses Profit before income tax expense 1b 366 1,789 1,499 130,245 136,022 (3,581) (3,537) 126,664 132,485 Income tax expense thereon 2a (4,287) (4,580) Profit attributable to shareholders of Milton 122,377 127,905 Basic and diluted earnings per share Cents 18.79 3 Cents 19.76 The consolidated income statement is to be read in conjunction with the notes to the consolidated financial statements. 20 Milton Corporation Limited Consolidated statement of comprehensive income for the year ended 30 June 2017 2017 $’000 2016 $’000 Profit 122,377 127,905 Other comprehensive income Items that will not be reclassified to profit and loss Revaluation of investments 182,810 (111,359) Provision for tax (expense) benefit on revaluation of investments (55,059) 32,816 Other comprehensive income, net of tax 127,751 (78,543) Total comprehensive income for the period attributable to the shareholders of Milton 250,128 49,362 The consolidated statement of comprehensive income is to be read in conjunction with the notes to the consolidated financial statements. 21 Milton Corporation Limited Consolidated statement of financial position as at 30 June 2017 Current assets Cash Receivables Current tax prepaid Other financial assets Total current assets Non-current assets Receivables Investments Joint ventures – equity accounted Plant and equipment Deferred tax assets Total non-current assets Total assets Current liabilities Payables Current tax liabilities Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Shareholders’ equity Issued capital Capital profits reserve Asset revaluation reserve Retained profits Note 2017 $’000 2016 $’000 9 10a 11 10b 7 8b 2c 118,376 24,336 - 6,336 149,048 123,403 23,048 148 7,324 153,923 4,786 2,763,980 22,901 77 388 2,792,132 4,323 2,568,458 20,581 87 405 2,593,854 2,941,180 2,747,777 1,142 267 128 1,537 993 - 50 1,043 2d 335,148 442 335,590 337,127 280,099 504 280,603 281,646 2,604,053 2,466,131 12 13b 13a 1,553,896 59,545 794,453 196,159 1,545,122 68,236 658,011 194,762 Total equity attributable to shareholders of Milton 2,604,053 2,466,131 The consolidated statement of financial position is to be read in conjunction with the notes to the consolidated financial statements. 22 Milton Corporation Limited Consolidated statement of changes in equity for the year ended 30 June 2017 Issued capital $’000 Capital profits reserve $’000 Asset revaluation reserve $’000 Retained profits Total equity $’000 $’000 Balance at 1 July 2016 1,545,122 68,236 658,011 194,762 2,466,131 Profit Other Comprehensive Income: Total comprehensive income - - - - - - - 127,751 127,751 122,377 - 122,377 122,377 127,751 250,128 Net realised losses Transactions with shareholders: Share issues Dividends paid Balance at 30 June 2017 (8,691) 8,691 - - 8,774 - 1,553,896 - - 59,545 - - 794,453 - (120,980) 196,159 8,774 (120,980) 2,604,053 Balance at 1 July 2015 1,504,589 64,971 739,819 189,266 2,498,645 Profit Other Comprehensive Income: Total comprehensive income Net realised gains Transactions with shareholders: Share issues Dividends paid - - - - - - - (78,543) (78,543) 127,905 - 127,905 127,905 (78,543) 49,362 3,265 (3,265) - - 40,533 - - - - - (122,409) 40,533 (122,409) Balance at 30 June 2016 1,545,122 68,236 658,011 194,762 2,466,131 The consolidated statement of changes in equity is to be read in conjunction with the notes to the consolidated financial statements. 23 Milton Corporation Limited Consolidated statement of cash flows for the year ended 30 June 2017 Cash flows from operating activities Dividends and distributions received Interest received Distributions received from joint venture entities Other receipts in the course of operations Proceeds from sales of trading securities Payments for trading securities Other payments in the course of operations Income taxes paid Note 2017 $’000 123,703 3,120 1,683 548 346 - (3,495) (3,805) Net cash provided by operating activities 23a 122,100 Cash flows from investing activities Proceeds from disposal of investments Payments for investments in equities and trusts Payments for investments in joint ventures Payments for plant and equipment Loans repaid by other entities Loans advanced to other entities Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Payments for issue of shares Ordinary dividends paid Net cash used in financing activities 7c 44,052 (55,775) (2,256) (17) 302 (1,221) (14,915) 8,793 (25) (120,980) (112,212) 2016 $’000 126,010 3,306 5,066 520 7,681 (3,933) (3,429) (5,271) 129,950 49,129 (69,550) (3,206) (64) 278 (675) (24,088) 40,621 (123) (122,409) (81,911) Net (decrease) increase in cash assets held (5,027) 23,951 Cash assets at the beginning of the year Cash assets at the end of the year 123,403 9 118,376 99,452 123,403 The consolidated statement of cash flows is to be read in conjunction with the notes to the consolidated financial statements 24 Milton Corporation Limited Notes to the consolidated financial statements: Key Numbers for the year ended 30 June 2017 1. Revenue Milton’s revenue is derived from dividends, distributions, interest income, profit from joint ventures and income arising from the trading. 2017 $’000 2016 $’000 a. Ordinary dividends and distributions Milton receives ordinary dividend income and trust distributions from its long term investments in companies and trusts listed on the Australian Securities Exchange. Investments held in portfolio at 30 June Investments sold during the year b. Special dividends and distributions 124,118 908 125,026 124,450 1,000 125,450 This special investment revenue is received on an ad hoc basis and cannot be relied upon each year. Investments held in portfolio at 30 June Investments sold during the year 251 115 366 1,277 222 1,499 Dividends and distributions are brought to account on the dates that the securities trade ex-dividend. Demerger dividends arising from company de-consolidations are treated as a return of capital and not as a dividend. c. Interest Milton earns interest on its cash, term deposits and other liquid assets. Interest from deposits & cash Interest income from other liquid securities 2,625 101 2,726 2,891 125 3,016 Interest on cash and term deposits is brought to account on an accruals basis. Interest on other liquid securities is recognised on the date these securities trade ex-dividend. d. Net gains from trading portfolio Net gains from trading portfolio 346 3,748 Trading securities are recognised initially at cost and subsequently measured at fair value. Changes in fair value are taken directly through the income statement. Dividends from trading securities are brought to account on the dates the securities trade ex-dividend. 