2013 turned out to be a very positive year for local equities with the local benchmark index registering its best annual performance since 2005. The MSE Share Index advanced by 14.75 per cent as the majority of the companies listed on the Malta Stock Exchange saw their share prices gain during the year.
More importantly, this upward movement in share prices was accompanied by a surge in trading activity to the highest level since 2007. In fact, the value of equity market trades that took place on the regular market this year, amounting to over €52 million, represents a significant increase of more than 56 per cent when compared to the trading activity of 2012. This is reflective of the renewed positive sentiment across the local investor community. Possibly, the surge in volumes is also due to the ‘great rotation’ that is taking place in Malta too, where in view of the low interest rate environment, a growing number of investors are resorting to taking an exposure to dividend-paying equities as opposed to low-yielding fixed interest rate securities.
2013 was undoubtedly the year of the IT companies as these strongly outperformed the rest of the market. In fact, a quick look at the performance table for the year immediately shows the significant increases in the share prices of RS2 Software plc (+227.6 per cent), 6pm Holdings plc (+134.9 per cent) and Crimsonwing plc (+73.5 per cent) compared to the other equities listed on the Malta Stock Exchange. However, it is also interesting that apart from the three IT companies, another nine equities registered double-digit gains indicating the widespread positive sentiment across the market.
Bank of Valletta plc was among the equities which produced double-digit returns with a 21.8 per cent rise during the year. The increase in the equity during the year helped BOV become the largest company on the MSE as its market capitalisation surged above €790 million.
Besides these 12 companies which generated double-digit returns, a further four equities showed mild gains while another three equities performed negatively. The negative performers were HSBC Bank Malta plc, Plaza Centres plc and Medserv plc.
The significant rally in the share prices of the IT companies (RS2, Crimsonwing and 6pm) came about following news that all three companies were awarded various new international contracts. Moreover, all three companies registered improved financial performances.
The MSE Share Index advanced by 14.75 per cent as the majority of the companies listed saw their share prices gain during the year
RS2 Software plc was the star performer with its share price rising by no less than 227 per cent. The market cap of the company surged from €30 million at the start of 2013 to a value of €97 million. The significant rise in the value of the company helped RS2 become the seventh largest company on the MSE. After the publication of the 2012 financial statements in April 2013 showing a 32.5 per cent increase in pre-tax profits to €3.15 and an announcement a few days earlier informing the market that contracts were signed with two new clients, the major announcement that fueled the upturn was that related to Barclays Bank plc.
The initial indication was given on May 16 when RS2 informed the market through an appropriate company announcement that a third party wished to acquire a 10 per cent shareholding in the company. On June 19, RS2 further disclosed that the party was a major European bank and that it intended to establish a strategic relationship with the company. Another announcement was made on July 12 related to a new licensing agreement for £8.5 million and on August 30, RS2 disclosed that the European bank wishing to establish a strategic relationship with the company was Barclays Bank plc. RS2 also confirmed that the large licensing agreement was also signed with Barclays Bank.
The various announcements related to the Barclays relationship led to a significant increase in activity in RS2 shares. After the initial 10 per cent shareholding was acquired by Barclays from the majority shareholder ITM Holding Ltd, the stake of Barclays increased to 18.5 per cent by the first week of November. The share price climbed to a high of €2.38 on November 18 in response to the publication of the interim directors’ statement a few days earlier indicating that the company “is in intensive and advanced negotiations to conclude various agreements with new clients”. RS2 also stated that it is “expanding the relationship with existing clients by negotiating additional licensing and services agreements. These agreements are expected to be concluded and signed in the early months of 2014”. The equity has since eased slightly and hovered around the €2.30 level during the final weeks of the year.
The sterling-denominated equity of 6pm rallied by over 134 per cent during the past 12 months as the company returned to profits during 2012 after two loss-making years and re-instated a dividend to shareholders. 6pm also issued regular press releases and announcements during the year confirming new contracts mainly in the UK health sector. In the recent interim statement, the company informed the market that it continued to register profits on a monthly basis and it highlighted that the directors aim to again recommend the payment of a dividend to shareholders during the 2014 annual general meeting. 6pm also provided an update on new contracts being awarded to them as well as other contracts which are still under negotiation.
Although it is only the third best performer, Crimsonwing too had a remarkable year with an increase of 73.5 per cent. The performance in 2013 must also be seen in the context of the strong gains also in 2012 where Crimsonwing was the strongest performer with a rise of 96 per cent. Crimsonwing also returned to a profitable position during their most recent financial year to March 31, 2013 after a number of loss-making years. The company furthermore reported a strong improvement in its interim financial performance for the current financial year which comes to an end on March 31, 2014.
Similar to RS2 and 6pm, Crimsonwing also announced a number of new international contracts with the most recent one for a multi-national nutrition and health company. Crimsonwing will be rolling out a global eCommerce project across 54 markets in 20 languages for this company.
While activity on the equity market increased significantly during 2013, the corporate bond market saw a 29 per cent decline in volumes on the secondary market mainly as a result of the lack of bonds on offer. The market is in need of various new issuers to offer fixed interest rate securities to satisfy the growing demand from a widening investor base. In this respect, there are strong indications that a number of new bond issues will hit the market during the course of 2014. This should translate into improved trading activity across the secondary market in corporate bonds.
Share price movements and trading activity in the equity market will continue to be dominated by the occasional newsflow released by the various companies. This was very evident from the developments in 2013. Investors will be particularly attentive to the upcoming statements on the financial performances of the three IT companies following the spectacular run over the past 12 months. Other major announcements may dominate the media during the course of 2014 such as the decision by Go plc on the Forthnet rights issue, the results of the voluntary bid by Burgan Bank and United Gulf Bank for all the shares not already held by them in FIMBank plc and the bank’s subsequent rights issue, the possible sale of the London residences by International Hotel Investments plc, the possible new equity investor in Island Hotels Group Holdings plc that will enable the company to fund a part of its upcoming capital expenditure programme, and the possible sale of shares by the largest shareholder in Lombard Bank Malta plc.
2014 is therefore likely to be another eventful year for the Maltese financial market.
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.