The MSE Share Index is the local equity market benchmark tracking the performance of the companies that have their shares listed on the Official List of the Malta Stock Exchange.

During the third quarter, which came to an end last Monday, the Index closed minimally higher at 3,418.297 points. The Index was on course to register its first negative quarterly performance after five consecutive positive quarters, but the rebound in share prices during the last few days of September pushed the Index back into positive territory.

The last time the Index had registered a negative quarterly performance was in Q1 2012. The local market has thus performed positively for the past six consecutive quarters, with the Index climbing 16.3 per cent higher.

The marginal movement during the past three months is not reflective of the entire market because three companies have a dominant effect on the Index due to their size relative to the other constituents. The three largest companies on the MSE are HSBC Bank Malta plc, Bank of Valletta plc and Inter-national Hotel Investments plc, which together account for 62 per cent of the overall market.

Movements in these equities therefore have a much larger impact on the Index as opposed to changes in the share prices of the other 17 companies. In fact, losses in HSBC and IHI of 6.9 per cent and 4.6 per cent respectively, together with declines in nine other equities, offset the 6.4 per cent rise in Bank of Valletta plc and the spectacular gains achieved by Island Hotels Group Holdings plc (+84.7 per cent), RS2 Software plc (+52.5 per cent) and Crimsonwing plc (+27.6 per cent).

The decline in the share price of HSBC accelerated shortly after the equity turned ex-dividend in mid-August. The equity dropped to a four-year low of €2.45 on September 19 before partly recovering to end the month at €2.515. Meanwhile, the negative share price performance of IHI in the summer, following the upturn during Q2, is possibly attributable to the delay in the sale of the London apartments, which had been originally earmarked for the first quarter of 2013, and the protracted negotiations for the equity injection which will enable IHI to purchase additional properties and fly the Corinthia flag in other major destinations.

The strong gains in Island Hotels, RS2 and Crimsonwing were the main highlight of the summer months.

The major surprise was probably the turnaround in the share price of Island Hotels. Ever since the initial public offering four years ago, trading activity was sporadic, with few shares changing hands over the years. This trend continued during the first five months of 2013 and the share price drifted to a low of €0.52 during the final two days of May.

The equity continued to trade within a tight range until the end of June, but trading activity increased significantly during that month with a total of 847,000 shares changing hands (representing 2.3 per cent of the issued share capital). The equity increased gradually to the €0.70 level by mid-August on further strong volumes of 775,000 shares.

Companies should therefore dedicate more time to enhance investor relations activities and regularly update the market on strategy, performance and outlook if they wish to see activity in their equity

The recovery gathered momentum in September, with the share price almost reaching the IPO level of €1.00, but volumes declined in recent weeks. Despite the high volumes registered and the significant share price recovery, there was no specific company announcement that instigated this turnaround. The latest announcement was on September 12 when Island Hotels reported it would register a marginal improvement in operational performance during the current financial year which closes on October 31, 2013.

Island Hotels again reiterated that it continues to seek a fresh equity injection to finance the upcoming Oasis development as well as the planned refurbishment and extension projects for some of its existing properties. The surge in the share price accompanied by high activity could therefore be attributed to increased investor interest ahead of possible positive developments in respect of the company’s ongoing efforts to attract new equity partners.

The second best performer in the summer was RS2 Software plc, with its share price surging ahead following the significantly improved financial performance during the first half of the year and details of the agreement signed with Barclays Bank plc.

The 52.5 per cent increase in the share price was also accompanied by high trading activity, with just over one million shares changing hands during the past three months. The strong performance during Q3 continued to reinforce RS2’s position as the best performer on the equity market, with an increase of 180 per cent since the start of 2013.

Few investors may realise that since September 28, 2012, RS2’s share price has rallied by 299 per cent. The upswing commenced with the announcement of a €5 million licence agreement in Latin America on September 30, 2012. Further announcements were released over the past year which led to a significant improvement in investor sentiment towards this global IT company. RS2 held an extraordinary general meeting yesterday, paving the way for Barclays to acquire the 10 per cent shareholding in the company from the majority shareholder ITM Ltd and to seek to purchase a further 10 per cent stake from the secondary market.

Following the milestone agreement with Barclays and the indication by the company that negotiations are ongoing with potential customers in Europe, Latin America and also North America for new licence agreements as well as for smart processing, the market will remain very attentive to upcoming announcements.

Crimsonwing’s equity also had a remarkable summer with an increase of 27.6 per cent, bringing the year-to-date gains to 51 per cent. The summer rally came in response to the confirmation of the financial turnaround for the Group as it released its March 2013 full-year results on July 25.

More importantly, Crimsonwing reiterated its aim of achieving an increase in revenue of over 12 per cent to a level exceeding €20 million during the current financial year ending March 31, 2014. Similar to the trend in Island Hotels and RS2, the rally in Crimsonwing’s share price was also accompanied by a surge in trading volumes. In the summer months 1.3 million shares were traded, representing over 4 per cent of the total issued share capital.

While the local equity market measured by the MSE Share Index performed only marginally positively during Q3, the main inter-national markets had another strong quarter. However, increased volatility continued to characterise global equity markets with a sharp downturn in August caused by fears of a possible conflict in Syria and concerns on the timing regarding the US Federal Reserve’s tapering of its accommodative policy. However, markets performed positively in July and September on improved economic data across the eurozone, the UK and the US and continued upbeat financial performance from a number of multi-nationals. In recent days, markets performed negatively on the developing political crisis in Italy and on the stalemate in talks over the US federal budget leading to a US Government shutdown for the first time in 17 years.

The movements across the local equity market over the past year clearly indicate that newsflow is the most important driver for trading activity and share price changes. Companies should therefore dedicate more time to enhance investor relations activities and regularly update the market on strategy, performance and outlook if they wish to see activity in their equity improve for the benefit of all shareholders and the market at large. This is possibly one of the biggest challenges for senior management when moving from a privately-owned company to one that has its shares traded on a stock exchange.

Q3 Performance

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.