Administration of condominiums across Italy.
i. Business overview.
SIF Italia (SIF.MI) is a condominium administrator and a properties and asset manager operating around 83,000 residential units across 8 different regions located in the North and central part of Italy through several subsidiary companies. The group also has an extensive know-how in the operation of thermal power and waste-to-energy plants that it has redeveloped over the past decades (with a total of 12 facilities under management as of this writing). The latter assets are used to generate and market energy, part of which is offered to the condominiums under administration. Closing this synergetic loop, waste from real estate complexes under management is sent back to the waste-to-energy plants operated by SIF.
With a market capitalisation of €26.0M and a total of c.100 employees, the group carries out its operations from its main office space in Milan and secondary locations in Lecco, Parma and Verona, as well as subsidiary facilities in Domodossola, Ravenna, Regio Emilia, Rome and Trieste.
SIF was founded in 1896 as a pure financial intermediary company, not being until 1993 when the corporate purpose shifted and the group entered the sector of management and administration of real estate assets with the acquisition of a 40.0% stake in what can be considered its pivotal subsidiary today: Home Service Italia.
Luca Giuseppe Ruffino, current CEO, has c.43.5% of the shares outstanding under his name after agreeing to sell part of his interest in the group from c.65.0% to Oxy Capital (a private investment fund with over €1.0 billion in AUM) earlier this year. We will revisit this topic later, as subsequent events are unfolding in a somewhat interesting way.
The figure of the condominium administrator is defined by the Italian Civil Code (art. 1129) as the subject (natural or legal person) appointed to manage the building but limited to its common spaces, responsible for their maintenance and integrity, absorbing the associated expenses and observing and safeguarding the rules established by the specific regulation of the condominium. In Italy, the appointment of a condominium administrator is mandatory when the presence of more than 8 condominiums is ascertained in any given residential complex.
In accordance with that same article, the condominium administrator must be appointed by a favorable resolution of the property owners with a duration of one year and shall be renewed on an annual basis should the relationship continue.
As a condominium manager, the value proposition of SIF consists of offering not only basic maintenance services (such as waste management or cleaning) through its IT platform, but also accounting, the digitization of the common spaces, energy supply (including the installation of wallboxes for EV recharge) and technical support in relation to energy certification and requalification (often as an intermediary by externalising most of these activities).
On the other hand, the property manager is considered a company or other professional figure that administers real estate assets on behalf of their owners, typically aiming to preserve and increase the value of the underlying assets.
Third-party property and asset management contracts typically have a shorter average duration of three to twelve months, compared to the annually fixed agreements made with condominiums.
As a property manager, SIF seeks to ensure that the asset becomes and/or stays as an income source for the owner by carrying out the following activities (among others):
Handling of property maintenance contracts.
Technical and administrative assistance on the property.
Acquisition and leasing assistance.
Although SIF Italia derives its revenues from the administration of condominiums and third party properties, the latter can be considered a marginal activity since, as of the end of 2022, it only contributes with 2.4% of the total turnover (or €0.2M), while 92.7% (€8.1M) comes from the management of condominiums and the remaining 4.9% (€0.4M) is categorised as “other revenues” (primarily fees collected from contingent assets).
SIF was listed in the Borsa Italiana at the end of 2021, so the financial data available to a potential investor is reduced (notwithstanding the pro-forma report covering the company’s operations in 2020). Since then, the group has presented gross and operating profitability levels in the range of 70.0% and 30.0% -respectively- with returns on capital employed typically averaging 15.0% to 20.0% while maintaining a strikingly strong balance sheet (as of the end of 2022, net debt was negative €2.5M with total debt shy of €0.1M).
During the two-year period ending in 2022, sales have grown at an annual pace of 28.0% to €8.7M while operating income and statutory earnings per share have followed at an impressive rate of 73.2% p.a. to €2.5M and €0.27/share, respectively. The reason behind such operating leverage is not a one-time event but rather a combination of increases of just 38.7% and 45.0% in service costs and headcount wages (these two items typically represent more than 65.0% of all COGS and operating expenses) with sales up 59.2% over the same period.
