Update No. 22 – 28/08/11

Full website: www.eternalgrowthpartners.com

There was a flood of profit announcements this week, I will briefly focus on 4 that are members of the EGP20 and discuss one that is not.  The funds holdings did not quite keep pace with the markets bold upward move this week, but we still have half of our holdings yet to announce and I expect there could be some good news from a couple of our largest this week.

First to the one that is not, Amcor Limited (AMC) announced this week a profit if 45.9 cents per share, I will ignore NPAT and other metrics for reasons I have discussed over the preceding weeks.  Its share price this week moved almost in-line with the market; however, it trades at about a P/E of about 14.8, which is approximately a 25% premium to the broader market, which should indicate significantly superior prospects – let us examine that.  Those who like the stock would point out AMC have substantially grown ROE over the last 10 years, from an average FY02-04 of 7.77% to a FY09-11 of 12.97%.  The reason for the improved ROE is simple, in the same periods, average equity shrunk from about $4.5b to about $3.6b, but long-term debt more than doubled to over $3b - ROC improvement, therefore has been much more modest, simply replacing equity with debt.  Those like me, who prefer to think (as I have posted previously about here) about return on the price paid for equity would be more interested in EPS.  Over the same period, EPS grew from an average of 39.8c to an average of 41.9c, I don’t know about you, but with inflation, EPS growth of 0.52% per annum over 10 years is probably not enough.  Interestingly, despite negligible EPS growth, AMC has returned 6.5% p.a. in total shareholder return over the last 10 years, of which only 0.2% has been in capital growth – makes you happy for Australia’s high dividend pay-out ratios…

Other concerns for me would include the falling cash-flows, FY02-06 saw cashflow per share of $5.15 for AMC but FY07-11 saw only $3.73, to my view, a business as mature as this should have improving cash-flows, at least stagnant and certainly not a 28% decline (Telstra using the same periods grew theirs by 18% despite a fall in EPS in the same period). AMC are forecast (not by me – analyst consensus) to grow EPS by about 27% over the next 2 years, interestingly TLS are forecast (again – not by me) to grow theirs by 19.9% in the same period, yet AMC trades on a P/E of 14.8 and TLS on 11.8x.  One of those numbers is either too high, or one is too low; I’m inclined to think the former.  I could go on, but just thought I’d share some thoughts, it astounds me how much unjustified faith the market will place in a company which has failed for so long to deliver anything.  JB Hi-Fi trade on roughly the same P/E as TLS and significantly lower than AMC, without any deep analysis, basic instinct should tell you which of those three businesses is most likely to look back in say 5 years and to have grown EPS at the fastest rate.

To the 4 EGP20 stocks - reporting this week were Hills Holdings Limited (HIL), Australian Infrastructure Fund (AIX), Fairfax Media Ltd (FXJ) and Pacific Brands Limited (PBG).  Now three of the four shot much higher on announcements that, to me, provided little more than a confirmation things were about as expected.

HIL actually reported a loss, while SP went from $1.01 at last Fridays close to $1.225 at this weeks close, so something in the result sparked hope.  HIL (unfortunately for them) have interests in steel-making (which is not the place to be in Australia at present…), these were substantially the cause of the write-off, the ORRCON business had assets, inventories and plant written down heavily, write-downs totalled $108.8m for HIL, which are HUGE for a business with a market cap this small (about $300m), the positive for investors is it leaves only $49m of intangibles on the balance sheet (not much left to write off).  I think HIL are at (or very near) the bottom of a cyclical low, I expect revenue will probably stabilise in FY2012 (barring some new crisis), NPAT will grow marginally and with the buy-back, EPS will be something like 12 or 12.5 cps, and could be as much as 15 cps in FY2013 if things continue to improve.  If that eventuates, the stock would seem to be pretty cheap even with the big jump this week; one concern is that it must be close to being replaced in the ASX200, which could spark short term price declines as index-huggers re-balance.

PBG also announced a loss, SP went from 63.5c at last Fridays close to 69c at this weeks close, so again, there were sufficient positives taken out of the report.  The write-downs leading to the announced loss, however, were flagged 6 months ago. Underlying EPS of 11.1 cps leave the company even with a large spike this week trading at about 6.3x earning.  Benjamin Graham tells us a business that is likely to earn the same EPS in perpetuity should trade at about 8.5x.  Although I think EPS growth for PBG will be muted, I don’t think it will decline, which is the way the stock is being priced.  PBG are generating solid cash, though unlike HIL, they still have over $1b in intangibles, which is pretty big for a company with a $650m market cap, but when you look through their stable of brands and consider their cash generating power, it is probably not an unreasonable figure.  With the continued pay down of debt and eventual increases in dividends, yield alone is likely to force PBG higher, I maintain my opinion this stock should outperform over the next few years.

