Update No. 291 – 15/03/17 (Portfolio Metrics)

The portfolio metrics based on 30 June 2016 balance date and 15 September 2016 prices:

For those of you who are new to EGP, every 6 months after reporting season, we provide a ‘portfolio metrics’ update, which is a simple ‘look-through’ snapshot of our portfolio after updating the financials for the reporting season that has just passed. For reference, the previous update was in September 2016 (Update 279). If you use the search bar on the blog page, searching for ‘Portfolio Metrics’ you can find the other such posts.

It crossed my mind to ‘normalise’ our results for this update. Then I remembered how the bile builds up in the back of my throat whenever I see someone ‘normalise’ a result. So I’ll just explain the ‘unusual’ things that should be considered.

We had two of our largest holdings post significant positive revaluation to the carrying valuations of their assets. Absent these valuation uplifts, the price to earnings ratio stated above would be closer to 10x (or about 12% higher). It should be pointed out that another holding (our 5^th largest) had a quite large (in terms of the size of the business) one-off loss that despite the company making profit saw a loss for the period ending 31 December, providing some offset to the positive revaluation effects. Our 9^th largest holding, Bendigo Telco bedded down an acquisition in the half just closed that led to a meaningful decline in profit on the half, though the effect of this was fairly modest. All four of these companies will distort the portfolio metrics at this half and the next portfolio metrics report as we use a trailing twelve months (TTM) calculation for the figures.

A very large part of the contraction in the EV/E & P/E multiples therefore came from positive revaluations, but it also came from generally sound results from our other holdings (with a couple of exceptions). The final factor leading to lower valuation multiples was a removal of a couple of higher multiple holdings, Challenger Group and Medibank Private from the portfolio.

These two removals and the additions of large positions in some smaller market capitalisation companies also saw a decline in the weighted average market capitalisation of the portfolio from $888m to $527m. Relatively small holdings in very large capitalisation companies significantly distort this metric. For example a 1% position in a $10b company adds $100m to the ‘weighted average’ capitalisation.

Our companies still hold net-cash, but the level of cash declined from 15.9% of market capitalisation to 7.1% over the half. This came mostly from addition of meaningful positions in companies with very little cash on balance sheet (but also very little debt). Another example of the cash decline was that United Overseas Australia (UOS) saw its cash levels dip by around 15% over the 6 month period. A weakening of the primary operating currency (Malaysian Ringgit) relative to the reporting currency (AU$) partially explains this, but the remainder can be explained by the expansion of the operations. UOS have a recently commenced development in Vietnam and another coming up in Australia. Traditionally, deployment of cash for UOS has seen very good outcomes for shareholders. If UOS can generate anything like their historic average gross profit margins (in excess of 40%) from their expanded development operations, this should be money well spent.

Dividend yield declined from 3.8% to 3.6%. This is due to the addition of 2 quite large positions in companies not presently paying dividends. With that said, we expect very substantial dividends from these businesses at some point in the not too distant future. One of these holdings is Kangaroo Plantation Timbers (KPT) which is not presently a dividend payer, but that at some point, probably a few years hence, we expect to be quite a prodigious supplier of dividend income.

Weighted ROE dipped from 16.8% to 13.6%. Disposal of a couple of high ROE businesses is the primary driver here.

I reported 6 months ago that the valuation of the portfolio had grown meaningfully faster than the underlying Intrinsic Valuation. I am pleased to report that despite a modest 3.8% rise in the value of the portfolio over the past 6 months, the underlying businesses have improved their valuation at a rate meaningfully exceeding this. This is no guarantee of outperformance in the near-term, the market is a fickle mistress, but we like to think it stacks the odds in our favour.

The Member Audit for the period ended has been completed. In fact it was completed on February 6^th this year, but with the hurly-burly of the launch of the EGP Capital brand and other recent distractions, I have overlooked several opportunities to broadcast this fact. Our member auditor’s words:

“After reviewing the share register – form 484s, broker statements, the spreadsheet for unit price calculation and bank statements, I feel comfortable that EGP is being run in a professional and correct manner. I appreciate the opportunity to look behind the scenes with full transparency and have full confidence in the fund going forward”

Our member auditor I’m sure would happily take any inquiries you might have. If you want to ask questions of him, let me know and I’ll put you in touch with him.

Finally, don’t forget we have the official launch event for EGP Capital on 31 March 2017. We have 33 confirmed attendees at this stage, but the room has a capacity of 50, so if you’d like to come along and meet some of your fellow (or future) EGP’ers, send me an email and I’ll add your name to the list – Tony Hansen 15/03/2017

P.S. I will be in Canberra this weekend so if any shareholders or potential shareholders would like to catch up, drop me an email

^{*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 and a 31 May 2016 Dividend of 6.0000 cps plus a 2.5714 cps Franking Credit}

^{*2 calculated based on dividends reinvested}