Update No. 180 – 12/09/14

Our invitation to invest e-mail went out this week. Any readers who would like to receive the invitation should contact me by e-mail.

This blog will be dedicated to the bi-annual ‘Portfolio Metrics’ review. As I mentioned in the invitation to invest e-mail, the portfolio got ‘more expensive’ as compared to the March figures. I further said this was explainable, so I will try to demonstrate the portfolio is at least as good a value as it was in March.

The portfolio in broad terms appears about 10% more expensive on the metrics set out in the table below; the largest part of that difference can be explained by the fact that our underlying asset values are about 5.5% higher than the levels at the end of March. The second contributor is that we have acquired holdings in a few businesses with higher multiples, these stocks have been among the better performers over the 6 months in terms of stock price, meaning their proportional influence on the metrics listed below has grown. These higher multiple stocks are held because they have very good prospects for earnings growth, they proved that out through the recent reporting period.

Finally, our two largest holdings, United Overseas Australia (UOS) and Dicker Data (DDR) had meaningful earnings declines ‘half on half’. UOS is a property developer and although the result was weaker in the June half than I’d expected, I still expect the general trend in earnings to remain positive and for this holding to underpin long-term solid performance for EGP, the much weaker cashflow in the June half for UOS also impacted the Free-Cashflow yield of the portfolio.

The decline in DDR was due to the expensing of costs relating to the acquisition of Express Data. DDR now trades on a multiple of around 40x trailing 12 months statutory earnings. Despite this apparently very lofty price, management have forecast PBT of around $30m and dividends per share of 15c in FY15. If the results generated get within two-thirds of these targets, DDR is very cheap in the $1.70’s price range it currently seems to be trading in. Assuming no new equity (management have flagged the intention to raise some equity through both DRP & possible institutional raising), the achievement of these forecasts would have DDR trading on a forward (FY15) multiple of about 11x and a yield of more than 9%. If I were to plug those DDR figures into the calculations that create the table below, the multiples set out would mostly immediately be better than the March half (such is the power of a substantial holding going from 40x to 11x earnings in a year).

Our holdings as a group are starting to spend considerably more on Capex, this should be a positive sign for future earnings also if the Capex has been wisely conducted.

Between a little buying and selling we are looking to do and expected step-changes in the results of our holdings, I am extremely hopeful of substantial improvements in our metrics when we next report them in 6 months’ time. In the mean-time, you can remain satisfied that virtually every metric set out below is well cheaper than the broader market, yet I expect our group as a whole should be able to grow earnings and cashflows at rates that equal or exceed that of the market. It is for this reason that I view our portfolio as carrying substantially less risk than the market as a whole – Tony Hansen 12/09/2014

EGP Fund No. 1 Pty Ltd. Up by 1.92%, trailing the benchmark by 1.90% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 73.57%, leading the benchmark by 39.56% all-time (April 1^st 2011).

^{*1 after 31May 2013 dividend of 2.333 cents per share plus 1.000 cent per share Franking Credit & 31 May 2014 Dividend of 7.000 cents per share plus 3.000 cent per share Franking Credit}

^{*2 calculated based on dividends reinvested}