AIX - I know infrastructure and real estate are unpopular at the moment, but the assets AIX own are truly outstanding collection of reasonably priced infrastructure assets with great growth potential, notwithstanding Athens Airport (probably not going so well, what do you think?) which makes up less than 4% of the portfolio.  This group of predominantly Australian airports, ports and some German airports are very good and in my view likely to perform very well in the coming 5 or 10 years.  The NTA of $2.85 is not overstated in my view (especially when compared with a current share-price of $1.80), and while I don’t think AIX will blast substantially higher in the very short term, I think there is a good chance of it consistently outperforming the market as cash-flows and the value of the underlying assets move steadily higher, coupled with a closing of the gap between price and NTA.  If I were CEO, I would reduce dividends and increasingly buy-back shares as the best way to add shareholder value and capitalise on the disparity between NTA and share-price.  At current prices AIX is trading at less than 16x cashflow and only 5.2x FY2011 EPS, if we assume cash-flow grows at 5% p.a. and asset values at 2.5% (both quite conservative, given the placement and quality of the assets), then the ‘repeatable’ earnings for FY2012 would be somewhere in the order of $140m, leaving AIX trading marginally below the Benjamin Graham, zero growth multiple of 8.5x (8.2x actually), when actual growth is unlikely to be less than about 7.5% in my view.  Pretty cheap for a fairly defensive asset I reckon.

FXJ A $655m impairment to intangibles, wow, still carrying $5.26b of intangibles on the balance sheet, double wow… Serves to remind investors of the earning power intangibles such as newspaper mastheads (used to, at least) have.  Given that FXJ trade at a market cap of $1.95b, the market is implicitly writing of a lazy couple of billion more of those intangibles.  The underlying performance of FXJ was actually pretty good, it is generating a lot of cash and despite the last 12 months being much tougher than the preceding 12 months, the underlying performance was roughly flat.  As I have said before FY2011 is in my view going to be the cyclical bottom for advertising/media and FXJ don’t really even need to grow their earnings to be cheap, but I suspect they have some growth left in them.

I have criticised the many ASX companies who were in very strong financial positions through FY2009, yet sat on cash when their share-prices were clearly and ridiculously under-priced, the boards of HIL and PBG are to be commended for recognising the mis-pricing of their stock and acting in the interests of long-term holders, buying back stock, I do find it interesting how a buy-back announcement almost always causes a very sharp re-pricing of a stock though, do buyers really need their opinions validated this way? Aren’t there highly paid equity analysts keeping the market ‘efficient’? – Tony Hansen 28/08/11

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.05376	(2.79%)	5.38%
S&PASX200TR	35632.05	34200.68	31445.24	(8.06%)	(11.75%)
EGP 20	1000.00	883.67	805.13	(8.89%)	(19.49%)

EGP Fund No. 1 Pty Ltd. Down by 2.79%, leading the benchmark by 5.27% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.38%, leading the benchmark by 17.13% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 8.89%, lagging the benchmark by 0.83% since July 1^st.  Since inception the EGP20 is Down by 19.49%, lagging the benchmark by 7.74% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 8.06% since July 1^st. The benchmark is Down 11.75% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 21 – 21/08/11

Full website: www.eternalgrowthpartners.com

The global share-markets seemed to settle somewhat this week until Friday, when I had cause to think of famous bush poet John O’Brien’s words in his Australian classic – Said Hanrahan.

 

 "We'll all be rooned," said Hanrahan, "Before the year is out”.

 

As long as the market is ‘rooned’ by October, I’ll be happy.  Sharp-eyed readers will notice our ‘per share’ values (below) didn’t change this week, I didn’t forget to update, just through the vagaries of movements in the prices of our holdings this week, we ended exactly where we began.  Fund-holders need remember it is to our financial advantage if markets stay down until October, when we will likely have a substantial proportion of the fund in cash and looking to deploy.

The US market, like ours is in the middle of reporting – in their case, quarter 2 results, whereas our reporting season is predominantly full year results.  I follow the US reporting season closely, because although we hold no economic interest in US businesses, the inescapable fact is when the US is weak, the world is weak, it always makes sense to keep an eye on ¼ of the global economy.

