Updates from local bond issuers (1)

Investors generally focus on the financial performance and developments of the 20 companies that have their shares listed on the Malta Stock Exchange. However, it is also important to follow the financial performance of those companies that only have bonds listed on the stock market and which are available to the public for investment purposes. To date, a total of 17 companies have used the financial market to offer bonds for public subscription without listing their shares, and scrutiny over the financial statements of such companies is therefore also important.

The bond issuers themselves also need to understand the importance of having a continuous flow of information to investors and market participants. Unfortunately, few bond issuers organise meetings with the financial community to discuss their annual business performance throughout the lifetime of their bond. Some companies only organise meetings on the eve of a new issue and once they have achieved their objective of raising the required amount of borrowing from investors, their communication with bondholders and the market is restricted to any statutory obligations required by the Listing Rules.

Intermediaries in the financial market such as banks and stockbrokers need to be kept updated by bond issuers of their business performance and prospects and this information should be available to bondholders and investors generally on an ongoing basis.

Admittedly, the communication flow has improved over recent years by some issuers, however much more can be done to ensure that bondholders and the investing public are kept regularly updated of ongoing developments.

Another important consideration which is very often overlooked by investors is the distinction between a bond and a share. A bond is an obligation issued by a company and ultimately a bondholder needs to ensure that the company is generating sufficient cash to meet its obligations, namely that of regular interest payments (either semi-annually or annually) as well as the capital repayment upon maturity. An interest payment is generally fixed at the outset for the duration of the bond and is a firm commitment by the issuer to pay such an interest. On the other hand, a dividend on a share is determined periodically. This is not a fixed amount but is determined at the discretion of the board of directors and very often is dependent on the overall level of profits as well as the capital investment required in the future among other considerations.

Issuers (and their guarantors, if any) are obliged to publish their financial statements within four months of their respective year-end. In recent weeks most companies have published their financial statements and the aim of this article is to provide the main highlights for some of these companies.

Dolmen Properties plc

Dolmen Properties plc reported a strong set of results for the year ended December 31, 2010. During the year under review the company registered a 10 per cent rise in turnover to €10.9 million as the hotel achieved higher occupancy levels and superior room rates following the record number of tourist arrivals. Dolmen posted a 16 per cent increase in EBITDA to €3.3 million. Overall profits at €1.2 million (2009: €1.4 million) declined marginally as Dolmen Properties had to account for a tax charge of €478,869 compared to a write-back in 2009 arising from an overprovision of tax in 2008.

The strong performance in 2010 continued to strengthen the company’s financial situation. Dolmen’s debt to equity ratio is only at 0.23 times, with a net debt of €5.9 million and total equity of €25.9 million. In view of the strong cash flow over the years, in November 2010 Dolmen repaid 50 per cent of the outstanding bonds in issue leaving a balance of €5.5 million due for a final maturity in November 2013. Dolmen has one of the highest interest covers at 5.15 times based on the financial performance in 2010 and a very low level of gearing.

The interest cover should continue to improve as a result of the lower interest expenses to be incurred in 2011 following the reduction in borrowings arising from the partial bond redemption. The bond is secured by a first special hypothec over the Dolmen Resort hotel (having a net book value of €33.1 million) which has been placed in trust with HSBC Bank Malta plc.

The bonds issued by Eden Finance plc are guaranteed by the parent company Eden Leisure Group Ltd. The financial statements published by Eden Leisure Group on May 2, 2011 reveal that during 2010 an improvement in performance was registered with an overall increase of 5.5 per cent in revenue to €20.4 million and an eight per cent rise in earnings before interest, tax, depreciation and amortisation (EBITDA) to €4.4 million.

This improvement was mainly due to the turnaround in the hospitality segment on the back of a rebound in the tourism market. In fact, the Intercontinental Hotel registered an increase in revenue of nine per cent to €13.7 million (accounting for 67.4 per cent of group revenues) and this resulted in a 33.3 per cent rise in EBITDA to €2.7 million. On the other hand, revenue from the ‘entertainment’ side of the business declined marginally to €6.6 million mainly due to a drop in advertising at the radio station (Bay Radio).

`Overall, the Eden Leisure Group reported a loss of €0.83 million (2009: loss of €1.5 million) after accounting for depreciation of €2.4 million and interest costs of €2.8 million. Eden Leisure is among the few bond issuers to hold an annual meeting with the financial community. During the recent meeting, the company indicated that the upward trend of 2010 was maintained during the first quarter of 2011 and this is expected to continue for the remainder of the current year.

Eden Leisure Group expect 2011 revenues to be in line with the record figures of 2007 (€23.8 million) mainly due to the rebound in the conference business with a promising pipeline extending through to October. The entertainment side also registered improvements in the first quarter of 2011. Nonetheless, EBITDA is anticipated to be lower than the record 2007 level of €6.5 million due to increased costs (mainly utility rates) and a change in business mix. In June 2010, Eden Finance plc issued €15 million 10-year bonds carrying a coupon of 6.6 per cent. The proceeds from this bond were used to partly fund the redemption of the €23 million 6.7 per cent 2010 bonds with the balance being funded through bank loans. The Eden Leisure Group maintained the same level of debt with the gearing ratio unchanged at 1.3 times. Meanwhile, the interest cover only eased marginally lower to 1.6 times in 2010, however, this is expected to improve in the current financial year.

Premier Capital plc

During 2010, the Premier Capital Group registered a loss after tax of €651,000. This loss mainly reflects the slower than expected recovery in the Baltic States. The McDonald’s restaurants in Latvia, Lithuania and Estonia had a very weak performance during the first half of 2010 and a gradual recovery only started to materialise in the third and fourth quarters of 2010. Declines in revenue were registered in Latvia (-5.3 per cent to €12.5 million) and Lithuania (-7.8 per cent to €11.5 million) while in Estonia, the group achieved a 4.5 per cent growth in turnover to €10.3 million.

On an EBITDA level, Latvia and Estonia only generated marginally improved performances while in Lithuania there was a 21.9 per cent decline to €0.93 million. On the other hand, Malta continued to perform well and remained a major contributor to the overall group performance. During 2010, revenue from the eight McDonald’s restaurants located in Malta grew by 4.7 per cent to €17.4 million with EBITDA rising by 25 per cent to €3.5 million. Premier Capital managed to deliver on its plans with respect to new restaurant openings and by summer this year it is expected to reach the target set of 38 restaurants spread across Malta and the Baltic States.

The gearing ratio increased from 1.6 times in 2009 to 2.7 times during the year under review following the issuance of €25 million corporate bonds in March 2010. The interest cover declined due to higher finance costs. However, despite the higher interest costs and the subdued performance in 2010, the interest cover of 3.1 times during 2010 compares well with other bond issuers. Another major development took place on May 23 when the company announced that it was appointed as the franchisee for McDonalds in Greece and that with effect from 1 June, it was taking over the running of 19 restaurants in Greece.

Further short reviews of the financial performances of bond issuers will be featured in the coming weeks in this column for the benefit of bondholders and investors generally.

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.

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