25 Milton Corporation Limited Notes to the consolidated financial statements: Key Numbers for the year ended 30 June 2017 2. Tax This note provides analysis of Milton’s income tax expense, shows amounts that are recognised directly in equity and how the tax expense is affected by non-assessable and non-deductible items. The note also details the deferred tax assets and liability balances and their movements. a. Reconciliation of Income Tax Expense to prima facie tax payable Profit before income tax Prima facie income tax expense calculated at 30% on the profit before income tax expense Increase (decrease) in income tax expense due to: Tax offset for franked dividends (Over) provision in prior year Other differences Income tax expense on profit b. Tax expense composition Current tax on profits for the year (Over) provision in prior year Decrease in deferred tax assets (note 2c) (Decrease) Increase in deferred tax liabilities (note 2d) c. Deferred tax assets The balance comprises temporary differences attributable to : Provisions Share issue expenses Other Total deferred tax assets Movements: Balance at 1 July (Charged) to the income statement Credited to equity Balance at 30 June To be recovered within 12 months To be recovered after more than 12 months 26 2017 $’000 2016 $’000 126,664 132,485 37,999 39,746 (33,601) (34,815) (101) (10) 4,287 4,374 (101) 24 (10) 4,287 357 28 3 388 405 (24) 7 388 54 334 388 (147) (204) 4,580 4,906 (147) 25 (204) 4,580 351 45 9 405 393 (25) 37 405 60 345 405 Milton Corporation Limited Notes to the consolidated financial statements: Key Numbers for the year ended 30 June 2017 d. Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised directly in equity: Revaluation of investments Realised capital losses Amounts recognised in profit: Gains on scrip for scrip rollovers Income receivable which is not assessable for tax until receipt Movements: Balance at 1 July (Credited) to income statement Charged (Credited) to other comprehensive income Balance at 30 June To be settled beyond 12 months 2017 $’000 2016 $’000 348,680 (29,813) 291,069 (27,379) 16,043 238 16,043 366 335,148 280,099 280,099 313,119 (10) 55,059 335,148 335,148 (204) (32,816) 280,099 280,099 The income tax expense for the period is the tax payable on the current year’s taxable income based on the current income tax rate applicable for the year adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and any unused tax losses. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. Milton Corporation Limited (the parent entity) and its wholly-owned subsidiaries have formed an income tax consolidated group. Each entity in the group recognises its own current and deferred tax, except for any deferred tax assets arising from unused tax losses from subsidiaries, which are immediately assumed by the parent entity. The current tax liability of each group entity is subsequently assumed by the parent entity. There is no tax funding agreement between Milton Corporation Limited and its subsidiaries. Deferred tax balances attributable to revaluation amounts are recognised directly in equity through the asset revaluation reserve. 27 Milton Corporation Limited Notes to the consolidated financial statements: Key Numbers for the year ended 30 June 2017 e. Offsetting deferred tax balances: Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities. Deferred tax assets from realised capital losses are offset against deferred tax liabilities from unrealised capital gains. Deferred tax liabilities have been recognised for capital gains tax on the unrealised gains in the investment portfolio at current tax rates. As Milton does not intend to dispose of the investment portfolio this tax may not be payable at the amount disclosed in Note 2d above. Any tax liability that may arise on disposal of investments is subject to tax legislation relating to the treatment of capital gains and the applicable tax rate at the time of disposal. Deferred tax assets relating to carried forward capital losses have been recognised based on current tax rates. Utilisation of the tax losses requires the realisation of capital gains in subsequent years and the ability to satisfy certain tests at the time the losses are recouped. The deferred tax assets related to carried forward capital losses have been offset against the related deferred tax liabilities as disclosed in Note 2d. 3. Earnings Per Share Basic earnings per share Profit attributable to shareholders of the parent entity 2017 Cents 2016 Cents 18.79 19.76 $’000 $’000 122,377 127,905 No. No. Weighted average number of ordinary shares used in the calculation of basic earnings per share 651,132,774 647,134,007 Diluted earnings per share and basic earnings per share are the same because there are no potential dilutive ordinary shares. 4. Dividends Paid a. Recognised in the current year An ordinary final dividend of 9.9 cents per share in respect of the 2016 year paid on 2 September 2016 (2016: an ordinary final dividend in respect of the 2015 year of 9.9 cents per share paid on 3 September 2015) Nil special dividend paid in respect of 2016 year (2016: 0.4 cents paid on 3 September 2015 in respect of the 2015 year) An ordinary interim dividend of 8.7 cents per share paid on 2 March 2017 (2016: 8.7 cents per share paid on 3 March 2016) 28 2017 $’000 2016 $’000 64,342 63,385 - 2,561 56,638 120,980 56,463 122,409 Milton Corporation Limited Notes to the consolidated financial statements: Key Numbers for the year ended 30 June 2017 b. Not recognised in the current year Since the end of the financial year, the directors declared an ordinary final dividend in respect of the 2017 year of 10 cents per share payable on 5 September 2017 (2016: ordinary final dividend of 9.9 cents per share per share paid on 2 September 2016) 5. Dividend Franking Account The amount of franking credits available to shareholders for the subsequent financial year, adjusted for franking credits that will arise from the payment of the current tax liability Subsequent to year end, the franking account will be reduced by the proposed final dividend to be paid on 5 September 2017 (2016: final dividend paid on 2 September 2016) 2017 $’000 2016 $’000 65,196 64,342 122,616 122,631 (27,941) 94,675 (27,575) 95,056 The franking account balance would allow Milton to frank additional dividend payments up to an amount of $220,908,122 (2016:$221,797,267) which represents 34 cents per share (2016: 34 cents per share). 6. Listed Investment Company capital gains account Balance of the Listed Investment Company (LIC) capital gain account available to shareholders for the subsequent financial year 1,282 1,255 Distributed LIC capital gains may entitle certain shareholders to a special deduction in their income tax return. LIC capital gains available for distribution are dependent upon the disposal of investment portfolio holdings which qualify for LIC capital gains and the receipt of LIC capital gain distributions. 