Forum Archive Index - May 2001

["Brian Brakenridge" <brianbrak@xtra.co.nz>]

I'm a student/proponent of "business investing" as opposed to "stockmarket investing" so I look at GPG and ask if it is a good business to buy a part of.

Because it is an investment company I don't pay too much attention to it's EPS and definitely have no problem with it paying low dividends, infact it wouldn't worry me if it didn't pay any dividends. What interests me with this type of company is how well management is allocating capital and growing the value of shareholders funds. Since 1993 Shareholder Funds have grown at an annual compounding rate of 22.3% and the company has little debt. The year just past has been a tough one for most investment companies and it must be recognized that GPG has a lot of "work in progress" at present.

It’s also important to consider that the returns mentioned above have not been influenced by the strong tech bull market of the late 90’s as GPG stayed away from the tech hype.

My question is, would it not be more logical for an existing shareholder to buy more GPG shares rather than take part in the note issue?

If the company issues Capital Notes at say 8%, which would be a healthy return, and if it is able to invest that money with the same efficiency as it has in the past, then I can't see why any long-term investor would consider taking up the capital notes offer. Even if Sir Ron and team only manage 10% compounded growth over the next 5 - 10 years (that's less than half what he's achieved in the past 7 years) then his partners in the business (the shareholders) are still way ahead of those who decide to take up the capital issue.

Why do I think this is the case? For two reasons. Firstly, the 10%+  GPG grows it's business is not taxable and secondly it is compounding. Conversely, the 8% the capital note holder will receive is taxable and the investor then must turn round and try to find a home for that money in another high yielding investment.

Simply it makes better business sense for me, and I’m willing to take the risk, to have GPG borrow money at say 8% and grow it at over 10% remember how well they have grown their shareholder funds over the past 7 years.

As always I’m happy for anyone to constructively debate and correct this logic.

Cheers

Brian