Update No. 278 – 31/08/16

August was a good month for the fund. Particularly in light of a retreating market.

We eliminated three positions over the course of the month. The first of them (SVWPA) we only owned for less than a day, which is far from usual EGP behaviour, but I will make money any way I can for our investors. A buyback was announced for SVWPA (the preference shares of Seven Group Holdings) on 3 August. The market at open looked like it was barely going to react to the news, which I thought should have caused a lift in price, so I bought 1000 @$66.31. I sold them a few minutes later for $68.82. After brokerage, we profited to the tune of $2,411.72, which is immaterial to the fund overall, but I have committed to profiling sales here in the blog, and occasional actions such as this keep the hands busy when interest rates are low and cash levels are high and no other obvious opportunities present.

The second sale was also an unfortunately short-term position. We sat on the bid for Arowana (AWN) for the longest time, trying to acquire a small position. In the end, we got about one-third of the starting position we were trying to build (i.e. really 1/6^th of what a normal position would be). The price subsequently exploded to about 40% higher. We thought they were very cheap when we were buying at 40.5 cents per share, and we know some smart operators who are still buying at prices nearly twice that level, but given it was such a tiny position, we sold to try to retain a focus on our larger holdings. The buyer of our stock has done very nicely, but we made more than $7,500 after costs for a holding period covering only 46 days. Again, not material in terms of the overall fund results, but reported out of our commitment to (post-hoc) openness.

Truth be told, the third sale was also considerably shorter-term than the majority of our ownership situations. We acquired our stake in Service Stream (SSM) at an average price a shade under 18.1 cents per share in November 2014. We eliminated our position over the course of the last month or so at an average price of 93cps. Along the way, we’ve received 7.5cps in dividends and capital returns. Every dollar we invested in SSM returned us more than $5.25 in less than two short years and our IRR was an eye-popping 167.7%. SSM operate in a tricky industry, and in our view should probably command valuation multiples below market levels, whereas current valuation multiples are quite near market multiples. With that said, there are excellent tailwinds for their main businesses, so continued good performance is certainly probable. Our discovery of SSM is due in no small part to Peter Phan at Castlereagh Equity, whose performance holders of EGP looking to diversify into other funds would be well advised to stay abreast of (you can sign up to receive the memorandums on the website…). After Peter’s explanation of SSM and a serendipitous meeting with one of their directors, who further explained the value drivers, all the pieces fell into place for an excellent outcome. We are currently benefitting from following Peter into another attractive idea (I do come up with my own ideas periodically).

While I’m on the subject of investors you should keep an eye on, sharing space in my new office in Bligh Street, is another fellow you might like to put on a watch, Kristian Dibble, his Sapient Capital website has only recently activated, but his fund kicked off in December 2015 and has outperformed handsomely in the short time since inception.

It has been an unusually active start to FY17 in terms of sales; we have turned over 6.8% of the portfolio FYTD, which is usually 8 or 9 months’ worth of sale activity at our historic turnover rates. We’ll hopefully be more sedate over coming months.

We are currently computing the ‘portfolio metrics’ figures, and await only a couple of our holdings that report a month ajar to the traditional financial year. If they’re not posted on the mid-September blog, they should definitely be available by the blog at September’s end. Our August Update is available on the ‘Reporting’ tab – Tony Hansen 31/08/2016

^{*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 and a 31 May 2016 Dividend of 6.0000 cps plus a 2.5714 cps Franking Credit}

^{*2 calculated based on dividends reinvested}