29 Milton Corporation Limited Notes to the consolidated financial statements: Assets for the year ended 30 June 2017 7. Investment in equity instruments Milton is predominantly a long term investor in companies and trusts listed on the Australian Securities Exchange. Investments – non-current Quoted investments - at fair value Unquoted investments - at fair value a. Included in quoted investments are: Shares in other corporations Stapled securities in other corporations Units in trusts b. Included in unquoted investments are: 2017 $’000 2016 $’000 2,763,696 2,568,348 284 110 2,763,980 2,568,458 2,611,319 2,418,631 129,806 22,571 122,526 27,191 2,763,696 2,568,348 Units in trusts 284 110 Investments are recognised initially at cost and Milton has elected to present subsequent changes in fair value of equity instruments in other comprehensive income through the asset revaluation reserve after deducting a provision for the potential deferred capital gains tax liability as these investments are long term holdings of equity instruments. Listed investments are valued continuously at fair value, which is determined by the unadjusted last- sale price quoted on the Australian Securities Exchange at the measurement date. Use of unadjusted last sale price in an active market such as the Australian Securities Exchange falls within the Level 1 fair value hierarchy of measuring fair value under AASB 13. c. Investments disposed of during the year The disposals occurred in the normal course of Milton’s operations as a listed investment company or as a result of takeovers or mergers. Fair value at disposal date Equity investments (Loss) Gain on disposal after tax Equity investments 44,052 49,129 (8,691) 3,265 When an investment is disposed, the cumulative gain or loss, net of tax thereon, is transferred from the asset revaluation reserve to the capital profits reserve as disclosed in note 13. 30 Milton Corporation Limited Notes to the consolidated financial statements: Assets for the year ended 30 June 2017 8. Investment in joint venture entities Milton has a long history of investing in property development joint ventures. Wholly owned subsidiaries of Milton have investments in separate joint venture entities that have non-controlling interests in three property development joint venture partnerships. a. Contribution from joint venture entities Milton has interests in the following joint venture entities: 33.33% interest in the Ellenbrook Syndicate Joint Venture contribution to operating profit before tax (2016:33.33%) 23.33% interest in The Mews Joint Venture contribution to operating profit before tax (2016:23.33%) 50% interest in the LWP Huntlee Syndicate No 2 Joint Venture (2016: 50%) Share of net profits of joint ventures b. Consolidated interest in the assets and liabilities of the joint venture entities Current assets Non-current assets Current liabilities Non-current liabilities Provision for diminution in value Net assets 2017 $’000 2016 $’000 1,647 2,285 137 267 (580) 1,204 (763) 1,789 22,075 16,237 (5,923) (8,945) 23,444 (543) 22,901 18,585 15,471 (3,572) (9,360) 21,124 (543) 20,581 Under AASB 11 Joint Arrangements, investments in joint arrangements are classified as either joint operations or joint ventures based on rights and obligations arising from the joint arrangement rather than the legal structure of the joint arrangement. Each joint venture partnership agreement provides that partners have rights to the net assets of the partnership. Accordingly, Milton has assessed the nature of its joint arrangements and determined that all current interests are joint ventures and thus accounted for using the ‘Equity Method’. Under the ‘Equity Method’, Milton’s investments in joint ventures are valued initially at cost and periodically adjusted for changes in value due to Milton’s share in the joint ventures’ income or losses, distributions and any call payments. c. Contingencies and capital commitments Guarantee entered into by the parent company Milton agreed to provide a financial guarantee facility totalling $11 million to support prepayments received by a joint venture in which LWP Huntlee Syndicate No 2 has a 23.75% interest. This facility, which is on commercial terms, is secured by a second ranking mortgage over the real property of the joint venture as well as guarantees provided by other related entities of the joint venture. At 30 June 2017, total facility of $11m had been utilised (2016: $8M). Other than the above, the directors are not aware of any material contingent liabilities, contingent assets or capital commitments as at 30 June 2017. 31 Milton Corporation Limited Notes to the consolidated financial statements: Assets for the year ended 30 June 2017 9. Cash Cash at bank Deposits at call Term deposits 2017 $’000 4,614 30,762 83,000 2016 $’000 3,351 21,052 99,000 118,376 123,403 The weighted average interest rate for cash and deposits at call as at 30 June 2017 is 1.7% p.a. (2016: 1.9% p.a.). Term deposits have an average maturity date of August 2017 (2016: August 2016) and an average interest rate of 2.6% (2016: 3.0% pa). 10. Receivables a. Receivables – current Dividends receivable Interest receivable Sundry debtors b. Receivables – non-current 23,803 22,371 526 7 661 16 24,336 23,048 Senior staff share plan loans (refer note 19b) 4,786 4,323 c. Terms and conditions Sundry debtors are due within 30 days and no interest is charged. 11. Other financial assets Other liquid securities include listed securities such as reset preference shares which are classified as equity instruments and may be realised within 12 months. Other liquid securities at fair value Prepaid expenses 6,209 127 6,336 7,199 125 7,324 Other liquid securities are recognised initially at cost and Milton has elected to present subsequent changes in fair value in other comprehensive income through the asset revaluation reserve after deducting a provision for the potential deferred capital gains tax liability. On disposal, the cumulative gain or loss, net of tax thereon, is transferred from the asset revaluation reserve to the capital profits reserve. 32 Milton Corporation Limited Notes to the consolidated financial statements: Capital Management for the year ended 30 June 2017 Milton offers its shareholders the opportunity to increase their holdings by participation in the Share Purchase Plan and in the Dividend Reinvestment Plan. Milton may also increase its capital through renounceable rights issues and acquisition of investment companies with the consideration being the issue of Milton shares. 12. Share capital All capital consists of fully paid ordinary shares which are listed on the ASX and carry one vote per share and the right to receive dividends. Movement in share capital No. of shares 2017 $’000 No of shares 2016 $’000 Opening balance 649,922,937 1,545,122 640,255,655 1,504,589 Share Purchase Plan - - 7,746,892 Dividend Reinvestment Plan(1) 2,040,690 8,791 1,920,390 32,373 8,246 Less: Transaction costs (net of tax) - (17) - (86) Closing balance 651,963,627 1,553,896 649,922,937 1,545,122 (1)Milton’s Dividend Reinvestment Plan (DRP) offers shareholders the option to reinvest all or part of their dividend in new ordinary shares. In the 2017 financial year, Milton issued 1,086,782 new shares in September 2016 and 953,908 new shares in March 2017 under the DRP (2016: 998,879 issued in September 2015 and 921,511 issued in March 2016). 