The accelerated decline in the prices of local equities in recent days has brought some to multi-year lows. This has resulted in many investors wondering how far lower equities can go. The conversion of share prices from Malta liri to euro on January 2, 2008 may have masked the extent of the downturn over the past 14 months and these graphs may help to show the extent of the decline.
The two large bank equities which dominate the Malta stockmarket (they account for over 42.8 per cent of the MSE Share Index), have tumbled since the start of the year on the back of heavy declines in 2008. BoV slipped 30.8 per cent to touch its lowest level since January 2004 while HSBC shed 21.9 per cent to a level last seen in September 2004. Meanwhile, the fourth largest cap, Go, touched an all-time low of €1.488 (equivalent to Lm0.639) and few might realise that this is well below the June 1998 IPO price of €2.096 (Lm0.90).
All markets move in cycles and the local equity market is no different. Tracking the MSE Share Index, one notices that after racing up to the then dizzy heights in January 2000 and even higher levels in March 2006, the subsequent downturn has been just as vicious. This bear market, which is almost in its fourth year since the market peak of 6,641.873 points on March 28, 2006, has been exacerbated by the collapse of the international stockmarkets especially following the demise of Lehman Brothers on September 14, 2008 and the ensuing global financial and economic turmoil. All stockmarkets have declined sharply since mid-September. The local Borza shed 29 per cent, similar to the declines in the US, UK, Germany and other European and Asian markets.
However one major difference between the Malta market and some of the problems of the international bourses is the health of Malta's banking system. Many international stockmarkets have been hammered as a result of the serious problems at a fairly large number of international banks. The nationalisation or part-nationalisation taking place in the UK, the US and other European countries and the need for massive amounts of fresh capital by banks in many parts of the world has diluted shareholders and has led to a significant decline in the share prices of such banks. CitiGroup and Bank of America in the US have fallen by 93.6 per cent and 88.3 per cent respectively in the past six months with Royal Bank of Scotland, Lloyds and Barclays following a similar fate with declines of 90.9 per cent, 85 per cent and 76.7 per cent respectively.
Although the share prices of Malta's two major banking institutions have also taken a beating, they are in a much healthier state and in sharp contrast to many other larger banks overseas. While HSBC Malta and Bank of Valletta are expected to face a challenging 2009 as a result of an economic slowdown in Malta due to the knock-on effect from the downturn in our major trading partners, they are not expected to suffer from the serious problems being faced by many international banks. The main issue that brought various international banks to seek fresh calls for capital from their shareholders is that these institutions depended to a great extent on inter-bank lending to fund their business. On the other hand, Maltese banks always adopted a more cautious approach and relied on traditional customer deposits to grow their loan portfolio.
Share price movements can at times be driven solely by sentiment and not by fundamentals. While genuine "investors" look at the business prospects of the company to gain a better understanding of likely profitability levels and growth over the long-term, short-term "speculators" or "traders" base their decisions on the likely movement in the share price over a very short timeframe. As a result, while "value investors" may be viewing this extended downturn as an excellent opportunity to buy good companies at cheap valuations, "traders" may be rushing out to avoid further losses, thereby creating supply for "value investors".
The share price movements of BoV, HSBC and Go over time and the comparison of some important indicators at the time of the bottoming of the last bear market and today, highlight some interesting observations.
The movements of BoV and HSBC have followed a very similar pattern. In fact BoV touched its low in the previous bear market on 29 October 2002 (at a price of €1.614) and HSBC's equity bottomed only a few days later on November 1, 2002 at €1.007. At the time BoV was trading on a price to earnings ratio of 12.1 times (compared to 12.5 times at last Tuesday's price of €2.21), a price to book value of 0.97 times (compared to 0.9 times on Tuesday) and a gross dividend yield of 6.7 per cent (compared to the current 7.6 per cent).
Meanwhile, on November 1, 2002, HSBC was trading on price to earnings ratio of 8.2 times (compared to 10.3 times earlier this week), a price to book value of 1.1 times (compared to a current ratio of 2.3 times) and a gross dividend yield of 6.1 per cent (compared to 9.7 per cent based on the recently announced dividend).
Go shareholders will probably be very surprised when seeing the share price pattern since the company's equity was listed in June 1998. Although the price has fallen to below the IPO level of €2.096, the latest financial statements show that despite the increasingly competitive landscape, the telecoms group continued to generate significant cash flows.
This is a very important indicator and should be seen concurrently with the actual profitability of the company since the bottom line profit figure is dented by a high level of depreciation, which is a non-cash item.
Moreover the level of cash flow generation determines the ability of the company to make dividend payments to shareholders. Although Go skipped its 2008 interim dividend, the total dividend distributed in respect of the 2007 financial year represents a payment of €15 million, which is 33 per cent of the total cash flow generated from operations of €46 million.
On November 7, 2008, Go announced that during the first 10 months of 2008 its cash flow had remained stable and this should enable the company to maintain its dividend payment level to shareholders for its 2008 financial year.
In times like these, investors generally shift attention towards bonds which offer less risk and relatively attractive yields.
