In my first article of the New Year, I reviewed the best performing equities listed on the Malta Stock Exchange during 2013. These were the three companies operating in the IT sector. In that article I also briefly mentioned that only three equities performed negatively last year, namely HSBC Bank Malta plc, Plaza Centres plc and Medserv plc.
While it is good for market participants to understand the reasons for the upswing in various equities, it is also equally important for investors to identify the factors behind the underperformance of certain equities and what they should be looking out for once these three companies update the market on their 2013 financial performance in the coming weeks and months.
During 2013, HSBC Bank Malta plc lost its ranking as the largest company listed on the Malta Stock Exchange as its share price eased 3 per cent lower and concurrently that of Bank of Valletta plc advanced by 21.9 per cent. HSBC’s share price touched a multi-year low of €2.45 in September and briefly recovered to close the year at €2.60.
HSBC Malta reported a flat performance during the first half of 2013 (pre-tax profits declined by a mere 0.6 per cent to €53 million) and the gross interim dividend was unchanged at €0.10 per share.
While HSBC’s financial performance suffered from a decline in the net interest margin, this was largely offset by improved profitability from the life assurance subsidiary and gains from ‘available-for-sale’ securities.
The financial performance of retail banks is impacted by movements in interest rates and the demand for loans as well as deposits. Following the interest rate cut by the European Central Bank in November, the general outlook is for interest rates to remain stable for the coming years, which is not an ideal scenario for retail banks.
As such, an increase in the overall loan portfolio is necessary for HSBC and other banks to generate improved interest income. In August 2013, HSBC Malta’s CEO had indicated a modest improvement in the business pipeline for new loans.
Market participants will therefore be eagerly awaiting the publication of the 2013 annual financial statements due on Monday February 24 to monitor such progress in the loan portfolio and the impact on the bank’s core performance.
The launch of the €50 million Malta Trade for Growth Fund could have also started contributing to an increase in the loan portfolio. Moreover, if the directors also maintain an unchanged final dividend, the gross dividend yield of circa 7 per cent per annum should continue to appeal to the numerous income-oriented investors.
The share price of Plaza Centres plc declined by 4 per cent during 2013 possibly reflecting the 11.6 per cent drop in pre-tax profits during the first half of the year.
The lower level of profits occurred as a result of the weaker revenue generated until June 2013 following a decline in the average level of occupancy to 83 per cent compared to 93 per cent in the first half of the previous year.
While the large majority of the retail outlets remained fully occupied, the decline came about from the office units.
A tenant, who had occupied a large area of the Plaza office premises for many years, vacated their units between June and August 2012. Plaza opted to undergo a refurbishment programme of the available office area and segregated the area into smaller units.
In the Half Year Report published on July 15, 2013, Plaza reported that out of the 3,000 sq.m. that had been vacated, the company managed to lease out 1,800 sq.m. but the increased area had not yet all started contributing to the company’s financial performance in the first half of 2013.
Moreover, in the Interim Directors Statement issued on November 18, 2013, Plaza’s directors also indicated that the occupancy level continued to improve since June 2013.
Shareholders who maintained their loyalty towards these companies will be expecting dividend payments apart from evidence of improvements in their financial performance
Once the 2013 annual financial statements are issued in the coming weeks, it would be interesting to discover whether Plaza managed to lease the remaining 1,200 sq.m. which was split up into five separate units. During the first half of the year, Plaza also relocated their management office to a lower floor in response to the higher demand for offices on the penthouse level.
This should also lead to an improvement in the rental income for the company over the coming years. Plaza’s revenue should also benefit from the higher rental rates being obtained from the new office tenants. Given the large area leased for a considerable number of years, Plaza had given beneficial terms to the previous tenant.
Another initiative in recent months which will also positively impact the financial performance going forward is the renegotiation of the banking facilities totalling €4 million as at the end of June 2013. Plaza consistently distributed dividends to shareholders on an annual basis ever since the company listed its shares on the Malta Stock Exchange in May 2000.
Shareholders therefore eagerly await the publication of the annual financial statements and the dividend recommendation for approval at the forthcoming Annual General Meeting together with further updates on the progress to move towards full occupancy in the coming months.
The worst performing equity during 2013 was Medserv plc with a decline of 18 per cent. Trading activity was weak reflecting the small number of shareholders on their share register but the price declined mainly in response to the loss registered by the company during 2012.
The slowdown in exploratory and production activity of oil and gas in the Mediterranean in recent years was brought about by the 2010 BP incident in the Gulf of Mexico as well as the 2011 civil war in Libya.
This led to a pre-tax loss of €1.2 million in 2012. However, during the second half of 2012, the Medserv Group experienced a pick-up in business activity and this trend also continued in the first half of 2013 resulting in pre-tax profits of €0.57 million.
Medserv was particularly active during the second half of the year with a successful €13 million bond issue being heavily oversubscribed.
The company tapped the bond market for the first time in its history to finance the investment in the solar farm in Malta, to develop a logistics base in Cyprus and to repay its loan and overdraft facilities.
The company also performed a share renominalisation and concurrently also effected a share split resulting in the shares now trading in the market at an adjusted price of €1.30. In the coming weeks and months, Medserv should be updating the market on progress at the solar farm and also on the outcome of the tender submitted to an international oil company to provide shore-based services from the new base in Larnaca, Cyprus.
The submission of this tender had been disclosed by the directors during the Interim Statement issued on November 19. In the same company announcement, Medserv also revealed that the volume of business continued to improve during the second half of 2013 leading to an increase in both turnover and profits. In the financial estimates included in the documentation issued in connection with the bond issue, Medserv indicated that the group should generate pre-tax profits of €0.97 million during 2013.
Once the annual financial statements are published in the coming months, market participants would compare the actual results with those estimated during the summer. Medserv would need to explain any material variances arising and would also need to update the market on whether it continues to maintain its profitability forecast for 2014. This was expected to jump to €1.7 million during 2014.
All three companies will therefore be under the spotlight in the coming months following the disappointing share price performance during 2013 especially when compared to the strong gains registered by most of the other local equities.
On the one hand, shareholders who maintained their loyalty towards these companies will be expecting dividend payments apart from evidence of improvements in their financial performance.
On the other hand, new potential investors are likely to be monitoring upcoming announcements of these companies closely to assist them in understanding ongoing developments, possibly with a view of taking advantage of the recent underperformance and investing in the hope that some positive sentiment starts materialising in these companies possibly leading to a gradual recovery in share prices in 2014 and beyond.
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.