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SFS Group Pcl (SFS.CY), the tenth biggest company quoted on the CSE in terms of capitalization, is in a strong fundamental position to withstand the negative effects from the global credit crisis hitting all markets.
The chief executives of SFS attribute the company’s strength to its prudent policy to begin the process of divesting from last year when it successfully sold its stake in Athena Investments and the bulk of its exposure in its shipping business.
SFS Chairman Christodoulos Ellinas and Vice-Chairman Philip Larkos told the Financial Mirror in an exclusive interview that their “timing was perfect”, since they sold both holdings at a substantial profit for shareholders but also importantly, raised millions in cash, some of which was used to pay off debt and the bulk now ready to be used as opportunities arise.
“We are eyeing a number of property investments,” said Ellinas, while some of the excess cash amounting to EUR 30 mln will probably be used as seed capital for the new funds being set up to invest in property, shipping and venture capital.
NEW FUNDS
Larkos admitted that there is a delay in the fund raising process, but stressed that “our timing for raising funds and investing within the next 36 months (by mid-2010) could not have been better.”
“The investors we are targeting still have substantial liquidity and are interested in our four specific funds; they will need to wait a bit more before they commit, given the current climate, which is totally understandable and acceptable,” he said.
To highlight the Group’s savvy timing to dispose its shipping exposure to a Bahrain based company in which SFS has a minority 10% stake, Ellinas explained that SFS sold its ships at around the time when the Baltic Freight index was hovering around 8.500 (the top was close to 11.000 in late 2007), while the index is now trading below 1.200.
“You can understand that many investors wish to participate in our funds to take advantage of our expertise,” said Larkos, who insists that timing is everything in the business of fund management.
UNDERVALUED
Larkos said the share price of SFS is grossly undervalued compared to its prospects, fundamentals and track record of emerging even stronger when market conditions deteriorate as happened during the previous local stock market crisis of 2001-2004.
“I cannot understand how the market gives us (SFS) a valuation of EUR 34 mln (when share price was EUR 0.55/share), which is below our net available cash balance of EUR 36 mln, let alone our book value, which as at June 2008 was EUR 1.95/share,” he added.
The price to book value of SFS when its share price is trading at EUR 0.55 gives a 0.28x valuation, which in layman’s term, means SFS is trading at a 72% discount.
Both Ellinas and Larkos dismissed rumours that liabilities have been understated and on the contrary, insist that as most of businesses are reflected at cost (with the exception of properties that are periodically revalued), one could argue that there is more value in the SFS balance sheet.
PROFITABILITY
SFS had previously announced that its profitability target for 2008 is EUR 31 mln and the Group has not revised this yet. Ellinas said the 3-year 2009-2011 targets will be reassessed in early 2009 after the release of the preliminary 2008 results.
“Revenue targets for continuing operations will be sustained even though overall Group revenue in 2009 will decline due to the disposal of ship owning activities and future scheduled disposals of other businesses within the Group,” said Larkos.
Previously, the SFS Group had stated that its target for 2009 and 2010 is at least a 20% return on equity maintained at EUR 110 mln, which gives a profit target of EUR 22 mln for 2009.
While admitting that there is no guarantee that last year’s dividend payout ratio will be maintained, Ellinas said the objective of SFS is to pay out 30% of its profits in the form of dividend.
Based on the dividend of 15.42 cents per share declared for 2007 and current prices, the dividend yield amounts to a whopping 28%.
PROVEN TRACK RECORD
Ellinas and Larkos admit that the sharp deterioration in market conditions will have a huge negative impact in Cyprus and give a bleak assessment that “2009 will be a very, very tough year for everybody,” but they insist that the sale of Athena, their shipping units and some properties, combined with the buyout of White Knight Holdings and a policy of divesting of businesses with the exception of Sharelink Securities & Financial Services is proof enough that the Group has been preparing itself for some time now.
“SFS has proved that it can prosper in both good and bad market conditions. Our asset allocation and pool of human capital is such that we can weather the storm ahead better than most other companies in Cyprus,” said Ellinas.
“Time will once again show who is best prepared,” concluded Larkos.