A concerning point that should be noted is how receivables are piling up at a pace of c.€1.5M/year with flat payables (inventories are pretty much inexistent given the light capital nature of the business), which is consuming almost the entire cash-flow generation capabilities of the group. This is reflected in the €0.1M of OCF generated in 2022. As of the end of last year, SIF had €4.3M in short-term receivables from customers, compared to €2.7M a year before.
Even though no related write-down has been acknowledged during the year, SIF’s comment on the changes in working capital points to the sharp increase in the cost of living across Italy (where year-over-year inflation peaked at 12.0% last summer and currently sits around 6.4%) as the main reason why customers are delaying payments. Translated version below:
“Trade working capital […] increased by approximately €1.7M compared to 2021 mainly due to the increase in trade receivables. In particular, the economic situation, primarily attributable to the impact of the Russian-Ukrainian crisis, weighted on Italian families through a sharp rise in the price of fuel, gas and electricity and a generalised increase in inflation to levels not seen in over twenty years. In this context, the company has put in place all the safeguards necessary to manage any further delays in collections by some managed condominium portfolios, also benefiting from a high internal administrative, financial and operational capacity.“
No further comment on such measures is provided.
While it is true that the current working capital poses a strong impact on the group’s operations, in my view it also distills two observations on the stickiness degree of SIF’s services: (a) on one side, it makes evident that the customer base of the group is vulnerable to the economic cycle and, as such, the pricing power of the company may not be as strong as one would initially assume given that its services are considered a basic need or even mandatory in certain cases and (b) on the other hand, it still results quite remarkable that a company can continue to be cash-flow profitable (at the operating level) notwithstanding c.20.0% of the total sales volume not being collected.
The strategy set forward by SIF is to act as an industry aggregator by selectively acquiring condominium portfolios and local office businesses within the sector as well as expanding the existing customer base organically, thus increasing the amount of residential properties under administration while reaffirming itself as the national industry leader. The group intends to focus its M&A efforts in those same regions where SIF is already operating, the most relevant benefit from this being an increased customer density (lower management costs per residential unit).
SIF favors contracts involving large real estate complexes and condominiums over individual units. In this regard, the group is considering entering the Sardegna region due to its high occupancy rates and density, especially during the summer season.
Another component of SIF’s strategy consists of strenghtening its brand recognition across the national territory, not (only) seeking the expansion of its retail customer base but that of institutional clients such as banks, asset managers or insurance companies). To achieve this, the group has led a marketing campaign punctuated with institutional meetings and dedicated to an audience of high-standing operators. In turn, a stronger SIF brand should ease the penetration in other niches of the economy:
“[…] a greater penetration in the property management sector will be possible thanks to the skills and know-how gained in the management of complex cases such as condominium administrations. In this regard, the group believes, thanks to the path of innovation technology already underway, to possess the characteristics necessary for the creation of added value in a sector which […] records low margins and is generally characterised by low innovation and barriers to entry.
These factors, combined with the financial stability derived from the condominiums administration, would allow the group to increase its positioning in the sector maintaining high-quality standards and competitive conditions.“
After consolidating several companies in 2022 (namely GestioniStabili, Studio Campana, Casadio Aimi & Partners, Studio Benessere Condominio and Studio Salvetti) and increasing the ownership in Home Service Italia to 87.8%, SIF has continued to announce a battery of new acquisitions year to date:
Chiavari Amministrazioni (operator in the Ligurian region).
Arsini (operator in the Milan area).
Casa Srl (operator in Lecco and its surroundings).
Two condominium portfolios from other operators: the first relating to Parma and its province and the second in Massa’s territory.
Management expects the three acquisitions and the two portfolios above to contribute with an annual turnover of c.€1.9M.
