Update No. 26 – 25/09/11

We start this week with a quote from the greatest literary work of the 20^th century:

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. – Benjamin Graham, “The Intelligent Investor”

Aside from the sexist assumption that an investor is a man (over 78% of EGP shares are owned by women – though many of those are my wife’s holding), this statement is every bit as correct now as when it was written, over 50 years ago.

As for ‘a portfolio of sound stocks’, after the recent reporting season, in the 12 months ended 30 June 2011, our holdings (as you can tell below) have declined in price, though not as severely as the benchmark.  In order to give fellow owners a sense of the type and strength of businesses we hold, I will give an update to some financial metrics, for a comparison you may wish to look back to Update No. 5 where I first mentioned a comparison of the metrics of the stocks we owned in comparison to the ASX200.

Now the second half of Financial Year 2011 was quite successful for our 8 holdings.  In particular our 3 largest holdings posted significant profit improvements compared to the second half of FY2010.  The end result of this is that in aggregate, because their prices have remained relatively static, and earnings have risen is that our portfolio, which had a P/E of 7x in May, now has a (weighted average) P/E 4.36x.  Because we have added a little to some of our smaller holdings, our (weighted average) Market Capitalisation is $219.75m, and the weighted average NPAT for FY2011 was $50.35m.  This NPAT is not some freaky number caused by some ‘one-off’ items, revaluations or any such thing, but a true reflection of the earning capacity of the ‘portfolio of sound stocks’ you own a share of, if anything, there were more negative ‘one-off’ items than positives, I truly expect our holdings in aggregate to grow their earnings in FY2012, even if the global economy remains weak.  In Update No. 5 I reported that our average gearing was 22.1%, but this was all debt included, without subtracting cash holdings (i.e. not net debt).  In order to give you a better picture of our holdings’ true balance sheet position, I have calculated the ‘Net Position’, the sum of all cash & cash equivalents less any long or short term debts. You should be impressed to know that your companies as a weighted average hold $45.3m of net cash on their balance sheets, which represents over 20% of their weighted average Market Capitalisation.

Now to put this in terms that might mean something more tangible to fellow investors.  Imagine instead I owned a smaller business; say a coffee shop, for arguments sake.  Imagine I offered to sell this coffee shop to you for $500,000, coming with the business is a sound management (so you won’t have to do any work!), included in the sale price is the $103,071 in cash that sits in the bank and best of all the shop returned (after taxation) in FY2011 $114,679 in profits, which have grown consistently over the last 10 years and appear likely to at the very least continue at approximately a similar rate (or even grow).  I would hazard that given such an opportunity, you would probably knock me over on your way out the door to get to the bank and sort the finances (at least I would if you offered it to me).  Well, for fellow EGP shareholders, there is no need; you already own a portion of such a business in aggregate, there is no coffee shop, but a diverse range of businesses that include two miners, a mining services provider, a property developer, manufacturers of industrial and consumer goods etcetera, in my view, much better than the coffee shop presented above.  All we need to do is remember Ben Grahams advice and be patient – Tony Hansen 25/09/11

EGP Fund No. 1 Pty Ltd. Down by 7.85%, leading the benchmark by 6.11% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 0.11%, leading the benchmark by 17.31% all-time (April 1^st 2011).