Update No. 128 – 01/09/13

Existing holders will receive their quarterly invitation to invest over the weekend. The first quarter FY2014 intake will be based on the published closing price on September 27th, given that the 30th is a Monday. If for any reason you don’t receive your e-mail and wish to subscribe, contact me Tony@eternalgrowthpartners.com and I will forward the documentation.

The benchmark hit a new record high (surpassing the mark set on 12 May this year) since EGP’s inception this week, our shares also hit an all-time high this week (for the 5th consecutive week) and our lead over the benchmark is also at its highest level since inception. Reporting season has been relatively kind to us this year. Despite this, I try to make the case that I do not think EGP shares are ‘more expensive’ than they were 6 months ago.

I have updated the portfolio metrics (below). Interestingly, despite a 6.71% rise (including dividends reinvested) in the price of EGP shares since I reported the same information on March 1st, the metrics actually look cheaper than they did 6 months ago. I received the FY2013 Audit report from our Auditor this week, it is available here.

Two of our current seventeen holdings report out of sequence with the Australian financial year, I have updated the rest of the results using the FY13 reports just issued. Based on the updates, our holdings are valued as follows, the first figure is the current metric, and the second figure (in brackets) was the same metric from the report 6 months ago:

  • Free Cash-Flow Yield of underlying assets:   15.1%             (14.6%)
  • Dividend Yield of underlying assets:                4.8%               (5.0%)
  • Price/Earnings ratio of underlying assets:        7.6X                (8.1X)
  • Net Tangible Assets per $1 of Market Cap:    $1.01               ($0.93)
  • Return on Equity:                                            16.9%             (14.9%)
  • EV/EBITDA:                                                       4.5X                (4.9X)
  • Weighted Average Market Capitalisation:    $400.1m          ($320.1m)
  • Net Interest Bearing Debt:                            -$68.8m           (-$15.4m)

These figures are ‘weighted averages’, our largest holding makes up around 30% of our asset-base and our smallest less than 2%. We have made some small moves in the intervening 6 months, but for the most part, the holdings are pretty similar (Return On Equity is the most distorted metric because I disposed of one holding that was dragging the portfolio down a little in respect of ROE – I dealt with this last week, cash on hand improved to some extent for the same reason).

Another interesting aside, whereas the weighted average depreciation charge for the portfolio was larger than the Capital Expenditure 6 months ago, the businesses in our portfolio have started to invest in growth CapEx now, spending around 10% more than the weighted depreciation charge. This hopefully means they are seeing growth opportunities. These are not ‘capital intensive’ businesses though; the weighted CapEx is $7.28m, which is pretty low for the average $400m business. The $68.8m cash in the bank is comforting too.

My takeaway from the foregoing data is that if you were to think of our ‘portfolio’ as a single business, in the way a private owner would, you would not know the market had marked up the price it considered your business to be worth by 6.71% (as it has our holdings over the last 6 months).

Instead, you would see that earnings had grown by 13.73%, Free Cash Flow had grown by 10.36% and Net Tangible Assets had grown by 15.89%. You would also note a dividend that had grown from $16 million (5% of a $320m market capitalisation) to $19.2m (4.8% of a $400m market capitalisation). So as an owner, you would think things were going very well. If I were forced to put a figure on the growth in ‘intrinsic valuation’ of our portfolio holdings over the last 6 months, I would think the average of the 3 figures in the first sentence of this paragraph would make a pretty good approximation. That number is 13.33% and given the underlying assets have increased in valuation by 6.71%, the implication is that the holdings of EGP Fund No. 1 Pty Ltd are probably slightly cheaper now than what they were on March 1st when the last version of these portfolio metrics were published.

I tell you this only in order to let you know how I’m thinking about the businesses we own (and because I don’t fully disclose all our holdings, I think it only fair that I give you all some means by which to understand my process of business evaluation). The fact that the underlying values of the businesses we own have grown faster than the prices have increased is no guarantee that prices will rise in the short-term. It does stack the deck in our favour though.

But you should know this:

If I find myself in 6 months’ time reporting that the portfolio metrics have again improved (13.33% in 6 months is a very high bar – equating to 28.44% annualised, anything between 5 & 10% would be pretty satisfactory come March 1st 2014), but through the vagaries of the market, our holdings are trading at a lower price, I will still consider that period to have been successful. As I have said before, if you would like to see your assets grow in value in a straight line, the share-market is not for you.

If however you would like to see your assets grow at a rate that exceeds (I expect) other asset classes over a reasonable (to long) period of time, and you can cope with a few ups and downs, then in my view, you will do OK in the stock market, and I hope a little better still if you own EGP – Tony Hansen 01/09/13


Apr 1st 2011

Jul 1st 2013

Current Price

Current Period

Since Inception

EGP Fund No. 1













EGP Fund No. 1 Pty Ltd. Up by 10.67%, leading the benchmark by 2.84% since July 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 51.14%, leading the benchmark by 32.62% all-time (April 1st 2011).

*1 after 31May 2013 dividend of 2.333 cents per share plus 1 cent per share Franking Credit

*2 calculated based on dividends reinvested