13. Reserves Nature and purpose of reserves Changes in fair value of investments are presented in other comprehensive income through the asset revaluation reserve as referred to in note 7b. Upon disposal of investments, the net gain or loss is transferred from the asset revaluation reserve to the capital profits reserve. a. Asset revaluation reserve Opening balance Revaluation of investments net of provision for tax Net realised losses (gains) b. Capital profits reserve Opening balance Net realised (losses) gains 2017 $’000 658,011 127,751 8,691 794,453 68,236 (8,691) 59,545 2016 $’000 739,819 (78,543) (3,265) 658,011 64,971 3,265 68,236 33 Milton Corporation Limited Notes to the consolidated financial statements: Risk for the year ended 30 June 2017 This section of the notes discusses Milton’s exposure to various risks and shows how these could affect Milton’s financial position and performance. 14. Critical accounting estimates, judgements and assumptions Judgements, estimates and assumptions are required to prepare financial statements. Apart from the items mentioned below, there are no key assumptions or sources of estimation uncertainty that have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. i) Deferred tax liabilities from unrealised capital gains are offset against deferred tax assets from realised capital losses as disclosed in Note 2e. ii) Classification of joint arrangements as joint ventures as disclosed in Note 8. 15. Management of financial risk The risks associated with the financial instruments, such as investments and cash, include credit, markets and liquidity risks which could affect Milton’s future financial performance. The Audit & Risk Committee has approved policies and procedures to manage these risks. The effectiveness of these policies and procedures is continually reviewed by management and annually by the Audit & Risk Committee. a. Credit risk exposures Milton’s principal credit risk exposures arise from the investment in liquid assets, such as cash, bank term deposits and income receivable. The risk that financial loss will occur because of a counterparty to a financial instrument fails to discharge an obligation is known as credit risk. The credit risk on Milton’s financial assets, excluding investments, is the carrying amount of those assets. Individual bank limits have been approved by the board for the investment of cash. Income receivable comprises 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. All financial assets and their recoverability are continuously monitored by management and reviewed by the board on a quarterly basis. 34 Milton Corporation Limited Notes to the consolidated financial statements: Risk for the year ended 30 June 2017 b. Market risk Market risk is the risk that changes in market prices will affect the fair value of the financial instrument. The fair value is determined by the unadjusted last sale price quoted on the Australian Securities Exchange at the measurement date. Milton is exposed to market risk through the movement of the security prices of the companies and trusts in which it is invested. The market value of individual companies fluctuates daily and the fair value of the portfolio changes continuously, with this change in the fair value recognised through the asset revaluation reserve. Investments represent 94% (2016: 93%) of total assets. A 5% movement in the market value of investments in each of the companies and trusts within the portfolio would result in a 4.7% (2016: 4.7%) movement in the net assets before provision for tax on unrealised capital gains at 30 June 2017 (2016: 30 June 2016). The net asset backing before provision for tax on unrealised capital gains would move by 21 cents per share at 30 June 2017 (2016: 20 cents at 30 June 2016). Milton’s management regularly monitors the performance of the companies within its portfolio and makes portfolio recommendations which are considered by the Investment Committee. The Milton board reviews the portfolio on a quarterly basis. Milton is not exposed to foreign currency risk as all its investments are quoted in Australian dollars. The fair value of Milton’s other financial instruments is unlikely to be materially affected by a movement in interest rates as they generally have short dated maturities and variable interest rates. c. Liquidity risk Liquidity risk is the risk that Milton is unable to meet its financial obligations as they fall due. Milton manages liquidity risk by monitoring forecast and actual cashflows. 16. Capital risk management The parent entity invests its equity in a diversified portfolio of assets that generates 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 may be increased through the issue of shares under the Share Purchase Plan and the Dividend Reinvestment Plan. Shares may also be issued through renounceable rights issues and as consideration for acquisition of unlisted companies. 35 Milton Corporation Limited Notes to the consolidated financial statements: Group Structure for the year ended 30 June 2017 The consolidated financial statements include the financial statements of Milton, being the parent entity and its subsidiaries. Details of subsidiaries are disclosed in Note 17b below. The balances and effects of transactions between subsidiaries included in the consolidated financial statements have been eliminated in full. 17. Subsidiaries Investments in subsidiaries are carried at net asset value which approximates fair value of the controlled entities. Income from dividends is brought to account when they are declared. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. a. Basis of Consolidation The consolidated financial statements include the financial statements of Milton, being the parent entity and its subsidiaries. The balances and effects of transactions between subsidiaries included in the consolidated financial statements have been eliminated in full. Where entities have come under the control of the parent entity during the year, their operating results have been included in the group from the date control was obtained. Entities cease to be consolidated from the date on which control is transferred out of the group and the consolidated financial statements include the result for the part of the reporting period during which the parent entity had control. b. Milton Corporation Limited’s subsidiaries The following subsidiaries have been included in the consolidated accounts. The parent entity and all subsidiaries are incorporated in Australia: Percentage of Interest held 85 Spring Street Properties Pty Ltd Chatham Investment Co. Pty Limited Incorporated Nominees Pty Limited Milhunt Pty Limited 2017 % 100 100 100 100 2016 % 100 100 100 100 c. Acquisition of subsidiaries No company acquisition was made by Milton during the year ended 30 June 2017 (2016: None). d. Business Combinations The acquisition method of accounting has been used to account for all business combinations. The business combinations have been accounted from the date Milton attained control of the subsidiaries. The considerations transferred for the acquisitions comprise the fair values of the identifiable assets transferred and the liabilities assumed. Costs related to the acquisitions, other than those associated with the issue of equity securities, are expensed to the consolidated income statement as incurred. 