On December 9, Maltapost plc published its financial statements for the year ended September 30, 2014, and the directors recommended that during the forthcoming annual general meeting being held on January 16, 2015, shareholders approve an unchanged net dividend of €0.04 per share. Moreover, similar to previous years, shareholders will have the option to receive the dividend either in cash or by the issue of new shares at the attribution price of €1.16 per share.
In previous years there was a very high take-up of new shares as opposed to a cash dividend, primarily due to the shareholding structure of Maltapost with Lombard Bank owning more than 65 per cent. This implies that the company actually only paid a very low cash dividend on a yearly basis and retained further capital resources. In fact, despite a high dividend payout ratio – assuming a cash dividend to all shareholders – total shareholder funds of Maltapost grew from €10.9 million in September 2009 to €18.2 million in September 2014.
Scrip dividends are normally used by companies which require additional capital resources to fund ongoing investment programmes. Moreover, the most common users of scrip dividends are banks that are typically in constant need of additional capital to sustain a growing loan book and also in view of changing regulatory requirements.
The balance sheet of Maltapost is rather ‘peculiar’, with no bank borrowings or debt financing and with high levels of cash (although some are held on behalf of third parties such as the utility companies on whose behalf money is collected from customers), as well as available-for-sale financial assets total-ling €3.3 million. Given this balance sheet structure, the need for a continued scrip dividend by the company is questionable.
The market is not aware of any immediate capital expenditure requirements by the company. If the company aims to purchase certain property assets, wouldn’t it be more advantageous for shareholders that Maltapost slightly leverages its strong balance sheet and takes on some bank borrowings to fund such an acquisition, given the current low interest rate environment?
Some years ago Maltapost borrowed €4 million to partly fund the acquisition of certain key properties, and this borrowing had been repaid by the company within a short period of time, given its posit-ive cash flow generation.
The cash flow statement for the last financial year shows that Maltapost acquired €1.9 million in property, plant and equipment and purchased financial assets for a value of €0.6 million during the year. Given the decision by the directors to opt for another scrip dividend, at the next AGM shareholders would be pleased to learn about the company’s capital expenditure requirements and why debt financing is not being considered as a financing option.
Take-up of shares as opposed to a cash dividend on an annual basis by Lombard Bank, as the majority shareholder, with some of the other investors opting for a cash dividend implies that Lombard’s stake is gradually increasing over the years once the new shares are allotted.
On October 25, 2012, Maltapost announced that its largest shareholder, Redbox Ltd (a fully-owned subsidiary of Lombard Bank) intended to increase its stake in the postal operator from the level of 67.72 per cent at the time to not more than 74.5 per cent. The announcement failed to disclose the way in which the majority shareholder intended to increase its shareholding, i.e. via purchases of shares on the secondary market or via the periodical scrip dividend allotments. The shareholding had only increased to 69.2 per cent by November 2013 (the latest inform-ation available). This indicates how difficult it has been to achieve its objective through the acquisition of shares from current shareholders via the Malta Stock Exchange. In fact, due to the company’s shareholding structure – with over 2,000 shareholders having very small stakes – it has not been easy for Lombard to increase its equity stake. The scrip dividend method could therefore be considered as the most viable solution to achieve Lombard’s objective, officially announced more than two years ago.
Given this balance sheet structure, the need for a continued scrip dividend by the company is questionable
The scrip dividend decision should also be analysed in the light of its impact on the company’s financial ratios, most notably the return on equity which is a widely- used indicator by financial analysts worldwide to gauge a company’s performance. Although the post-tax return on equity improved to 10.6 per cent during the last financial year, compared to 8.3 per cent the previous year, this must be viewed over a longer-term period. The post-tax return on equity in 2009 and 2010 was just below 20 per cent – a very attractive return for the company’s shareholders.
The reason for the decline in the ratio was twofold: a decline in pro-fits from circa €2.0 million in 2009 and 2010 to €1.8 million in 2014, coupled with an increase in the company’s equity base from €13 million in 2010 to €18.2 million in 2014. This ratio shows that the company did not manage to employ the extra capital in a similarly profitable way for the benefit of all shareholders.
The 2014 financial statements show a profits rebound after two disappointing years when profits dropped following the adverse impact from the higher regulatory-induced costs related to cross-border mail which were not recovered from higher postage rates.
The increase in certain postage tariffs in November 2012, followed by others in April 2013 and January 2014, is now having a positive impact although profits are still below the record levels of 2009 and 2010.
In this respect, Maltapost warned that “the high fixed-cost base of the Universal Service Obligation needs to be re-evaluated so as to ensure its long-term sustainability.”
In December 2013 the MCA concluded that no further changes in universal service tariffs would be required before financial year 2016. Given this recent statement by the directors, investors should be informed whether Maltapost is making any representations to bring forward any further hikes in postage rates in order to mitigate the higher costs being incurred.
In last week’s announcement, Maltapost also confirmed that its strategy “remains focused on securing a reasonable share of the growing parcels market, while enhancing and consolidating a diversified portfolio of services to counter the irreversible decline in letter mail volumes”. The company’s portfolio of services expanded with the introduction of document management, invoice processing and printing, the Send On mail forwarding service from UK to Malta and other services.
In the financial services sphere, on September 30, 2014 Maltapost launched Posta Pay & Save in conjunction with Lombard Bank. This is an interest-bearing account with a passbook allowing customers to receive funds and deposit cheques as well as to make payments or withdraw money.
Maltapost shareholders would be pleased to hear how this long-awaited product was received and how positively this is likely to impact the company’s financial performance in the coming years.
Maltapost had also intended to enter the insurance sector, but in December 2013 the company announced that its aim of securing an agreement for its new subsidiary to act as an insurance agent of Middlesea Insurance plc would no longer be pursued. Maltapost claimed at the time that it still intends to provide insurance-related services, but over the past 12 months no further mention was made of any developments in this respect. Shareholders ought to be informed of whether the company still intends to pursue its plans.
The AGM will provide the right forum for details on any capital expenditure plans, the funding options being considered and the strategic initiatives being taken by the company to help profits recover to their past record levels.
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 company/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, and may also have other business relationships with the company/s. 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.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stock-brokers) Limited.