This week, I was particularly interested to observe some US retailers reporting.  Walmart, for example improved Q2 earnings by 12.4%, Home Depot by 13.9% and Costco by nearly 20%.  These figures are very impressive and would seem to belie the stream of fairly negative economic data; as usual we need to look a little closer.

Walmart are the world’s biggest retailer with a US$180b market capitalisation, they trade on a fairly modest multiple of 12x (indicating about a US$15b current annual profit).  This multiple would indicate any significant growth is behind them, making any 12% quarter such as their June quarter very impressive.  The most significant (in relation to assessing how the US is going) part was that substantially all of the growth came outside the US, sales in the US were slightly worse than flat, whilst international sales were up over 16%, so the US retail environment is pretty weak still according to Walmart.  The weak US dollar and their substantial international footprint substantially supported their result.

Costco and Home Depot haven’t nearly as large an international footprint as Walmart and that makes their results even more impressive.  Sydney (and Canberra) based readers will be aware of Costco opening its first Sydney (and Canberra) stores, I had my second visit there this week and I have to say it’s a pretty compelling offering.  I have spent a lot of time thinking about the likely effect of this development on Australian grocers.

The most amusing thing about the reporting of Costco’s push into Australia is how I keep seeing ‘American Giant’ in the media-reporting relating to it.  Costco’s market capitalisation is about US$33b, which would make it just a little smaller than Woolworths based on the current exchange rates.  If they are successful in Australia, it will not be because of their size and power, but because of a superior business model.

If Woolworths and Coles truly want to compete with Costco, they would be far better rolling out their own ‘membership’ based offering, with their existing logistical advantages; it would be very difficult for any newcomer to compete.  Walmart compete with Costco with ‘Sams Club’ - though the US market is much bigger.

The issue here (for Coles and Woolworths) is that they would be cannibalising their own stores in the catchments of each new ‘membership’ store, this is a likely reason for not pre-emptively competing in the ‘membership’ business.  After poking around the Woolworths ‘store locator’, I estimate there would be about 25 of their supermarkets closer than the approximately 15 kilometres I drive to get to Costco (2 are walking distance – less than 1 kilometre), I would imagine there are approximately 50 other reasonably large supermarket alternatives (between Coles/Franklins/Aldi/IGA etc) in the same radius.  So it is reasonable to assume that in medium density areas at least, that while Coles or Woolworths would cannibalise some turnover from existing stores, they would likely ‘steal’ about twice that amount from their competitors.  Judicious site selection could probably further distort that ratio to cause less harm to their own stores (and correspondingly more to their competitors).

By the way, I’m not joining the chorus-line of people who want to bash Coles and Woolworths.  I sympathise - people think our grocery duopoly has led to price-gouging, or grocers earning unreasonable returns, I have read many reports such as this which would indicate that not only are our grocers generally efficient on most commonly used metrics, but they also operate on much leaner margins than their international counterparts.  Don’t forget Australia is a large, distant and sparsely populated country, transport adds enormously to the cost of both local and imported products compared to most countries.

Reporting Season:

It’s my blog, so I guess I can report on the things that interest me most, though there were much larger/more important results announced this week, I wanted to mention a little business I have been interested in for some time.  One that gets relatively little attention in financial press - Slater & Gordon (SGH) - a listed law firm.  The listed law firm is a fairly recent innovation in Australia, SGH listed in mid-2007, given how the market has performed since; their performance has been comparatively good.  The company is capitalised at just over $300m, they are not in the ASX300, but I would imagine, given that there are smaller entities within that index that they will probably be in it soon enough (this type of entry usually generates a short-term spike in prices as index-trackers add the stock).

Their result gave media the chance to (again) trumpet one of the most misrepresented reporting figures - NPAT; headlines read ‘Slater & Gordon profit up 40.9%’.  Now this figure is not wrong, SGH grew NPAT by 40.9% (from $19.8m to $27.9m), however, more importantly EPS ‘only’ grew by 6.7% to 19.1 cps, and this is the shareholders result out of the growth.  I could be wrong here, but I would hazard SGH could probably have grown EPS by about 6.7% organically (I outline why below).  I explained in more detail here a fortnight ago that NPAT is essentially worthless to shareholders unless it translates into EPS.  If NPAT growth is not reflected in EPS growth, the only benefits are likely so be in the salaries of senior executives who now preside over a much larger empire.