36 Milton Corporation Limited Notes to the consolidated financial statements: Other Information for the year ended 30 June 2017 18. Related party transactions a. Directors and Key Management Personnel compensation Short-term benefits Other long-term benefits Post-employment benefits Share-based payments 2017 $’000 1,184 17 103 160 1,464 2016 $’000 1,166 17 102 151 1,436 Information regarding individual directors’ and executives’ compensation and equity instruments disclosures, as permitted by Corporations Regulations 2M.3.03, are provided in the Remuneration Report section of the Directors’ Report on pages 14 to 17. b. Shareholdings of non-executive directors and their related parties – number of shares held Non-executive directors and their related parties held 11.5% (2016:12.1%) of the voting power of Milton as at year end. All shares acquired by non-executive directors and their related parties during the year were purchased on an arm’s length basis. Movements in the number of shares held are given below. There were no amounts outstanding from or due to any non-executive director or their related parties as at 30 June 2017. Number of shares at beginning of the year Acquired during the year Disposed during the year Number of shares held at end of year No of shares No of shares 78,927,571 78,775,660 459,431 (4,296,494) 151,911 - 75,090,508 78,927,571 c. Loans to key management personnel and their related parties Details regarding loans outstanding at the reporting date to key management are as shown below. No loans were granted to related parties of any key management personnel. Balance at beginning of the year Loans advanced Loans repaid Balance at end of the year $ $ 2,677,206 2,440,184 363,112 (139,208) 367,342 (130,320) 2,901,110 2,677,206 Notional interest 160,346 150,359 Notional interest is based on the applicable FBT benchmark interest rate for the year which averaged 5.52% (2016: 5.65%). The loans are advanced to key management personnel in accordance with the Senior Staff Share Plan (SSSP) as disclosed in Note 19 b. Loans to individual key management personnel are disclosed on the remuneration report on page 17. 37 Milton Corporation Limited Notes to the consolidated financial statements: Other Information for the year ended 30 June 2017 d. Other related party transactions All directors have entered into the Deed of Indemnity, Insurance and Access that was approved at the Annual General Meeting held on 10 October 2000. Milton has a Remuneration and Retirement Benefits Deed with each of the non-executive directors except Messrs G.L Crampton and K.J. Eley. During the 30 June 2004 year, Milton and the directors varied the Remuneration and Retirement Benefits Deed, whereby the maximum retirement benefit payable to a non-executive director on retirement will be the provision for the director as at 30 June 2003. Apart from the details disclosed in this note no director has entered into a material contract with the parent entity or Milton since the end of the previous financial year and there were no material contracts involving directors’ interests subsisting at the end of the year. e. Transactions with subsidiaries Dividends paid to parent Capital repaid to parent f. Loans to and from subsidiaries 2017 $ - - - 2016 $ 81,811,084 27,251,635 109,062,719 Loans have been made between the parent entity and wholly owned subsidiaries for capital transactions. The loans between the parent and its subsidiaries have no fixed date of repayment and are non-interest bearing. Amounts owed by/(to) subsidiaries at beginning of the year Loans advanced from subsidiaries Loan advanced to subsidiaries 26,658,200 (1,912,197) (82,439,408) (2,976,109) 3,566,162 112,073,717 Amounts owed by subsidiaries at end of the year 28,312,165 26,658,200 g. Other arrangement with non-executive director Mr J.F. Church rented office space from Milton at commercial rates from 1 July 2016 to 30 June 2017 and rental income received by Milton during the financial year was $13,377 (2016: $12,800). 19. Share based payments Under the Employee Share Plan, shares are acquired for employees as part of their remuneration and the cost of the shares is recorded under employment costs. Under the Senior Staff Share Plan, shares are acquired for eligible employees as part of their remuneration and held on their behalf by the trustee of the Plan. The purchase of the Plan Shares is financed by a loan from Milton. a. Employee Share Plan The Employee Share Plan ("ESP") is available to all eligible employees to acquire ordinary shares in Milton in lieu of a cash bonus of up to $1,000 per year as part of the employee’s remuneration. The transaction and administration costs of acquiring the shares and administering the plan are paid by Milton. During the year, 454 shares (2016:672 shares) were acquired by Milton on behalf of eligible employees under the ESP at a cost of $2,086 (2016: $3,083) with a total market value at 30 June 2017 of $2,048. Any shares acquired cannot be disposed of or transferred until the earlier of 3 years from the date of issue or acquisition or on the date that the employee's employment ceases with Milton. 