The schematic below reflects the current relationship between SIF (parent holding) and its subsidiaries (excluding 2023’s M&A deals):
Every box in the picture above represents a company under SIF’s umbrella. The gray boxes are fully controlled by the group, with a lighter gray color indicating direct ownership from SIF and a darker tone being used for those whose partial ownership is taken to effect through Home Service Italia. The relative interest from SIF and Home Service Italia on each subsidiary is included in the top-right and bottom-right corners -respectively- of the corresponding subsidiary. Lastly, Power Point City Car appears highlighted in yellow to indicate the lack of controlling rights from its parent company.
Asides from Power Point City Car, all subsidiaries operate in the industry of condominium and asset administration. The former being the vehicle through which SIF operates its thermal and waste-to-energy power plants.
A tailwind that SIF is benefiting from in recent years is the so-called Superbonus 110.0% which, after being formally approved by law in July 2020 in response to the economic slowdown, allows a legal person or entity in Italy to receive a tax-break ranging between 50.0% to 110.0% of the total investment made to property upgrades that qualify as energy renovations (including seismic retrofitting). This superbonus can be traded (cessione del credito) by entitled property owners, effectively selling it to third parties such as asset managers. It has recently been announced that the Superbonus 110.0% is extended until December 31st, 2023.
The Italian asset management landscape is an extremely fragmented industry, there being no single comparable to SIF across the national territory. Through a series of M&A activities, the group has acquired several condominium portfolios and other local administrators, positioning itself as a potential candidate to lead the consolidation of the sector.
In Luca Ruffino’s words (translated):
“It is not possible to make a comparison with the competition as there are no companies on the market comparable to the SIF Italia group. The providers of similar services constitute a reality scattered throughout the national territory and always operate in a local area.”
As mentioned earlier, Luca Giuseppe Reale Ruffino has been the CEO of SIF since 1997 and owner of c.65.0% of the total pool of shares outstanding until March 2023, when he (together with Cinzia Tarabella, owner of 19.4%) agreed to reduce his interest in the group to just about 43.5% to a private investment fund (Oxy Capital).
Cinzia Tarabella (member of the board) used to be, after Luca Ruffino, the biggest shareholder of the group. After the aforementioned transaction, her stake in the company has been reduced to 13.0%.
My view is that this sale was not based on a fundamental problem at SIF but rather a life matter: Mr. Ruffino is 60 years old and has run the company for 27 years. It seems to me natural to start thinking about enjoying some of the capital compounded over the years, and a retained 43.5% stake in the group is still no small position. This transaction (executed at €3.97/share) provided Mr. Ruffino with c.€7.0M in cash (enough for a nice house by the sea and few fine dinners).
This story turns quite interesting when we fast forward to May 2023, when Mr. Ruffino starts purchasing shares several times a week at prices ranging between €3.5/share and €3.6/share.
In the last two months he has executed 12 orders amounting to 12500 shares or about €45.0k. While judging this figure it is important to bear in mind the extreme illiquidity of a company of SIF’s size (the average daily volume ranges between 500 and 3000 shares). Granted, not a big deal compared to the size of the sale made just two months earlier, but why would you sell such a big stake in the company you are running to just start buying back shares right after the deal is closed? Certainly does not look like a decision one would make if the prospects of the company are worsening. Does it not make more sense then to just not sell any shares in the first place? The reason is we do not know why he sold such a big position, but if I had to guess I would opt for a decision of a private nature more than one related to the business itself.
The reader may allow me to begin this section with a personal story. Earlier this year I started renting an apartment. Living and working in a different country, we sought to avoid, as much as possible, dealing with the day-to-day distractions from it. After some research we found a property manager who keeps c.5.0% of the rent and takes care of all the administration work. They offer their services through an IT platform that enables easy communication as well as tracking payments from tenants, overviewing costs/issues and reporting. Not much time has elapsed since then but I must admit that I am a happy customer and most of it is due to the flexibility and traceability provided by that software.