Therefore, 2009 is not only likely to be looked at from an equity market perspective, but is expected to be a very active year for the bond market as investors seek to place some of their lower-yielding investments into bonds offering higher rates of return.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd. RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
• Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
http://www.rfstockbrokers.com
The two large bank equities which dominate the Malta stockmarket (they account for over 42.8 per cent of the MSE Share Index), have tumbled since the start of the year on the back of heavy declines in 2008. BoV slipped 30.8 per cent to touch its lowest level since January 2004 while HSBC shed 21.9 per cent to a level last seen in September 2004. Meanwhile, the fourth largest cap, Go, touched an all-time low of €1.488 (equivalent to Lm0.639) and few might realise that this is well below the June 1998 IPO price of €2.096 (Lm0.90).
All markets move in cycles and the local equity market is no different. Tracking the MSE Share Index, one notices that after racing up to the then dizzy heights in January 2000 and even higher levels in March 2006, the subsequent downturn has been just as vicious. This bear market, which is almost in its fourth year since the market peak of 6,641.873 points on March 28, 2006, has been exacerbated by the collapse of the international stockmarkets especially following the demise of Lehman Brothers on September 14, 2008 and the ensuing global financial and economic turmoil. All stockmarkets have declined sharply since mid-September. The local Borza shed 29 per cent, similar to the declines in the US, UK, Germany and other European and Asian markets.
However one major difference between the Malta market and some of the problems of the international bourses is the health of Malta's banking system. Many international stockmarkets have been hammered as a result of the serious problems at a fairly large number of international banks. The nationalisation or part-nationalisation taking place in the UK, the US and other European countries and the need for massive amounts of fresh capital by banks in many parts of the world has diluted shareholders and has led to a significant decline in the share prices of such banks. CitiGroup and Bank of America in the US have fallen by 93.6 per cent and 88.3 per cent respectively in the past six months with Royal Bank of Scotland, Lloyds and Barclays following a similar fate with declines of 90.9 per cent, 85 per cent and 76.7 per cent respectively.
Although the share prices of Malta's two major banking institutions have also taken a beating, they are in a much healthier state and in sharp contrast to many other larger banks overseas. While HSBC Malta and Bank of Valletta are expected to face a challenging 2009 as a result of an economic slowdown in Malta due to the knock-on effect from the downturn in our major trading partners, they are not expected to suffer from the serious problems being faced by many international banks. The main issue that brought various international banks to seek fresh calls for capital from their shareholders is that these institutions depended to a great extent on inter-bank lending to fund their business. On the other hand, Maltese banks always adopted a more cautious approach and relied on traditional customer deposits to grow their loan portfolio.
Share price movements can at times be driven solely by sentiment and not by fundamentals. While genuine "investors" look at the business prospects of the company to gain a better understanding of likely profitability levels and growth over the long-term, short-term "speculators" or "traders" base their decisions on the likely movement in the share price over a very short timeframe. As a result, while "value investors" may be viewing this extended downturn as an excellent opportunity to buy good companies at cheap valuations, "traders" may be rushing out to avoid further losses, thereby creating supply for "value investors".
The share price movements of BoV, HSBC and Go over time and the comparison of some important indicators at the time of the bottoming of the last bear market and today, highlight some interesting observations.
The movements of BoV and HSBC have followed a very similar pattern. In fact BoV touched its low in the previous bear market on 29 October 2002 (at a price of €1.614) and HSBC's equity bottomed only a few days later on November 1, 2002 at €1.007. At the time BoV was trading on a price to earnings ratio of 12.1 times (compared to 12.5 times at last Tuesday's price of €2.21), a price to book value of 0.97 times (compared to 0.9 times on Tuesday) and a gross dividend yield of 6.7 per cent (compared to the current 7.6 per cent).
Meanwhile, on November 1, 2002, HSBC was trading on price to earnings ratio of 8.2 times (compared to 10.3 times earlier this week), a price to book value of 1.1 times (compared to a current ratio of 2.3 times) and a gross dividend yield of 6.1 per cent (compared to 9.7 per cent based on the recently announced dividend).
Go shareholders will probably be very surprised when seeing the share price pattern since the company's equity was listed in June 1998. Although the price has fallen to below the IPO level of €2.096, the latest financial statements show that despite the increasingly competitive landscape, the telecoms group continued to generate significant cash flows.
This is a very important indicator and should be seen concurrently with the actual profitability of the company since the bottom line profit figure is dented by a high level of depreciation, which is a non-cash item.
Moreover the level of cash flow generation determines the ability of the company to make dividend payments to shareholders. Although Go skipped its 2008 interim dividend, the total dividend distributed in respect of the 2007 financial year represents a payment of €15 million, which is 33 per cent of the total cash flow generated from operations of €46 million.
On November 7, 2008, Go announced that during the first 10 months of 2008 its cash flow had remained stable and this should enable the company to maintain its dividend payment level to shareholders for its 2008 financial year.
In times like these, investors generally shift attention towards bonds which offer less risk and relatively attractive yields.
Therefore, 2009 is not only likely to be looked at from an equity market perspective, but is expected to be a very active year for the bond market as investors seek to place some of their lower-yielding investments into bonds offering higher rates of return.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd. RFC, are members of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
• Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
http://www.rfstockbrokers.com