Update No. 14 – 03/07/11

*Note – Unaudited Period Closing Price

EGP Fund No. 1 Pty Ltd. Up by 8.40%, leading the benchmark by 12.42%. Please note this is the unaudited result, though I do not expect there will be any reason for our auditor to alter our calculation of NTA.

EGP 20.  The EGP20 index is Down by 11.63%, lagging the benchmark by 7.61%.

S&PASX200TR    The benchmark index was Down by 4.02% in the April quarter.

These were the first 10 constituents of the EGP20 (for the second half of calendar 2011) I nominated last week:

1. OST
2. OMH
3. ERA
4. OGC
5. PBG
6. RSG
7. AGO
8. BOQ
9. SIP
10. AIX

As I said last week, I will give a little more explanation behind the second 10 members of the EGP 20 this week:

1. RIO– Rio Tinto Limited.  RIO and BHP are both churning out unbelievable amounts of cash due to China’s insatiable appetite for commodities.  Although both are enormous and well covered by analysts, I believe they will both outperform the broader market by a handsome margin over the medium term.  Key risks are a major problem with Chinese demand or being overcome by the need to ‘do something’ with the constant stream of cash pouring into the coffers.  Both companies need to remember, there is no shame in returning cash to shareholders if there is no truly compelling opportunity.
2. FXJ – Fairfax Media Limited.  I have been a long-time bear on the prospects of media companies, when my daughter was born in 2000, I was telling anyone I’d discuss stocks with that my greatest feeling was about what not to buy.  The stock I most advised avoiding was NWS (News Corporation), it was a prescient call, every $1 invested in NWS at her birthday would now be worth about 48c (NWS earns about 3x as much per share now too).  The world is changing too fast and ‘monetising’ web traffic etc has proved extraordinarily difficult.  Now that I’ve said all that, I think FXJ is too cheap to ignore at current prices, it will continue to be profitable and in my view is likely to be earning more per share in 5 years’ time than it is now.  I wouldn’t own it with our assets, but if I were restricted to ASX200 companies, I would certainly be giving it some thought.
3. BHP – BHP Billiton Limited.  Ditto the RIO sentiment above.
4. APN – APN News and Media Limited.  I like APN for similar reasons to FXJ above.  The media and advertising industry is at a cyclical low, from which it will in my view recover.  APN are unlikely to grow their earnings really substantially in the next few years, but in my view, they are likely to grow them somewhat, fractional growth would make them very cheap at today’s prices.
5. GNS – Gunns Limited.  GNS have destroyed shareholder wealth like champions, it is a difficult industry, and they have a poor track record.  Despite this, I think there is enormous upside potential in this business which would warrant further investigation, were it not for a raft of better opportunities, with substantially less downside risk outside of the ASX200, which we are already invested in.
6. KCN – Kingsgate Consolidated Limited.  For someone who doesn’t like gold, it may puzzle readers to find a 3^rdgold miner in the EGP20.  I cannot ignore a consistently profitable producer with a good track record and sound reserves, just because I don’t appreciate the yellow metal as others do.  That would be like not owning Coke shares because you don’t like the taste, even though about 6 billion other people do…
7. JBH – JB Hi-Fi Limited.  I appreciate there is significant uncertainty in the retail sector at the moment.  What I cannot grasp is why JBH is selling so cheaply, truly outstanding businesses such as this rarely sell below their intrinsic values, my intrinsic valuation for JBH is on the north side of $22.  I would be surprised if JBH were not earning in excess of $2.50 per share by 2020, at about $17 in 2011, they are very cheap.
8. HVN – Harvey Norman.  Similar industry to JBH, very different business.  HVN has the defensive advantage of having a huge portion of its earnings underpinned by its property portfolio.  Couple this with what I believe is a cyclical low in retail, and I believe HVN at under $2.50 is a safe bet.
9. HIL – Hills Holdings Limited.  HIL is a business owning outstanding brands with a strong record of profitability and cashflow is currently being hammered by the market due to what will no doubt be a year with a poor result.  It is to my constant bemusement (and personal enrichment) that the market broadly oversells sound businesses when they face some short-term headwinds.  I wouldn’t expect HIL to set EPS records in the next few years, but at about $1.20, I think the market has seriously overreacted to a weak business period.
10. DOW – Downer EDI Limited.  DOW has had a very hard time, chiefly due to the issues surrounding the ‘Waratah’ rail contract.  I think the market has oversold this one too, the profit from the ‘Waratah’ contract was always going to be ‘back-end loaded’, I think the issues will be worked through and sometime in the next 10 years, they will be setting new EPS records and those people who acquired them at the current $3.70 price will be quite satisfied with their returns in comparison with the market.

Two notes this week, the usual one about doing your own research and seeking advice (the above is my opinion and subject to change due to new information etc).  The second note is that the (NTA) figures quoted above are unaudited, though I don’t think they should need to change due to audit.  The first 3 months for EGP Fund No.1 Pty Ltd has proven extremely satisfactory, I hope it will continue to do so, for our 8 new shareholders, welcome aboard and to those existing holders who added to their holdings, I thank you for the faith you have placed in me and I will do my utmost to deliver another strong result in the second half of 2011 – Tony Hansen 03/07/2011