Update No. 153 – 08/03/14

Our last portfolio metrics post came after FY2013 reporting season in Update No. 128. It seems like only a blip, but another reporting season has gone by, this time HY2014.

Without further ado, the portfolio metrics as at 31 December 2013 (from reports received in relation to this period throughout February):

With the exception of 2 holdings which have non-standard financial years, all the figures are updated to reflect a rolling 12-month measurement after 31 December reporting. The figures are put together as if the entire portfolio had a 31 December 2013 full year balance date. Mostly this means I have used the 2^nd half of FY13 and 1^st half of FY14 to manufacture a rolling 12-month result.

The first thing readers will notice is almost all figures are a little weaker than they were 6-months ago. This is not because of a poor performance in the second half of 2013, although a number of the results were weaker than I had hoped for. On the contrary, the reduction in the levels of the metrics can be chiefly attributed to two things.

The first is an extremely easy one to explain, so I will start there. At the time of the last report, the EGP share price was $1.47429. The closing share price this week was $1.61953. In simple terms the assessed value of the underlying businesses has risen by about 9.85%. For example in the P/E metric, this should have caused the P/E to go from 7.6 to about 8.3 if the underlying earnings were unchanged. Unfortunately, the underlying earnings were approximately unchanged. A couple of holdings had weaker than expected halves in a couple of cases involving write-downs meaning the second half was unchanged in a net earnings basis for the portfolio. Fortunately write-downs down do not affect cash earnings, so free-cashflow remained strong and dividends have been raised somewhat. Despite the fact that we had a few weak reports, the commentary regarding the second half was generally fairly bullish. I would be surprised over the 6-months to 30 June if we didn’t get at least 10% earnings growth across our current portfolio. In simple terms, this will indicate the underlying businesses have likely improved their intrinsic valuations. Whilst this is no guarantee of increased prices, for the patient investor, it means that eventually, there should be an approximately commensurate increase in valuation.

The remainder of the ‘deterioration’ in the P/E can be attributed to the purchase within the portfolio of stock in businesses which possess metrics that are higher than the portfolio as a whole. We have purchased a couple of businesses of late that have fairly high P/E ratios (compared to the rest of the portfolio, not that high relative to the market). There is nothing wrong with paying up for good businesses, provided you are very confident the higher growth rates implicit in the price are likely to come to fruition.

The market (ASX200) is currently trading on a trailing P/E of 16x, not cheap based on history (although not especially expensive either). I am happy that our portfolio has at least equally good prospects as the market over the coming few years for earnings growth. It is in the event of a substantial decline in the market that owning a portfolio with lower valuations really shows an advantage – Tony Hansen 08/03/2014

EGP Fund No. 1 Pty Ltd. Up by 1.07%, trailing the benchmark by 2.18% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 66.06%, leading the benchmark by 36.72% all-time (April 1^st 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}