Update No. 232 – 11/09/15

The portfolio metrics based on 30 June 2015 balance date and 11 September 2015 prices:

The earning season just passed was a good deal better than my expectations, which is probably why we haven’t been punished as much as the wider market as sentiment has turned more negative. Out of our 20 major holdings (which are about 95% of our equity holdings), 12 issued results that were better than I had expected, 7 were pretty much spot-on and there were 3 that really missed the mark.

The first thing regular readers will notice is that I have added the EV/E metric to the table. It is one I value as it enables a capital structure ignorant look at the price you’re paying for a company’s earnings. An EV/E of 8.3 as above means that if the cash is ignored (and our weighted average portfolio company is heavily net cash) and after tax earnings remain at the same level as the trailing twelve months, then our weighted average company will take 8.3 years to pay us back the current market price.

There were ups and downs in some of the other metrics; P/E is slightly lowered (improved) on the same report 6 months ago. NTA per share has improved. ROE is down. Dividend yield is slightly down. Free cash flow is up.

Overall, I believe it is an inexpensive portfolio on average. The companies contained in it are less expensive than their prospects would seem to justify. I have forward 12 month weighted EPS growth at about 12.5%. Were such a happy outcome achieved, assuming the 5% dividend was maintained and the multiples were the same at this time next year, we should have generated a return of about 17.5%. This is not a forecast (of course), simply that if my current expectations of earnings for our portfolio are met, the dividend maintained and the multiples to hold steady, mathematically, that would be the result. Obviously many things can change this, my forecast could be wrong (this one is almost a certainty; the question is whether I’m wrong on the low side or the high side!), the multiple the market is will pay for our holdings could contract (or expand) and so on.

This particular maths is very simple. If you can find a company that will grow its earnings at 10% annually, paying out 50% of earnings as dividends and if it trades at the same multiple in 10 years as you pay today, you will basically earn 15% per annum. If the dividend payment is fully franked, you will actually get over 17% annually. If you can buy the business at a multiple of say 10x and the above holds true, and the multiple grows from 10x to 15x over a 10 year holding period, you will generate an IRR of about 18.7%, or if it’s a fully franked dividend, your annual return will comfortably exceed 20%.

10% annual EPS growth sounds simple, but over the last 10 years, out of over 2000 ASX listed companies, fewer than 70 firms, or scarcely 3% achieved this feat. Over the last 5 years, there is nearly twice that many, but it is still an uncommon achievement – Tony Hansen 11/09/2015

EGP Fund No. 1 Pty Ltd. Up by 0.61%, leading the benchmark by 4.79% since July 1^st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 86.81%, leading the benchmark by 56.12% 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}