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Go’s dividends slashed by 50%

Go plc’s announcement on March 15 that dividends to shareholders have been halved to a net distribution of €0.05 per share was yet another disappointing piece of news for the local market.

Within the space of a few weeks, financial markets worldwide have had to grapple with an escalating political crisis in the Arab world which pushed the price of oil up sharply and a horrific natural disaster in Japan. Both these events hit investor sentiment badly and caused markets to touch 2011 lows. Our local market was not spared. It also had to absorb an unexpected credit rating downgrade of Bank of Valletta plc and the negative performance in the listed securities of those companies with exposure to Libya.

The significant decrease in the dividend distribution to Go shareholders was also unexpected. In previous meetings with the financial community, Go’s directors did not indicate any possible change in their dividend payout policy, unlike other local and international companies who normally guide the market in anticipation of the event. On the other hand, the group’s worsening overall financial performance was anticipated given the trends within Go and Forthnet at the half-year stage.

Go’s 2010 annual financial results provide mixed messages. On a positive note, it is clearly evident that the work being undertaken by management and the decision to seek inorganic growth through the purchase of a majority shareholding in a data centre operation is quickly reaping the desired results. However, on the other hand, the improved performance on the local front is being wiped out by mounting losses in Greece where Go and its majority shareholder have a 41 per cent shareholding in Forthnet.

Locally, some important financial objectives have been reached. Broadband and TV remain the two growth sectors in terms of subscriber numbers. The bundling offers provided by Go through the Home Pack helped improve customer connections during the year. Very importantly, Go reported that it managed to seize a majority market share in the broadband sector as customer connections climbed by 28 per cent during the year to 63,000. In the TV segment, Go reported that it surpassed 60,000 customers while in the mobile market, Go registered a four per cent increase in customers despite the stiff competition.

Go’s CEO David Kay also reported that surprisingly there was a slight increase in fixed line connections. These achievements helped the group register a 15.4 per cent increase in normalised EBITDA to €49.1 million which is excellent progress given the current economic and competitive landscape. The mobile segment remains the largest contributor to the Group’s performance.

Meanwhile, shareholders should be pleased to note the contribution from the new data centre operation. In 2009 Go had acquired a 60 per cent shareholding in the Bell Med Group and this generated an operating profit of €3.8 million in 2010 from overall revenue of €10.5 million. Mr Kay revealed that this business is expected to continue growing steadily in the coming years vindicating management’s acquisition only two years ago.

Another positive indicator was the strong cash flow generation which amounted to €43.2 million during 2010. In addition to financing the dividend payment of €10 million in respect of the 2009 financial year, this high level of cash generation helped the group finance its capital expenditure of €16 million from internal resources. With such a healthy cash flow, shareholders were expecting the company to at least maintain this year’s dividend payment on a similar level to that of last year.

During last week’s meeting with the financial community, Go’s management team also provided some figures on the performance of Forthnet during the year. While the Greek company seems to be making good strides in its telecoms business with EBITDA rising from €18.3 million to €28.6 million, the same cannot be said for the pay TV segment. Unfortunately, the severe economic recession in Greece is leaving its impact on this part of the business as EBITDA from pay TV slipped to €36.4 million from €45.7 million in 2009.

The worsening performance in this business area led to an impairment loss of €18.7 million being recognised by Forthnet, in turn contributing to an overall loss which swelled to €86.8 million in 2010. As a result, Go has had to recognise a loss of €24.7 million in its financial statements to reflect this performance.

Go’s decision in 2008 to use its large cash pile to invest in an overseas telecoms company had been ‘sold’ to its shareholders on the premise that this could be the only possibility for Go to achieve higher profitability levels in future years. It had been argued that the local market was saturated leaving little cope for growth for the incumbent operator. However, Go is now making good progress from its local operations and suffering from the significant losses being incurred in Greece. The 2008 international financial crisis and ensuing economic recession coupled with the Greek sovereign debt crisis has hammered the Greek economy and left its market on Forthnet.

Go’s shareholders therefore have to absorb the shock of the huge loss incurred as a result of the Greek investment and a 50 per cent cut in the dividend. In this respect, Go’s chairman Deepak Padmanabhan claimed that the drop in dividend was a prudent decision given the sizeable local investment programme being undertaken by Go in the coming years. Go’s shareholders will also need to come to terms with the fact that Go is continuing to invest further in the Greek company while slashing its dividend.

In fact, during 2010, Go and its majority shareholder invested a further €5.6 million in Forthnet, the bulk of which was affected on 30 March 2010 at a price of €1.08 per share. Forthnet’s share price has since fallen sharply and touched a low of €0.35 in November 2010 when a very sizeable transfer of shares took place. It has since recovered towards the €0.50 level but remains significantly below the level of 2009 and the first half of 2010. Since the start of 2011 a number of small transactions took place on a regular basis in Forthnet where Go and its majority shareholder continued to acquire further shares. Mr Padma­nabhan who is also the chairman of Forthnet defended this strategy by re-iterating the importance of remaining the largest shareholders in the Greek company.

Another concern is the note made by Forthnet’s auditors in the 2010 Annual Report published last week. The auditors noted that as at December 31, 2010, Forthnet’s current liabilities exceeded current assets and remarked that “it may not be able to meet part of its contractual principal repayment obligations under its long-term loan agree­ments”. Moreover the auditors high­lighted that “the group may not be in compliance with certain of its loan covenants in 2011”. The effects of this on Forthnet and its shareholders needs to be clarified at a meeting being held in Malta for the financial community with Forthnet’s execu­tive management team in the coming days. Go had been among the top dividend yielding equities in recent years but has now fallen back in the dividend yield table rendering the company a less attractive proposition from a dividend yield perspective. The company’s equity has also been underperforming the local equity market for several years now although it had a high dividend yield. This latest disappointment is likely to add to further misery for shareholders. Mr Padmanabhan did hint that the company may decide to re-introduce interim dividends in the coming months.

However, it is the overall level of the dividend payment which needs to be reverted to, coupled with a return to overall profitability, for interest in the company’s equity to pick up again. Hopefully, the lower dividend distribution is a temporary measure and dividends will be restored to higher levels once the economic outlook in Greece improves and further progress is achieved by Go on the local front.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member 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.

© 2011 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

www.rizzofarrugia.com

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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