Hopefully this example reflects the importance -in my view- of being sufficiently digitised in the property management sector, an industry traditionally characterised by low rates of technological disruption and a predominant lack of innovation. In a world where one can get any type of food at his doorstep in less than 20 minutes, buy any item online and having it delivered next day or open a savings bank account abroad without even picking up the phone, customers are becoming more and more used to getting instant gratification to the point where companies not adapting to these major trends will find survival a bit difficult. I’m not commenting on whether we as customers lacking the ability for delaying gratification is a net positive for our lives or not (although the recurrent reader probably senses what my thoughts are in that regard). It is just the way consumption trends are unfolding, and these do not seem to solely concern physical products but also data.
In my opinion, the single best asset that SIF Italia has working for the group very well could be its IT platform: a centralised hub where standing payables and past expenses can be retrieved anytime and where reports and payments are automatically handled. The operational efficiencies of such a system are vast, especially when your competition does not have the meanings or the scale to even think about offering it.
It shall be mentioned that the software provided to SIF’s customers is not proprietary but licensed from a third party, so the risk of a cancellation of the service (e.g. supplier’s bankruptcy) is not inexistent.
At €3.6/share and with €26.0M in market capitalisation, SIF is currently trading at around 13.0 times statutory earnings per share with depressed cash-flows as a consequence of the delay in payments from customers.
In my opinion, how working capital unfolds over the next six months plays a critical role in determining whether SIF represents an attractive investment case at this point or not since, with €4.3M in receivables due within 2023 (16.5% of total market capitalisation) and €2.5M in excess cash and equivalents (another 9.6%), the company would be trading with a discount of 26.1% to the appearing 13.0 times 2023’s EPS which would entail a real quotation closer to 9.6 times.
Furthermore, should the €4.3M receivables be collected in full (assuming no write-downs) and taking into account a stabilisation of the working capital, 2023’s cash-flows would be yielding about €6.0M OCF or 25.5% from an operating cash-flow standpoint in 2023 alone. Capital expenditures typically represent around 2.0% of sales, so in free cash flow terms this figure would not vary radically.
Let’s opt for a more conservative path and assume that half of receivables from customers are written down within 2023.
Taking for granted the €1.9M increase in sales from the acquisitions made year to date (c.22.0% top-line growth in 2023) and estimating 10.0% annual sales increase moving forward into 2025 with similar profitability to the levels seen last year (no cherry picking here, I consider 2022 to be the most reliable period as 2020/21 do not account for the additional expenses related to being listed in the Euronext Growth Milan exchange), the group would be generating around €0.36 in EPS by the end of 2025 (€12.8M sales with 20.0% NPAT margin and no dilution).
SIF has not participated in any share repurchase program or dividend distribution to date, so it is fair to assume this will continue unchanged over the coming years.
Regarding market quotation, what would be a fair multiple for a company growing top-line and EPS at an annual pace of c.14.0% (inorganically), historical returns on capital of 15.0% (on the lower end), debt free, with a capital-light business model and owner-operated? I would like to argue 14.0 or 15.0 times statutory earnings would be a fair price (in fact, the transaction made between Mr. Ruffino and Oxy Capital was at €3.97/share just two months ago at around 14.7 times trailing EPS).
Flipping over the envelope we get the following expected IRR:
EPS growth: +33.3% (€0.36/share 2025 EPS compared to €0.27 last year).
Multiple expansion: +30.8% (14.0 2025 PER compared to today’s 10.7*).
Currency fluctuations: 0.0%**.
*The 10.7 figure is reached when assuming 50.0% of receivables are written down in 2023 and inclusive of the €0.35/share in excess cash today.
**No currency fluctuations are computed as SIF already trades in EUR.
Should the assumptions above materialise, total shareholder return over the forecasted three-year period would be c.74.5%, or an IRR of 20.4%.