The proposal of SIF Transilvania to distribute free shares has not been well received

Shares of SIF3 Transilvania yesterday fell 7.78%, to 0.5805 lei/share, after the management of the company proposed to shareholders increasing the share capital using last year's profit and offering free shares instead of dividends.

"There are theoretical conditions for the decision of SIF3 Transilvania not to pay dividends in 2013 having a positive impact in the medium term, considering the alternatives offered by the other SIFs", says Mihai Iulian Căruntu, Head of the Stock Market Research Team of BCR.

He has commented: "First of all, we shouldn't forget the context, namely that on the BSE there is a history of share capital increases by incorporating profits, which has been successfully used by Banca Transilvania, and which has been positively viewed by investors. This kind of share capital increases have been proven to cause the capitalization of companies to increase, the kind which simply incorporating the profits into the reserves wouldn't have brought about to the same extent".

The analyst says that the decision of SIF3 Transilvania must be considered in context of the fact that the SIFs really can't afford to pay significant dividends for several years in a row: "Let's not forget that at SIF3 Transilvania, the revenues from dividends and interests in 2013 amounted to 13.7 million lei and 5.8 million lei respectively, and operating expenses amounted to 29.5 million lei. In other words, the SIF is basically forced to sell off assets to cover its operating expenses, to say nothing of the payment of dividends. And a policy of selling assets to allow the payment of dividends can not be a sustainable one in the medium term. Selling off assets means lower NAV and implicitly, a lower price of the stock in the medium term.

Thus, by not paying dividends, SIF3 Transilvania sends a signal that it wants to protect its NAV from now on, which would theoretically mean that keeping the profit within the company should positively affect the price in the medium term. But there is one big < if > that has been brought up in the case of SIF1 Banat Crişana as well. Namely, whether SIF3 Transilvania will take on a credible and very transparent investment and management strategy and will adequately explain it to the investors, then there is every chance of seeing the capitalization increase. Otherwise, SIF3 may be perceived like SIF1, which has not convinced investors through its public messages and investment decisions made so far that the decision not to pay dividends in 2012 and 2013 will be offset through a substantial increase of the company's value in the medium and long term".

• Bogdan Gherghe, "Tradeville": "It was to be expected that the total value of annual dividends would be significantly reduced"

In line with the other SIFs, the price of SIF Transilvania has performed in the first half of January, but later, amid the uncertain political context, as well as of some corrections of the international indices it has returned to the level of 0.6 lei/share, said Bogdan Gherghe, Tradeville analyst.

He added: "The fact that over the last two years, SIF3 has seen record profits, distributing over 90% of its net profit in the form of dividends has put pressure on it to sell liquid assets. The strategy has diminished the quality of the portfolio, and in case it were to continue this year as well, there was the possibility of the structure of its assets becoming one of the least attractive in the sector. Thus, it was to be expected that the total value of the dividends paid out would be significantly reduced, as the management of SIF Transilvania opted for a solution where the profit stays within the company, and the shareholders are rewarded with free shares".

Given the fact that investors were expecting another year of exceptional dividends, the proposal has disappointed the market, the analyst said, and he went on to say that yesterday's evolution of the stock was exacerbated by the unfavorable context in the region.

"Still, we can expect for the immediate future a group of shareholders will ask for the payment of dividends", according to Mr. Gherghe.

In his opinion, in the current context, the evolution of the SIF3 shares will be affected by the global sentiment, by the evolution of the assets in its portfolio, as well as by the talks concerning dividends.

• Simion Tihon, "Prime Trasaction": "It is a good thing that the company doesn't get recapitalized, but at the same time, the measure is not popular"

Simion Tihon, broker at "Prime Transaction", thinks that the proposal of SIF3 to increase its share capital by granting free shares will arise controversies among investors.

He said: "On one hand, it is a good thing that the company doesn't get decapitalized, but at the same time, I don't think the measure is popular, as over the last few years investors have become accustomed to receiving significant dividends.

I think there have also been some investors that have anticipated a change in the manner of allocation of the profit, considering that the shares of SIF3 have seen a high volatility lately.

For the moment, I expect the evolution of the shares of SIF3 to follow the general trend set by the conflict from the Krimea region".

The directorate and the Supervisory Board of SIF3 shows that the proposal to distribute free shares is motivated by strategic and operational factors concerning the structure of the portfolio, the investment process and risk management.

On Friday, shares of SIF3 rose 3.88% on Friday, before the publication of the notice to attend the General Shareholder Meeting, as the other SIFs saw subdued evolutions, as the BET-FI index closed the day up 0.93%.

The General Shareholder Meeting of the shareholders of SIF3 was summoned for April 28th, 2014, and the agenda includes the allocation of the profit towards the reserves and the increase of the share capital to 218.42 million lei, using the reserves set up from the profit.

In 2013, SIF Transilvania (SIF3) has posted a net profit of 189.6 million lei, down 10.6% compared to that of 2012.