Egnatia issues “buy” recommendation on CTC

Egnatia Financial Services have initiated coverage on Cyprus Trading Corporation Pcl (CTC) with a ‘buy’ Recommendation and a combined EUR 1.75 price target, which yields a 2008 target P/E ratio of 9.9x.

Cyprus Trading Corporation Pcl is part of the Shacolas Group, one of the largest private groups in Cyprus with its annual turnover above EUR 500 mln. CTC is a conglomerate, the main activities of which are: (i) Operational (Import & Distribution, and Retail Trade), and (ii) Investments (investment in associates, investment properties).
The Company’s investment thesis lies on: (i) growth opportunities via its participation in CTC-ARI Airports Ltd, (ii) Ermes’ aggressive strategic expansion in fashion and DIY retailing, (iii) opportunity to enhance bottom line from utilisation of Woolworth’s real estate projects, (iv) diversified activities with leading presence in key sectors, and (v) the investment in Hermes Airports for the construction and management of the Larnaca and Paphos airports over 25 years. We also attach significant importance to the experience of CTC’s human resource across all Company levels. Yet, the significant related party transactions among group companies cause some concern.
The earnings growth outlook for the projected period 2006 to 2008 is positive, based on the Company’s intense growth especially in the ‘Retail Trade’ class of business through its subsidiary companies (i) CTC-ARI Airports Ltd, which manages the commercial operations of the Larnaca and Paphos airports, and (ii) Ermes Department Stores Ltd, which aims to expand its net retailing area by 55% to 57.000 m2 by the end of FY08.

Egnatia expect normalised net profit at CYP 5.5 mln, CYP 7.2 mln and CYP 9.4 mln in FY06, FY07 and FY08 respectively (CAGR 05-08 27.6%).
“We have used the Sum of the Parts method of valuation to value CTC. Apart from its normal operating activities, which we valued using 2007 EV/EBITDA multiples, we have also incorporated CTC’s significant investment activities.”

Based on 2007 EV/EBITDA multiples, CTC’s ‘Operational’ activities after adjusting for debt and minority interest, yield a Target Price of EUR 0.98 per share, whilst the value of its investments yields another EUR 0.77 per share. Thus, the SOTP Target Price stands at EUR 1.75 per share, yielding an attractive upside potential of 72%. To this respect, Egnatia have initiated coverage on CTC with a BUY Recommendation. Based on the Target Price, CTC yields a 2008 target P/E ratio of 9.9x.