38 Milton Corporation Limited Notes to the consolidated financial statements: Other Information for the year ended 30 June 2017 b. Senior Staff Share Plan The Senior Staff Share Plan ("SSSP") was approved by shareholders at Milton's Annual General Meeting on 9 October 2001. Eligible employees are given the opportunity to apply for Plan Shares in Milton which are subscribed for or acquired and held on their behalf by the trustee of the plan. The purchase of these Plan Shares is financed by an interest-free limited recourse loan from Milton with recourse only to Plan Shares. The loan will be repaid partially from any dividends received. Milton administers the SSSP and meets the transactional and administration costs. During the year,160,000 shares (2016: 152,000 shares) were acquired by the trustee of the plan on behalf of eligible employees under the SSSP at a cost of $683,505 (2016: $656,893). The loans to eligible employees are as disclosed in note 10b.The shares acquired by the trustee during the year had a market value of $721,600 at $4.51 per share as at 30 June 2017. Any shares acquired are held in the name of the trustee and classified as Restricted Shares which cannot become Unrestricted Shares until the earlier of 3 years from the date of issue to the trustee or acquisition by the trustee or on the date that the employee’s employment ceases with Milton. The trustee may transfer Unrestricted Shares to the participant provided that any outstanding loan has been repaid in full. 20. Auditors Remuneration Auditors of the company Audit and review services Related practice of the auditor Agreed upon procedures 21. Parent entity disclosures 2017 $’000 2016 $’000 113 - 113 109 6 115 In accordance with the Corporations Amendment (Corporate Reporting Reform) Act 2010 and the Corporations Act 2001 the following summarised parent entity information is set out below. As at, and throughout, the financial year ended 30 June 2017 the parent entity is Milton Corporation Limited. Profit of the parent entity Profit for the year Total comprehensive income for the year 121,406 250,129 126,407 49,362 39 Milton Corporation Limited Notes to the consolidated financial statements: Other Information for the year ended 30 June 2017 Financial position of the parent entity as at 30 June Current assets Total assets Current liabilities Total liabilities Net assets Total equity of the parent entity comprising of Issued capital Capital profits reserves Asset revaluation reserve Retained profits 2017 $’000 2016 $’000 177,437 2,944,074 (1,269) (340,021) 181,105 2,750,812 (1,043) (284,681) 2,604,053 2,466,131 1,553,896 1,545,122 68,123 848,071 133,963 76,814 710,657 133,538 Total equity attributable to shareholders of the parent entity 2,604,053 2,466,131 22. Summary of other accounting policies a. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, Australian accounting interpretations, other authoritative pronouncements of the Australian Accounting Standards Board, the Corporations Act 2001 and complies with International Financial Reporting Standards (IFRS). Accounting policies adopted in the preparation of these financial statements have been consistently applied to all the years presented, unless otherwise stated. The financial statements include the consolidated entity (“Milton”) consisting of Milton Corporation Limited and its subsidiaries. Milton is a ‘for- profit’ entity. These financial statements have been prepared on an accruals basis and are based on the historical cost basis except as modified by the revaluation of certain financial assets and liabilities measured at fair value. New and amended standards adopted: AASB 2015-2 Amendments to AASB 101 (Presentation of Financial Statements) which applies to annual reporting periods commencing on or after 1 January 2016 was early adopted since the preparation of financial statements and notes for the 2015 financial year. AASB-9 Financial Instruments Standard which applies to annual reporting periods commencing on or after 1 January 2018 was early adopted by Milton since the 2010 financial year. New and amended standards not adopted: AASB 15 Revenue from Contracts with Customers is applicable to annual reporting periods beginning on or after 1 January 2018 and is not expected to have any material impact on Milton’s financial statements. AASB 16 Leases is applicable to annual reporting periods beginning on or after 1 January 2019 replaces AASB 117 'Leases' for lessees will eliminate the classifications of operating leases and finance leases. Milton does not expect this standard to have any material impact on Milton’s financial statements. No other new accounting standards and interpretations that are available for early adoption but not yet adopted at 30 June 2017, will result in any material change in relation to the financial statements of Milton. 40 Milton Corporation Limited Notes to the consolidated financial statements: Other Information for the year ended 30 June 2017 b. Rounding of amounts Unless otherwise stated under the option available in ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191, the financial statements are presented in Australian dollars and all values are rounded to the nearest thousand dollars ($'000). c. Operating segments The consolidation entity operates in Australia and engages in investment as its principal activity. As such Milton considers the business to have a single operating segment. 23. Cash flow information a. Reconciliation of net profit to net cash provided by operating activities Net profit Share of net profits of joint ventures – equity accounted Distributions received from joint venture entities Depreciation of non-current assets (Increase) in receivables Increase in payables and provisions 2017 $’000 2016 $’000 122,377 127,905 (1,204) 1,683 28 (1,296) 30 (1,789) 5,066 13 (649) 94 (690) Increase (Decrease) in income taxes payable 482 Net cash provided by operating activities 122,100 129,950 b. Non-cash financing and investing activities During the year ended 30 June 2017, Milton did not engage in any material non-cash investing or financing transaction (2016: None). 24. Contingent liabilities Apart from the contingent liability relating to the Huntlee joint venture disclosed in Note 8c, the directors are not aware of any other material contingent liabilities 25. Events subsequent to reporting date Since the end of the financial year, the directors declared a fully franked ordinary final dividend of 10 cents per share payable on 5 September 2017. Milton entered into an agreement to acquire all of the shares of a private investment company with an investment portfolio valued at approximately $18M. Consideration for the acquisition will comprise Milton shares which are expected to be issued on an ex-dividend basis by the 31 August 2017. This financial report was authorised for issue in accordance with a resolution of directors on 3 August 2017. The directors have the power to amend and reissue the financial statements. 41 26. Holdings at Fair Value through Other Comprehensive Income at 30 June 2017 The following holdings are valued at fair value through Other Comprehensive Income. 