Update No. 258 – 11/03/16

The portfolio metrics based on 31 December 2015 balance date and 11 March 2016 prices:

The earning season was again quite strong for EGP holdings. Despite this, a number of the valuation metrics listed above have become ‘more expensive’. Since Update 232 when I last reported the weighted metrics, EV/E has increased from 8.3 to 9.5 and P/E from 10.3 to 11.0 and EV/EBITDA increased from 5.9 to 6.6. The NTA per dollar of market capitalisation decreased from 92c to 82c.

These changes are mostly no surprise when you consider the EGP share price is up by more than 8% on the 6 month period.

Weighted ROE improved from 14.7% to 16.1% and dividend yield from 5.0% to 5.1%. Weighted market capitalisation increased from $565m to $769m.

If I were to describe the changes over the last 6 months, I would say the better than 8% EGP share price increase was nearly offset by increases in earnings of the existing holdings over the period. That being the case, metrics like P/E & EV/E should have been roughly stable. The changes in the portfolio valuations are mostly attributable to a new position we have added in the intervening period. I will not name the position at this stage, but it is a larger capitalisation business and depending on the day, has become our 5^th or 6^th largest holding. It is not ‘cheap’ on traditional valuation metrics, at around 19x P/E and 11.8x EV/EBITDA. In fact it is second in these metrics to our largest capitalisation holding, Medibank (MPL) which despite its valuation metrics never looking ‘cheap’ has delivered an IRR of 45.5% over our brief holding period (which makes the 9.33% we were allocated of our attempted IPO subscription all the more upsetting). But we think the earnings of this business will grow very strongly over the next 3-5 years and a slightly higher multiple will be well justified should it do so.

The portfolio remains inexpensive in my estimation. I expect a weighted average profit growth of about 10-14% over the next 12 months. Given our weighted yield is 5.1% (franked to about 60%), our grossed up yield is about 6.5%. If my forecast of around 12% profit growth is correct, valuation metrics hold constant and the 6.5% grossed up yield is correct, the implication is for a return of 18.5% over the next 12 months (bear in mind, if the weighted average P/E fell from 11.0x to 9.8x, all else constant, the capital value of the portfolio would not change even if a 12% profit uplift eventuated).

Obviously, valuations never remain constant, and my forecasting cannot be relied upon (nor can anyone else’s – look at Iron Ore prices forecasts over the last 5 years…), but I am certainly pleased to be adding to my family position in EGP at the upcoming intake, and hope any fellow EGP-ers with any spare capital will join me in so doing. If the fact that the EGP share price hit another new all-time high today makes you hesitate to increase your holdings, consider this, my family and I have added to our holdings at the highest price ever paid for EGP shares in the following intakes:

1. June 2011;
2. December 2012;
3. May 2013;
4. September 2013;
5. December 2013;
6. March 2014;
7. May 2014;
8. March 2015 and
9. December 2015

The price often traded lower for a while afterwards, but it has tended to be the right thing to do to add to our holdings when spare capital was available, so we will scrape around to see what we can find before the end of March…

If you want to look back through past ‘Portfolio Metrics’ posts (they’re issued around mid-March and mid-September each year since I began the concept), this link is a search for the term ‘Portfolio Metrics’ on the blog and will assist you in finding equivalent past posts – Tony Hansen 11/03/2016

EGP Fund No. 1 Pty Ltd. Up by 8.37%, leading the benchmark by 8.59% since July 1^st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 101.21%, leading the benchmark by 65.11% all-time (April 1^st 2011).

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit}

^{*2 calculated based on dividends reinvested}