SIFCO Industries Inc T.SIF.UN

Amortisation is not selling assets.

[baudelaire]

"Energy Savings has come to the end of their leash and will soon have to replenish their assets by issuing more stock. Since the stock is trading at about thirteen times book value, you may say 'so what'. That would be the 'greater fool theory of investing'. In the four short years of their life (to Mch 05) they have had cash inflows from 1)Issuing shares $320M and 2)Operations $220M. They have spent cash on 1)Purchases of assets $300M and 2)Distributions $220M. The problem is that of the $220 cash from operations, only $82M was profit. The rest ($138M) came from 'selling' assets. The company no longer has all the $300M assets it started with. It has only $162 left now ($300-138). In the four years of its life it has used up almost half of its assets to fund distributions. This quarter showed that they need all their remaining assets. That left them with the question " how to fund the $22M distributions?" Since profits were only $11M, they went $10M into debt. Borrowing to pay distributions is one big NO-NO! This company is worth only a quarter of what it trades at. Its inflated share price will allow it to purchase more assets by paying only pennies on the dollar. That is the insanity of the market, not an atribute of the company." ******************************************************************** “Energy Savings has come to the end of their leash and will soon have to replenish their assets by issuing more stock. “ I’ve only just skimmed through the 2004 AR and the latest quarterly news release. I don’t own any SIF.UN and haven’t followed it. OESC buys groups of electricity or gas contracts. The price paid for the collection of contracts is reflected on the balance sheet as an asset (i.e. gas contracts, electricity contracts and the portion of the purchase price that they allocate to goodwill). These contracts are then amortised over their average estimated remaining life. I would guess that that would be about say five years or so (recent $6.7MM Epcor acq’n will be amortised over 1.5 years according to latest quarterly results). At this rate of amortisation the assets on the balance sheet will decline rapidly. But, all of the customers don’t fail to renew or cancel after five years. I would guess that the majority of the contracts are renewed. (The attrition rate would likely be figured into the initial price paid for the contract acquisitions anyway.) So even though the group of contracts the trust purchased five years ago has been amortised to zero (or will soon be) the customers and cash flows are largely still there or may even have grown if management has done a good job. (Latest quarterly results has management describing low margin contracts that they will dump and other types of contracts that they will pursue.) So I don’t think that they have to “replenish” assets – they just have to make sure they get the renewals (and watch that the cost of renewals or new customers doesn’t rise much beyond that implied by the purchase price). “The problem is that of the $220 cash from operations, only $82M was profit. The rest ($138M) came from 'selling' assets. The company no longer has all the $300M assets it started with. It has only $162 left now ($300-138). In the four years of its life it has used up almost half of its assets to fund distributions.” I’m assuming that you are referring to the accumulated amortization of gas and electricity contracts when you write “’selling’ assets”. Amortisation of gas and electricity contracts is the largest expense deducted from net income. Some of the amortization should probably not be included in distributable cash just like some of the depreciation of properties should not be paid out by REITs. To say that SIF.UN has “…come to the end of their leash…” would mean that not a single customer in the $300MM group they’ve amassed will renew. Ditto for “…it has used up almost half of its assets to fund distributions…”. Where, with reference to the quarterly or annual balance sheet, statements of operations and cashflows, are you able to show asset sales being used to finance distributions to unitholders? Has the number of customers under contract to SIF fallen by a half?, no. Sales and net income have not been halved either. Could you elaborate on how “…it used up half of its assets to fund distributions.” if they have more customers now than four years ago. (2004 AR has an overall increase in long term customers from 690,000 in 2003 to 993,000 in 2004.) ‘”This quarter showed that they need all their remaining assets. That left them with the question " how to fund the $22M distributions?" Since profits were only $11M, they went $10M into debt. ‘ $0.7MM on IT systems, $10MM for 2005 corporate tax liability and $6.7MM for Ont EPCOR acq’n. Quarter over quarter cash decreased by $8MM and they used $10MM from credit facility. Dists for the quarter were $23.5MM. It does look like they’re paying out too much (don’t know if the seasonal factor to this trust will bring numbers back into line in later quarters). This is not due to having fewer assets to sell to fund distributions.