Update No. 193 – 12/12/14

We completed the final sale of a stock we have held since inception and finished selling on 27 November.

The stock is Zicom Group (ZGL.ASX). The business is a conglomerate style operation, with an ‘old-school’ manufacturing arm that is being used to fund ventures in a number of ‘new-school’ or ‘start-up’ type fields.

We bought because the old-school businesses were profitable and selling at a pretty cheap price, simple, reliable, profitably manufacturing things like concrete mixers, hydraulic systems, marine decking and oil and gas equipment etc. There was a precision engineering arm that seemed to be growing like a weed. These businesses alone appeared to be worth at least the asking price on market. The potential upside, along with very good growth prospects of precision engineering were some small investments in ‘disruptive technologies’.

Since the inception of EGP, we purchased over the years about 800,000 shares in ZGL at an average price of 25.6 cents per share. We sold our whole stock for an average of 25.2 cents per share. Our IRR over the holding period was 4.3% per annum, only the decent dividend saved us, it was not an investment that performed well and given we had a decent chunk of our capital tied up in this business and have still achieved returns exceeding 15% annually, it gives you an idea the sort of anchor this position was to performance.

Interestingly, it appears we sold at least a portion of those shares to the CEO and major shareholder GL Sim who has been buying on market of late. I remain of the view that the business will likelier than not do pretty well over time, a recent announcement indicates orders are picking up at the primary business. There is a better than average chance the buyer at today’s prices (which are down nearly 10% since we sold) will do quite well. The primary business seems to be on the other side of their business cycle (though the current fall in oil prices could slow down somewhat the parts of the business exposed to oil & gas) and the ‘disruptive technologies’ only need to stop consuming cash and the business as a whole will benefit, Should they turn one or more profitable, there is great potential. But as with virtually all sales, it comes down to my having a greater certainty about the superior potential of alternative applications for the funds. So we sell.

One issue this business does have is what appears to be a slightly indifferent attitude by the founding family to minority shareholders. They seem for example to be particularly adroit at timing option grants at low points of the cycle, but that may just be a coincidence – Tony Hansen 12/12/2014

EGP Fund No. 1 Pty Ltd. Down by 1.81%, trailing the benchmark by 0.5% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 67.26%, leading the benchmark by 39.88% 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}