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Melita Capital plc is another bond issuer which annually meets members of the financial community to provide an update on its financial performance and the local telecommunications industry.
The meeting last week was addressed by the CEO of the Melita Group Andrei Torriani and the CFO Stuart Williamson.
Melita Capital plc, which was set up in July 2009, shortly before the public bond issue, is essentially a holding company and a finance vehicle owning 100 per cent of Melita Infrastructure Ltd (the owner of the fibre-optic cable from Malta to Sicily) and 30 per cent of Melita Mobile Ltd. As such, the two members of the senior management team dedicated most of the presentation speaking about the broadband and mobile markets.
A network operator in the EU appears to be overcoming the economic and telecom sector challenges
The leading client of Melita Infrastructure Ltd is Melita plc and therefore the market share statistics of Melita plc are important to gauge the business performance of Melita Infrastructure and its sustainability in future years. This fully-owned subsidiary is the main contributor to the financial performance of Melita Capital. It is therefore important to monitor such trends in order to gauge whether the company can honour its annual interest obligations.
The statistics published by the Malta Communications Authority for 2012 confirm that the Melita Group now has a 47.2 per cent share of the local broadband market which is only 2.2 percentage points below that of its main competitor Go. The company confirmed that a large majority of the growth in the internet market during 2012 was absorbed by Melita thus enabling it to improve its market share.
The CEO explained that one of the initiatives of the Melita Group is to sustain and improve the quality of broadband services and at the same time review cost structures to meet the growing demand for bandwidth in the most efficient ways possible.
Mr Torriani explained that an improvement in quality was possible through the recent enhanced extension of Melita’s initial submarine fiber link in Sicily to Milan via a Tier 1 international provider ‘Level 3’.
The Pay TV business run by Melita plc is an important customer of Melita Infrastructure. The CEO explained that this investment enabled Melita to enhance its TV offering and retain market leadership in pay-TV with interactive IPTV services despite the company’s decision to direct investment away from sports content and towards enhancements of broadband services.
CFO Stuart Williamson confirmed the strong increase in performance by Melita Infrastructure with operating profits of €1.3 million in 2012 compared to €0.85 million the previous year. Likewise, pre-tax profits grew to €0.56 million from only €156,000 in 2011. The CFO explained that this is a very predictable business given the bandwidth provision to Melita and he expects a similar financial performance also for 2013. Part of the proceeds of the bond issue raised by Melita Capital were lent to Melita Infrastructure to refinance a bank loan. The CFO confirmed that most of this loan has since been repaid by Melita Infrastructure and from the original amount of €4.94 million, the outstanding balance has been reduced to approx. €1.8 million.
The improved performance of Melita Infrastructure has naturally positively boosted the financials of Melita Capital. The 2012 financial statements reveal a 17.7 per cent increase in revenue to €4.4 million and a five percentage point increase in its operating profit margin to 26.4 per cent largely reflecting the lower bandwidth costs incurred from the newly installed direct link with a Tier 1 operator in Milan.
Although the financial performance of Melita Mobile is not reflected in the income statement of Melita Capital (this is solely accounted for as a financial investment in the balance sheet), it still important to assess the performance of the mobile arm given the issuer’s credit exposure to Melita Mobile through a loan of almost €28 million. The 2012 Annual Report of Melita Capital reveals that on December 10, 2012, an amendment to the loan agreement between Melita Capital and Melita Mobile provides that this sum will be repaid as a bullet payment on July 31, 2016 ahead of the bond redemption date.
During the recent meeting, Mr Torriani explained that in spite of the intense competition in the highly saturated Maltese mobile market, Melita Mobile managed to further grow its subscriber base. Their market share grew from 10.7 per cent in December 2011 to 12.7 per cent of total subscribers by the end of 2012. Furthermore, the CEO also explained that Melita Mobile has a greater market share in terms of mobile minutes. During 2012, Melita Mobile accounted for 25 per cent of total mobile minutes. Mr Torriani explained that the company’s mission is to improve mobile coverage indoors and also seek to grow its market share further by targeting the smaller business community. He also indicated that another of the company’s aims is to provide superior speeds for mobile data and that they are actively working on introducing a next generation Wi-Fi service to support the ever growing demand from devices such as smartphones and tablets. (See story on Page 13)
The growth in the mobile market share from eight per cent in 2010 to over 12.5 per cent in 2012 is important for stakeholders of Melita Capital given the exposure to this business and falls in line with the targets of the original business plan which had been presented to the market at the time of the bond issue. It is also comforting for bondholders that in the notes to the 2012 financial statements, management state that Melita Mobile is not expected to default on any of its obligations to Melita Capital – namely the repayment of its loans by July 31, 2016, in anticipation of the bond maturity on September 30, 2016. This statement was replicated by the CEO and CFO during last week’s meeting with the financial community. In fact, the CFO confirmed that the auditors of Melita Capital (PwC) performed an analysis of the loans provided to Melita Mobile and no issues were raised on the possibility of the non-performance of such receivables.
Another important factor worth highlighting for bondholders is that the 2012 Annual Report confirms that Melita Capital effected the second payment into the bond redemption sinking fund.
Given that the Melita Capital is dependent on the business from the entire Melita Group, the top executives also provided a brief overview of the Group performance and market statistics. Without giving specific numbers of the Melita Group financials, the CEO referred to the overall telecoms market in Malta and Melita’s respective share. The data covering the past three years indicates that the overall market was stable in the region of €245 million with respect to revenue with Melita’s share hovering around the 20 per cent level but this is expected to improve to 23 per cent during 2013. O
verall market EBITDA levels improved by 13 per cent between 2010 and 2012 but these are expected to shrink during the current year. However, despite this contraction as a result of the intense competition, the Melita CEO indicated that the share of total EBITDA by the Melita Group is expected to increase from 20.5 per cent in 2012 to 24.5 per cent in 2013. Between 2010 and 2012, statistics indicate that the absolute EBITDA generation of the Melita Group surged by 85 per cent.
These statistics were also published on an international journal TMT Finance following a presentation made by Melita’s CEO at a recent MENA conference. The publication carried a piece stating that a network operator in the EU appears to be overcoming the economic and telecom sector challenges. By describing Melita as a private equity quad play operator the journal explained that Melita “has been quietly posting customer growth in a saturated market with three competitors, but even more impressively robust growth in top and bottom line”.
A continued profitable performance by the Melita Group also in future years will be positive for the financial market in general and this could also enable other group companies to consider financing their respective growth projects with the assistance of retail and institutional investors via public offerings.
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 from 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.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.