2017 Market value $’000 2016 Market value $’000 Investments in equity instruments Adelaide Brighton Limited AGL Energy Limited ALS Limited Amcor Limited AMP Limited A.P. Eagers Limited APA Group ARB Corporation Limited Argo Investments Limited ASX Limited AUB Group Limited Australia & New Zealand Banking Group Limited - ordinary shares - convertible preference shares - capital notes 2 Australian Foundation Investment Company Limited Auswide Bank Limited Automotive Holdings Group Limited Aveo Group Bank of Queensland Limited Bendigo & Adelaide Bank Limited BHP Billiton Limited BKI Investment Company Limited Blackmores Limited Boral Limited Bradken Limited Brambles Limited Brickworks Limited BT Investment Management Limited BWP Trust Caltex Australia Limited Carlton Investments Limited Carsales.Com Limited Challenger Limited Charter Hall Group Charter Hall Long WALE REIT CIMIC Group Limited Coca-Cola Amatil Limited Cochlear Limited Commonwealth Bank of Australia Cover-More Group Limited CSL Limited Diversified United Investment Limited DuluxGroup Limited EQT Holdings Limited Event Hospitality & Entertainment Limited Finbar Group Limited Fletcher Building Limited Flight Centre Travel Group Limited Goodman Group GrainCorp Limited Gresham Private Equity Co-Investment Fund Growthpoint Properties Australia Insurance Australia Group Limited - ordinary shares - convertible preference shares 42 15,966 68,796 45,292 21,422 11,009 48,765 18,393 14,313 7,561 29,430 13,572 96,776 - 203 - 2,229 11,311 2,386 83,655 63,264 84,668 1,983 35,175 14,190 - 13,953 44,605 7,495 4,720 10,431 11,238 11,462 5,069 6,859 3,853 30,732 13,535 5,254 257,535 - 81,741 - 11,487 8,867 13,516 2,226 6,113 3,075 10,163 3,431 18 1,265 39,645 - 15,239 51,656 31,587 18,207 10,945 69,589 18,534 14,682 7,265 25,121 10,552 81,276 1,960 185 7,050 2,203 11,943 4,750 77,371 54,813 67,829 1,934 48,222 10,365 827 17,742 46,448 4,150 5,766 5,997 11,317 11,334 1,122 - - 28,287 12,069 4,098 231,287 2,591 66,433 1,167 10,461 8,231 13,381 2,309 6,554 1,841 7,881 3,127 21 - 30,603 305 26. Holdings at Fair Value through Other Comprehensive Income at 30 June 2017 The following holdings are valued at fair value through Other Comprehensive Income. 2017 Market value $’000 2016 Market value $’000 IAG Finance(NZ) Limited Perpetual - Reset Exchangeable Notes Incitec Pivot Limited InvoCare Limited IOOF Holdings Limited Janus Henderson Group PLC Lendlease Group Lindsay Australia Limited Macquarie Group Limited McMillan Shakespeare Limited MyState Limited National Australia Bank Limited New Hope Corporation Limited Orica Limited Origin Energy Limited Orora Limited Perpetual Limited Premier Investments Limited QBE Insurance Group Limited Qube Holdings Limited Ramsay Health Care Limited Reece Limited Regis Healthcare Limited Rio Tinto Limited Santos Limited Scentre Group Schaffer Corporation Limited Select Harvests Limited Seven Group Holdings Limited - TELYS4 preference shares Sims Metal Management Limited Sonic Healthcare Limited Stockland Group Suncorp Group Limited Sydney Airport Tank Stream Ventures Tatts Group Limited Telstra Corporation Limited TPG Telecom Limited Transurban Group Treasury Wine Estates Limited UGL Limited Vicinity Centres Washington H. Soul Pattinson & Company Limited Wesfarmers Limited Westfield Corporation Westpac Banking Corporation Woodside Petroleum Limited Woolworths Limited WorleyParsons Limited 43 - 5,492 28,678 16,821 4,839 11,697 4,816 57,790 8,436 2,158 140,786 1,974 3,916 4,817 3,130 68,831 7,479 30,920 15,239 13,968 8,993 6,194 36,925 5,101 7,288 483 793 525 6,867 15,123 13,819 49,117 18,502 266 4,846 64,376 23,193 41,629 15,714 - 16,585 152,941 113,762 6,914 318,869 27,804 74,167 2,750 2,763,980 1,200 4,784 25,635 10,177 - 5,853 5,599 44,795 6,509 1,838 120,992 1,832 2,330 4,038 3,021 55,894 8,417 27,310 11,953 13,332 7,923 4,203 26,555 7,811 8,853 352 1,091 392 5,727 13,456 13,108 39,003 18,111 89 8,839 83,240 44,405 42,121 11,021 3,120 21,425 155,969 113,705 9,170 307,266 23,642 60,664 3,061 2,568,458 26. Holdings at Fair Value through Other Comprehensive Income at 30 June 2017 The following holdings are valued at fair value through Other Comprehensive Income. Other liquid securities APT Pipelines Limited Bank of Queensland Limited - convertible preference shares Colonial Group - subordinated notes 2017 Market value $’000 2016 Market value $’000 1,029 5,180 - 6,209 1,016 5,170 1,013 7,199 44 DIRECTORS’ DECLARATION 1. In the opinion of the directors of Milton Corporation Limited: (a) the consolidated financial statements and notes that are set out on pages 19 to 44 and the Remuneration report, that is set out on pages 14 to 17 in the Directors’ report are in accordance with the Corporations Act 2001, including: (i) giving a true view of the consolidated entity’s financial position as at 30 June 2017 and of its performance for the financial year ended on that date; (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (iii) complying with International Accounting Standards as issued by the International Accounting Standards Board as described in Note 22a to the financial statements; and (b) there are reasonable grounds to believe that Milton Corporation Limited will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2017. Signed in accordance with a resolution of the directors. R. D. MILLNER Chairman Sydney, 3 August 2017 45 Independent Auditor’s Report to the Members of Milton Corporation Limited A.B.N. 18 000 041 421 REPORT ON THE FINANCIAL REPORT We have audited the accompanying financial report of Milton Corporation Limited and its controlled entities (“the consolidated entity”), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration. Opinion In our opinion a) the financial report of Milton Corporation Limited and its controlled entities is in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the consolidated entity’s financial position as at 30 June 2017 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001. b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 22 Basis of preparation. Basis of Opinion We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. Our responsibilities under those standards are further described in the Auditor’s Responsibility section of our report. We are independent of the consolidated entity in accordance with 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. An independent New South Wales Partnership. ABN 17 795 780 962. Liability limited by a scheme approved under Professional Standards Legislation. 46 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 year. We have communicated the key audit matters to the Audit Committee, but they are not a comprehensive reflection of all matters that were identified by our audit and that were discussed with the Committee. 