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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (19835)	10/12/2004 8:31:22 PM
From: E_K_S	Read Replies (3) of 78717

Hi Paul - Today an analyst at Smith Barney cut SFL to a sell from a buy based on valuation. His argument for his Sell call is that the annual profit sharing for SFL will be less than expected. Therefore, his call is based on the market expectations of the profit sharing. My Buy on this company was based on the agreements that SFL has with FRO (and possible other similar companies in the future) and the cash flow that these long term lease agreements generate. The general business model is an interesting new approach to this industry as SFL provides the day to day operation and management of FRO's tankers. I believe SFL will obtain other similar long term operating agreements with other major tanker companies. I never valued this company on the "profit sharing" clause SFL has with FRO but rather it was gravy if shipping rates came in high for the year or in SFL met other operating efficiencies. Our analyst at Smith Barney reduced his estimate for SFL's profit sharing from $600 million to $210 million. He also thinks the overall long term leasing trends have peaked. I believe the smart investor has been valuing the company based on the fixed lease agreements with FRO not the extra profit sharing kicker. Fair value IMO at a 10 PE based on FRO long term lease agreements is $35. Any extra profit sharing is a bonus and should really has not created the over valuation that this analyst believes. I bought more SFL at $21 as I believe the 6% dividend is strong for several years and eventually the market will discount this rate of return to the market price (perhaps to a 4% return). This implies that the stock should sell for $35 BEFORE any extra profit sharing! FWIW, 2010 all of the single hull ships must be double hull and the company has a transition plan to achieve this for their fleet. The company recently adjusted their accrual accounting to reflect this with an aggressive write down to reflect the scrap value of assets of any single hull ships that may be taken out of the fleet because of this 2010 requirement. I have a hard time trying to see the concern this analyst has for this company especially if he believes the recent stock advance is due to SFL's "profit sharing" high expectations. My only comment is he should look at the fixed contracts now in place and the cash flow that these agreements generate. Perhaps you provide a small premium for the company entering into similar contracts with other tanker companies that would allow them to expand their model to other companies in this sector. I continue to like this company and will add more shares over time. It is now one of my top ten holdings in my taxable account and a top ten holding in my IRA account. What's your take? Did you even consider the SFL profit sharing "expectation" when you purchased shares? EKS

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