Update No. 130 – 15/09/13

The market in my view is pretty near to fair value at present. Depending on your nature, this might cause you to consider other options if you have money to invest. Let me put forward an argument as to why you shouldn’t let a ‘fair-price’ scare you off.


The average result has historically been very good in the stock-market, over time. Although it swings quite widely from year to year, the average returns over the last 5, 10, 30 or 100 years have been very good for Australian listed businesses. Exceeding 7% per annum for all of those periods actually. I mentioned on Twitter this week, if you had bought the ASX200 this week 5 years ago (just as the Lehman Bros crisis was peaking in 2008), your annualised return over the ensuing 5 years would have been 6.43% per annum, 1.69% from capital gains and 4.74% from dividends. To the Australian holder, these dividends would have been franked at about 70%, meaning your ‘grossed up’ return would have been about 7.85% p.a. over the 5 years.

Given this, if we assume that the return will be around 7.5% annually, then in paying ‘fair-value’, the midpoint of our range of expectations over a reasonable investment period (say 20 years) would be about 7.5%. Obviously, if the market is trading at say 20% below ‘fair-value’ and we buy, over the 20 years, our return will now be more like 8.7% p.a.

Assume we can’t bring ourselves to pay fair price, and I myself ALWAYS try to buy at a discount – though it’s much easier with individual companies than the market. That being the case, were we to wait 3 years for the market to fall to 20% below fair value, all else being equal (and in truth it doesn’t really work this way – this is really for the purpose of demonstration) the underlying fair value of the market has increased by 7.5% p.a. If we still have 17 years of our 20 year investment horizon to go, our annualised return will be around 8.9% p.a. based on the same assumptions as the above over these 17 years, so your return over the 20 years will depend on what your capital was doing for those first 3 years. If it was earning 3% in a Term Deposit, your return over 20 years would be about 9.5%. Wait 6 years though, under the same circumstances and despite buying at a 20% discount, you are no better off than had you paid fair price.

My point here is to the average investor, trying to time the market is fraught with problems and causes unnecessary stress, better to add steadily to your investments and try to get sound, rather than spectacular results.

As requested by a reader recently, I will also provide an update on the valuation for one of the three publicly declared current EGP holdings this week. In doing so, I will talk a little about the selling process.

We remain holders of Maxitrans (MXI) shares. I have mentioned the company previously in Updates No. 48, 73 and 89.

With respect to the ‘selling process’, I sold this business too early in hindsight. I find this happens very often. Selling is by far the hardest part of investing most of the time I think.

Our average sale price for the portions we have sold so far was $0.785 per share (buy price $0.235). My first sales were particularly badly timed; my most recent sales ($1.43 in March) were not too bad, given the business still trades near that level.

The test, however is, and must always be, did I have a better application for the capital received from the sale. Obviously, at the time, I thought I did, though this turns out not to have been the case, I’ll explain why.

In order to calculate how much of a mistake the sales were, I calculated the Internal Rate of Return (IRR) had I not sold the shares I did. This figure was painfully high at 80.5% p.a. I then compared it to the IRR to that delivered by EGP had I purchased shares with the MXI sale proceeds on the same dates. The IRR for EGP from these same dates was 34.3%, so I found good alternative applications for the capital, but still would have been better off not selling.

The cost in terms of what EGP shares would be worth had I never sold a share of MXI is upsetting, but for full disclosure, had I not sold any MXI stock since I bought it, EGP’s share price would be about 4.3 cents higher, which is nearly 3% and I’m sure you’ll agree, a meaningful improvement.

This is all based on the current prices for EGP & MXI measured over a fairly short period. Should the wider EGP portfolio outperform MXI stock for the next 12 or 18 months, things could level out in terms of IRR performance.

What’s done is done, however we must always try to review our investing decisions to see where improvements could be made. But we will not dwell, our key decision is what to do with our remaining MXI stock – Buy/Sell or Hold? I gave a brief account of my reasons for buying MXI in Update 48. A primary reason was the management’s decision to conservatively deal with capital. Even when times were tough, MXI spewed cash (particularly in relation to their depressed Market Cap at the time) because in the 7 years between FY2006 and FY2012, MXI spent $26.4m on CapEx and their depreciation charge was $26.9m. When tough times came, management conserved capital, I like that.

As the upswing took hold, they have started to invest in the business, in FY2012 CapEx exceeded depreciation by 24% (though they did dispose of plant meaning PP&E declined in FY2012). In FY2013, CapEx was more than double the depreciation charge, MXI have historically generated decent (but not spectacular) returns on CapEx, I estimate between 13 & 15% p.a. Given historic management conservatism, I am comfortable they would not be committing the capital if they did not expect to see good returns.

The big story from the FY2013 report for mine was the new acquisitions. The more stable revenues from the parts business will meaningfully mitigate the bumpy nature of the trailer manufacture nicely I think. They acquired these businesses entirely with debt, and have made meaningful inroads into the debt already.

Now to the tricky part, future earnings… Management’s presentation accompanying the FY2013 Appendix 4E was considerably more cautious than the same document 12 months earlier. Positives in the grain transport were highlighted, but the increased order book, which was a highlight of the previous year’s commentary was absent. I expect come the AGM in mid-October, we will get a more detailed update.

It is my view that the extremely rapid growth in EPS – which has come from about 3 cps in FY2009 & FY2010 to nearly 14 cps in FY2013 – will substantially moderate over the coming 5 or 10 years. There are very good opportunities for continued organic growth and if management continue to make the right decisions capital-wise, growth exceeding that of the wider ASX200 companies is likelier than not. We should be careful to remember what a huge mining investment boom Australia has been through of late. But more importantly, remember the real pay-off for a business like MXI comes once the production phase begins.

MXI currently trades at an EV/EBITDA multiple of a little over 6x & a TTM P/E of about 10x. These are pretty undemanding figures for a business that has better than quadrupled NPAT over the last 4 years, and shows no apparent sign of stagnating. At current levels, the ‘grossed up’ dividend yield is over 8.5% and feels very sustainable. FCF improved last year, even as management invested in business growth. There are no indicators of decline visible to me.

It is hard to imagine a scenario where MXI isn’t generating EPS of something like double the FY2013 figure 10 years hence. Using a mid-point of EV/EBITDA valuation and DCF (discounted cash-flow), the mid-point of my range of values is $2.02. Given how badly I’ve been burned selling MXI too early in the past, I will not sell until it exceeds this figure, or something materially reduces my current view of the likely future profitability of the business – Tony Hansen 15/09/13

P.S. Although the market bested EGP for the first time since mid-July, we still managed enough of an advance to close above $1.50 for the first time. The beard finally came off…


Apr 1st 2011

Jul 1st 2013

Current Price

Current Period

Since Inception

EGP Fund No. 1












EGP Fund No. 1 Pty Ltd. Up by 12.68%, leading the benchmark by 2.52% since July 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 53.90%, leading the benchmark by 32.82% 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