In order to examine the benefits to shareholders of the acquisitions we can compare various ratios from last year to the current year.  For example in FY2011, SGH have converted 15.31% of revenue into NPAT ($27.908m/$182.309m) last year the conversion rate was higher – 15.87% ($19.8m/$124.73m).  So in growing the business, management would seem to have made it less profitable.

Other ways of looking at whether the acquisition has delivered cost savings is by examining whether various important expenses have grown more slowly than NPAT (this will deliver efficiency benefits to the business and EPS growth to the shareholder).  The biggest single SGH expense was salaries, which grew by exactly the same as NPAT (40.9%).  I can cop this, you are not going to retain good lawyers by paying uncompetitive salaries, truth is I probably would not expect savings here.  The next biggest expense is administration, and it is in this area most acquisitive companies would seek to make big savings by removing duplicated functions and eliminating excess costs caused by the combination of businesses.  Here though is the greatest failing of the report, administration expense grew by 44.5%, or about 10% faster than profit.  Now it could be that there have been additional costs incurred in the short term, but I would be eagle eyed on this area in future reports, if you cannot reduce administrative costs through acquiring more firms (scale), it is hard to argue the acquisitions will have significant shareholder benefits.  Advertising costs were up 60.6%, provided the spending generates future revenue and helps imbed the brands then it is justified.  The only area where a significant instant pay-off in expense reduction (I define as expenses growing more slowly than corresponding NPAT) came was in rental.  Rental expense only grew by 23.8%, much slower than profit growth, this was probably due to acquiring businesses with footprints in areas with substantially cheaper rental costs, but there will likely be further savings as when it comes time as a larger player to negotiate new deals.

I still like the business idea, but without any obvious benefits deriving from scale, it is hard to see what the real SGH competitive advantage is.  I don’t believe a law firm has a realistic hope of properly creating a brand as law is so reliant on individual talent.  However, I do think that owning listed equity gives the partners of the firm a much more tangible and visible attachment to their employer and could result in less leaving with their portfolio of clients to start their own firm.

I think SGH equity is very reasonably priced at the moment, but I would like to be able to assess with a little more certainty the flow-through (to EPS not NPAT) of benefits through acquisitive growth before I commit.  I think slowing the growth trajectory down a little and trying to make purchases with a greater portion of cash and less new equity would also ensure more of the growth in NPAT appears in EPS.  Helluva post again this week (lengthwise – you be the judge of quality…), but I think it helps my investors to know the types of things I am considering when I deploy your cash – Tony Hansen 21/08/11

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.05233	(2.92%)	5.23%
S&PASX200TR	35632.05	34200.68	30578.23	(10.59%)	(14.18%)
EGP 20	1000.00	883.67	762.49	(13.71%)	(23.75%)

EGP Fund No. 1 Pty Ltd. Down by 2.92%, leading the benchmark by 7.67% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.23%, leading the benchmark by 19.41% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 13.71%, lagging the benchmark by 2.12% since July 1^st.  Since inception the EGP20 is Down by 23.75%, lagging the benchmark by 9.57% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 10.59% since July 1^st. The benchmark is Down 14.18% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 20 – 14/08/11

Full website: www.eternalgrowthpartners.com

Well, what a fascinating week that was, for those who were watching the market from day to day, you would have noticed some highly unusual behaviour.  The market moved from substantial losses to gains in a single day and vice-versa, depending on a variety of factors.  Interestingly, the Australian market was one of the strongest of the international markets and closed the week up slightly.  Markets like this certainly test the resolve of some people, if your sphincter is still twitching, stock-market investing may not be for you…

Reporting Season:

One of the results I was most interested to see this season was JB Hi-Fi (JBH), I think this is about the 3^rd time in the last month I’ve mentioned this business.  They are getting near the valuation point where I would give them serious consideration for investment, in fact if it wasn’t for a particularly swift upturn in price, I probably wouldn’t be mentioning them now as they’d be one of the funds holdings.  This week their price hit a low of $13.35 just after announcement, this was despite what I would describe as a pretty sound result.  I think by the end of the week the market started to realise what brighter prospects JBH has (relative to the broader market), its closing price Friday was nearly 15% above its opening price Monday, which was a much better weekly performance than the overall market.

I usually look to pay less than 50% of my intrinsic valuation, but for larger, well-run businesses, such as JBH, with particularly good economics, I will consider lower margins of safety.  JBH are a growth stock on the verge of becoming a mature business, their P/E ratio has quite properly been declining to reflect this fact, but the current price in the market of about 12x would indicate it is likely to only manage a couple of percentage points of growth in EPS in future years.  Whilst I appreciate the difficult retail conditions currently being experienced are not likely to abate in the immediate future, I am quite sure the current market price for JBH is incorrectly estimating likely future earnings.