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 matter Ownership and accurate recording of investments in equity instruments and related movement in reserves Refer to Note 2(d): Deferred tax liabilities, Note 7 Investments in equity instruments and Note 13 Reserves At 30 June 2017, the consolidated entity’s balance sheet includes investments in equity instruments of $2,763,980,000, an asset revaluation reserve of $794,453,000 and a deferred tax liability recognised in relation thereto of $348,680,000. Listed investments are valued continuously at fair value, which is determined by the unadjusted last-sale price quoted on the Australian Securities Exchange. Changes in fair value of equity instruments are recognised in other comprehensive income through the asset revaluation reserve after deducting a provision for the potential deferred capital gains tax liability, as investments are long term holdings of equity instruments. Given the significance of the balances, the key audit matter for us was whether the consolidated entity has accurately recorded the above balances and the movement in the past 12 months and has ownership of the investments at year end. Our procedures included, amongst others: § We documented our understanding of management’s processes and related key controls. § We performed testing of key controls to ensure that appropriate review and analysis by management is performed regularly. § We confirmed the proper recording and ownership of a sample of investments and transactions during the year by agreeing the SRN/HIN numbers to share registry holding statements online and to the books and records of the consolidated entity. § We analysed and tested the movement of investments in relation to purchases and disposals. § We tested management’s calculation of the revaluation of investments and the corresponding deferred income tax effect during the year. 47 Other information The Directors are responsible for the other information. The other information comprises the information in the consolidated entity’s annual report for the year ended 30 June 2017, 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 consistent 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. Directors’ Responsibility for the Financial Report The Directors of Milton Corporation Limited are responsible for the preparation and fair presentation 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 controls as the Directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the consolidated entity’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 consolidated entity or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our responsibility is to express an opinion on the financial report based on our audit. 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 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 report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. 48 The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. We conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the consolidated entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the consolidated entity to cease to continue as a going concern. We evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. We obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the consolidated entity to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the consolidated entity audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. The Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the consolidated financial report of the current period and are therefore key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 49 REPORT ON THE REMUNERATION REPORT Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 14 to 17 of the Directors’ Report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Milton Corporation Limited for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of Milton Corporation 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. M A Alexander Partner 3 August 2017 Sydney Pitcher Partners 50 DIRECTORY DIRECTORS MANAGEMENT R. D. MILLNER - Chairman F.G. GOOCH - Managing director D.N. SENEVIRATNE - CFO, Secretary J. F. CHURCH G.L. CRAMPTON K.J. ELEY F. G. GOOCH - Managing director J.E. JARVINEN I. A. POLLARD REGISTERED OFFICE & PRINCIPAL PLACE OF BUSINESS LEVEL 4, 50 PITT STREET SYDNEY NSW 2000 PHONE: (02) 8006 5357 FAX: (02) 9251 7033 EMAIL: general@milton.com.au WEBSITE: www.milton.com.au AUDITORS PITCHER PARTNERS LEVEL 22, MLC CENTRE 19 MARTIN PLACE SYDNEY NSW 2000 WEBSITE: www.pitcher.com.au SHARE REGISTRY LINK MARKET SERVICES LIMITED LOCKED BAG A14 SYDNEY SOUTH NSW 1235 PHONE: (02) 8280 7111 FAX: (02) 9261 8489 TOLL FREE: 1800 641 024 EMAIL: milton@linkmarketservices.com.au WEBSITE: www.linkmarketservices.com.au 51 TOP 20 SHAREHOLDERS AS AT 30 JUNE 2017 ASX INFORMATION NAME Washington H Soul Pattinson & Company Limited Higlett Pty Ltd Argo Investments Limited Australian Foundation Investment Company Limited Griffinna Pty Ltd Bortre Pty Limited Danwer Investments Pty Ltd JBF Holdings Pty Ltd Chickenfeed Pty Ltd Jamama Nominees Pty Limited J S Millner Holdings Pty Limited Redemptorists Macdawley Proprietary Limited Gartfern Pty Limited Hexham Holdings Pty Limited Millane Pty Limited A V L Investments Proprietary Limited T N Phillips Investments Pty Ltd Ms Julia Jane Drew Mr James David Oswald Burns SHARES HELD 30,047,758 27,539,279 25,919,808 10,841,468 6,355,020 6,079,504 6,079,504 5,253,920 4,218,449 4,195,685 3,743,514 3,577,000 3,479,615 3,313,584 3,230,079 3,165,269 2,979,080 2,962,664 2,875,000 2,724,955 % 4.61 4.22 3.98 1.66 0.97 0.93 0.93 0.81 0.65 0.64 0.57 0.55 0.53 0.51 0.50 0.49 0.46 0.45 0.44 0.42 On 30 June 2017, there were 24,726 holders of ordinary shares in the capital of Milton. Holders of ordinary shares are entitled to one vote per share. Number of shares held Number of shareholders 1-1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over The number of holders of less than a marketable parcel of $500 (110 shares) OTHER INFORMATION Milton is taxed as a public company. There is no current on-market buy-back. The total number of transactions in securities undertaken by Milton was 284 and the total brokerage paid or accrued was $329,027. 2,957 6,691 5,088 9,357 633 646 52 SHARE ISSUES HISTORY Date 19.10.2007 03.10.2008 09.10.2009 30.09.2013 22.10.2013 01.10.2014 02.10.2015 Date 23.03.2007 14.05.2007 20.06.2007 24.09.2007 19.02.2009 26.02.2010 20.08.2010 21.02.2013 24.02.2014 Issue price per share $22.48 $17.85 $16.08 $19.12 5 for 1 share split $ 4.45 $ 4.18 Shares issued 1,895,976 2,424,582 252,477 1,223,252 3,555,958 4,132,711 2,446,521 521,464 3,280,382 Shares issued 8,273,505 23,803,854 Share Purchase Plan history Date 10.11.1999 13.11.2000 13.11.2001 08.11.2002 31.10.2003 29.10.2004 21.10.2005 16.10.2006 Issue price per share $ 8.75 $ 8.86 $10.79 $11.70 $13.21 $14.10 $17.11 $19.60 Acquisition of unlisted companies Date 21.06.2002 31.12.2002 11.03.2004 01.04.2004 17.08.2006 23.08.2006 28.08.2006 21.09.2006 10.11.2006 Shares issued 2,287,200 1,739,112 2,742,777 496,809 1,000,322 1,476,254 382,404 278,103 1,888,353 Acquisition of listed investment companies Date 31.12.2001 16.12.2010 Company Cambooya Investments Limited Choiseul Investments Limited Dividend Reinvestment Plans Date 04.03.2014 03.09.2014 03.03.2015 03.09.2015 03.03.2016 02.09.2016 02.03.2017 Shares issued 187,207 698,365 712,273 998,879 921,511 1,086,782 953,908 Price $4.27 $4.55 $4.56 $4.39 $4.19 $4.28 $4.34 Share Split Date 22.10.2013 Ratio Five shares for one The number of shares issued prior to this date have not been adjusted for the share split. A full list of issues to shareholders since commencement of Capital Gains Tax in September 1985 can be found on the company’s website at www.milton.com.au 53 

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