Orphanides burdened by high renovation & finance costs

Orphanides Pcl reported a 63% YoY decline in net profit for 2007 to EUR 1.48 mln, with sales and profitability burdened by high renovation and finance costs. Sales came in lower by 2.4% yoy to EUR 139.5mln, despite the higher number of retail outlets operated in FY07. This is attributed to the sub-optimal operation of three supermarkets (Larnaka, Paralimni, Zakaki) as a result of the renovation of the above which begun in February 2007 and ended in early 4Q07. As a result, 4Q sales rose by 3.5% yoy and by 7.1% qoq.

Despite a lower sales figure for FY07, the Company succeeded in improving its gross profit margin (management however did not reveal this figure in the preliminary results). Operating expenses were up by 7.7% yoy to EUR 24.6m (17.6% in terms of sales vs 16.0% in FY06). Higher operating expenditure resulted from increased payroll costs, advertising and promotion expenses.

EBT was slashed to EUR 2.2m (+5.2% divergence from our estimates) amid higher finance charges, which resulted from a significant increase in the Company’s net debt position (as at 9M07). Additional debt is used by Orf to finance its expansionary programme.

The bottom line was also burdened by a significant increase in the effective tax rate from 12.6% in FY06 to 32.4% in FY07, with taxation charge increasing by 24% yoy. EPS amounted to EUR 0.0184.

At first instance, though the preliminary figures show a poor performance for the Company, Marfin Egnatia analysts say they do not neglect the fact that ORF is currently

undertaking and implementing its expansionary plans. As a result, additional renovation and high debt levels are bound to occur. ORF’s current expansionary stage however, is no panacea as it also entails risks as to whether failure to proceed or delay the implementation of its 3-year strategic plan targets may significantly impact the Company’s overall financial performance.

Marfin Egnatia have a buy recommendation on ORF with a target price of EUR 0.84 per share.