One of my main reasons for believing this is the ability JBH have over the next few years with their ongoing roll-out of new stores to continue to grow EPS. Underlying EPS grew this year despite flat same-store sales in mature stores.  This would indicate with the pace of the roll-out of stores over the coming years, even with flat mature stores sales (I do not believe mature stores will continue to present no sales growth), there is likely to be solid growth in EPS over the next few years, as new stores are introduced and immature stores mature.  I also appreciate that the quality of the stores they are introducing is declining, the really cracking ‘tier 1’ store roll-out is substantially complete.

So bearing in mind this is subject to new information coming to light and all the usual caveats, I would say this; I would be surprised by FY2015 if JBH didn’t earn somewhere approaching $2 per share.  Coming of the normalised $1.25 per share just announced, this essentially implies about 12.5% per annum growth over the next 4 years.  This may prove to be ambitious, but at that price, even if we assume a similar P/E to now (say 12.5x) this would imply a $25 share price.  Assuming JBH payout about 2/3 in dividends (by FY2015 I would be surprised if this payout figure were not in the 70%+ range); they will also pay out about $4.42 in dividends.

To the mathematically inclined, this $29.42 in (theoretical) 2015 value ($25 SP + $4.42 in dividends) could be purchased at a closing price on Friday for $15.90 (or earlier in the week as noted above for $13.35).  Assuming the purchase played out exactly as I described above, the buyer at $15.90 on Friday afternoon would generate a 16.63% gain per annum over 4 years (18.47% if we include the franking credits attached to the dividends as we should).  The buyers who picked the 12-month low of $13.35 this week would have a 21.84%/23.76% annualised 5-year gain situation under the same circumstance, so you can see why a low entry price is so beneficial.  I believe the possibility presented above is approximately in the middle of the range of possible outcomes, with a superior return approximately as likely as an inferior return.

Please bear in mind this is not a forecast for JBH, just one man’s view of how things could play out, as I have said many times before, do your own research and seek professional advice.  Here’s hoping for a more sedate week ahead – Tony Hansen 14/08/11

P.S. I had intended to give an analysis of Computershare’s (CPU) result, but don’t want to drone on and on and bore regular readers (it was a pretty mediocre result, but the business is getting to the price where I will start to pay closer attention over the coming months & sharpen up my analysis).

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.05233	(-2.92%)	5.23%
S&PASX200TR	35632.05	34200.68	31005.98	(-9.34%)	(-12.98%)
EGP 20	1000.00	883.67	784.22	(-11.25%)	(-21.58%)

EGP Fund No. 1 Pty Ltd. Down by 2.92%, leading the benchmark by 6.42% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.23%, leading the benchmark by 18.15% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 11.25%, lagging the benchmark by 1.91% since July 1^st.  Since inception the EGP20 is Down by 21.58%, lagging the benchmark by 8.59% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 9.34% since July 1^st. The benchmark is Down 12.98% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 19 – 07/08/11

Full website: www.eternalgrowthpartners.com

Some investors in shares at the moment could be forgiven for feeling like Rodney Dangerfield when he said “My luck is so bad that if I bought a cemetery, people would stop dying”.

If your horizon is a couple of years out or more, I really believe you need not panic.  In fact for holders in EGP No. 1 Pty Ltd, it appears very likely that October will see a large holding, which represent a sizable portion of our (currently) small assets returned to us at a price 16.66% above current trading price.  Should the deal close, I will talk more about it then, but between now & then, you should pray for further declines, so I can deploy the incoming cash at advantageous prices.

Reporting Season:

NVT, Navitas is an education provider; they have reported profit up 20.5%, off revenues up by 15.6%.  These are the figures you’d have seen if you read the financial press coverage.  One area it always staggers me the financial press fail to focus on is the growth in earnings per share (EPS).  If a company I own doubles its profit, but at the same time doubles its shares on issue, the profit growth is essentially useless to the shareholder, yet the financial pages will trumpet “Company X doubles profits”.  Its EPS I care about, all else equal, if the EPS rises, the share-price rises.

