Update No. 187 – 31/10/14

We have done a little selling of late, closing out a couple of positions and trimming a couple of others.

This week I will cover the first of the completed sales, AMA Group Limited. AMA is not expensive at current prices, but is on the lower side of the IRR I target for EGP.

We started accumulating a position in AMA group earlier in 2014 with purchases between 23.5cps and the majority at 26.5cps. We didn’t really manage to complete the full intended position as the price ran away and I was reluctant to chase the price up. In hindsight, I should have bought with more conviction when I started.

We were paid the recent fully franked dividend and exited our position at an average price of 32cps for an excellent annualised return exceeding 60%.

Based on the numbers management has indicated for FY15, revenues should be around $90m, PBT is likely to be something like $12.5m and NPAT will be something like $8.7m, or EPS of about 2.6cps. Working capital was squeezed nicely in FY14, so cashflow may not be quite as good relative to NPAT (i.e. lower cash conversion ratio) in FY15. This places AMA on a forward multiple of about 12.3x, which in this market is an undemanding multiple and for a company that has executed extremely well over the past few years and has access to sufficient capital to exploit a consolidating industry. AMA could still be comfortably described as fairly cheap relative to a fully valued market. In fact, I am almost certain we have left decent above market gains on the table, but a couple of very well priced opportunities which I expect to offer even better mid-term returns have presented themselves and as AMA was a smaller position it made sense to take a good, albeit small win and move on to greener pastures. I have a good sense that CEO Ray Malone may make me regret this, but without a crystal ball, I feel the sale is the best. It should be remembered I kicked myself for sales of MXI at 75c, 99c & into the $1.40’s, I am now being offered the opportunity to rebuild that position (should I so choose) at prices in the low 60c range, ahh Mr Market, you lovely creature.

When we commenced building a position in the mid 20cps range, the centre point of the future I modelled involved 2019 EPS of around 3.5cps and a terminal P/E multiple of about 14, for a mid-point of expectations 2019 share price of about 50c. Given perhaps 8 or 10c (conservatively) of dividends over the intervening 5 years, at a terminal 2019 valuation of 60cps including dividends, I modelled an IRR exceeding 20% annually. With the rerating of the share price having happened so quickly, and with my future expectations of the business largely unchanged, the expected future return is now probably between 12 to 15% annually, the owner of AMA in my view is likely to do better than the broader market. The obvious implication is that I think I can have EGP perform still better than that. A few years hence, fellow owners, you may bookmark this post and remind me how we went – Tony Hansen 31/10/2014

EGP Fund No. 1 Pty Ltd. Up by 1.92%, trailing the benchmark by 1.89% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 73.56%, leading the benchmark by 39.58% 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}