I should say, EPS and the competitive strength of the business.  I will accept growth in profit, for example by acquisition, not reflected in EPS as long as I can see a compelling benefit to the business (that is to say, future EPS will benefit, so really it still comes down to EPS)

So, having had my little rant about EPS, I should point out, NVT grew their EPS by a quite impressive 15%, so the majority of profit growth was reflected in EPS.  NVT made a major acquisition, for which it paid predominantly in cash, taking it from a net cash position to a net debt position of $102.8m, which is about as heavy a debt-load for a company of their size as I’d tolerate.

I actually think the result is pretty impressive given an enormous variety of headwinds the company faced.  The most important, I think is the strong AU$.  This hurts NVT in two ways, with a good chunk of their earning coming off-shore, and also with the impact on international students, who when faced with a particularly strong currency are likely to choose alternative countries for their education.  There were also some issues around the issue of international student visas.

All in all, a pretty good result for Navitas, if a few factors turn in their favour, the 12% per year analysts are forecasting EPS to grow over the next 2 years could be conservative.  In any case, in my view, they are neither cheap nor expensive at present, my reviewed intrinsic value (IV) is virtually unchanged at $3.73, and doesn’t have me clamouring for my wallet, given their SP is currently very near that.

The other result this week most likely to be of interest to regular readers is Rio Tinto (RIO).  RIO is a member of the EGP20, and I thought the result was very commendable.  RIO are in the fortunate position of being in the many of the best commodities, with extraordinary capacity in, for example iron ore when demand is very strong and supply is not expected to catch up for some time.  RIO’s result gives a good opportunity to draw attention to the use of EBITDA (Earnings Before Interest, Taxation, Depreciation & Amortisation) in reporting.  For some CEO’s, EBITDA is trumpeted loudly and often, but it is again, EPS that matters.  For an example here, if a company were to earn an extra $1b in a jurisdiction with a 40% corporate tax rate, it would not have as much value to shareholders as the same $1b earned in a jurisdiction with a 15% tax rate, in fact, the EBITDA earned in the latter jurisdiction would have about 41.66% more value to shareholders, so use the metric with care.

I don’t say this with particular reference to RIO, in my view; their reporting gives a good balance between the important metrics, cash-flow, EPS, EBITDA & net-earnings.  US$8.185 per share is what RIO has generated in the last full 12 months.  Using an AU$1.07 exchange rate, this equates to AU$7.65 in after-tax earnings.  RIO are trading at the close of the ASX this week at $72.00 (down 10% in a week, ouch… sometimes size doesn’t matter), which puts them on a P/E multiple of about 9.4x (trailing 12 months).  RIO trades generally at a discount to the market, over the last 7 years, the average P/E has been about 11.3x (this tells you they are 16% under their historic valuation, which would be $86.45).  There is understandable concern that many commodity prices are likely to decline over the medium term, in my view RIO’s growth in output should more than compensate, barring a particularly savage fall.  Come 2015, I would hazard they will be reporting EPS a good deal higher than AU$7.65, that being the case, I view them as pretty cheap.  My current estimate of IV is $103.75, which for one of 10 biggest companies (on the ASX) is a handsome discount (there are still far better alternative listed investments in my view, so none of our capital will be heading their way)

To me, the most fascinating thing in the RIO results package was a graph explaining the seemingly logarithmic growth in steel used in taller buildings, on a KG/M² basis.  It showed that an 8 storey or smaller building can be built using as little as 5kg/m², whereas buildings over 100 storeys high require as much as 220kg/m².  Estimates indicate that over the next 15 years, an additional 300 million Chinese will urbanise (move to cities), that’ll require a lot of very tall buildings and a mind-blowing amount of coal & iron ore.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.07596	(0.74%)	7.6%
S&PASX200TR	35632.05	34200.68	30472.60	(10.91%)	(14.48%)
EGP 20	1000.00	883.67	777.39	(12.03%)	(22.26%)

EGP Fund No. 1 Pty Ltd. Down by 0.74%, leading the benchmark by 10.17% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 7.60%, leading the benchmark by 22.08% all-time (April 1^st 2011).  It is probably a cold comfort to those who joined us on 1 July, that we’ve ‘only’ had our assets decline in value by 0.74%, but I maintain that if we can beat the market when it plunges and keep pace with it when it rises, our long-term results will be satisfactory.

EGP 20.  The EGP20 index is Down by 12.03%, lagging the benchmark by 1.12% since July 1^st.  Since inception the EGP20 is Down by 22.26%, lagging the benchmark by 7.78% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 10.91% since July 1^st. The benchmark is Down 14.48% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com