Last week, Malta International Airport plc published its 2014 financial statements and while the double-digit growth in pre-tax profits was expected, given the news earlier this year that passenger figures increased by 6.4 per cent, the extent of the increase in the final dividend at +77 per cent was very much unpredicted.
The airport operator has a straight-forward business model with good visibility of future income streams. The number of passenger movements remains the most important determinant for the company’s operations and the monthly passenger traffic announcement provides the market with valuable information which can be used to gauge the company’s ongoing financial performance.
In recent years, although passenger movements climbed from one record to the next almost on a monthly basis, non-aviation income activities also became a serious contributor to overall revenue. In fact, income from non-aviation activities accounted for almost 30 per cent of overall revenue during 2014 notwithstanding the 8.1 per cent growth in aviation income.
Revenue from the ‘retail and property’ segment, also referred to as non-aviation income, improved by 11.8 per cent to €19.1 million during 2014. The SkyParks Business Centre was among the main contributors to the increase in income from the retail and property segment in the last few years. In 2014, MIA reported that rental income from SkyParks exceeded expectations and amounted to €2.6 million. However, the largest contributor to non-aviation income is the revenue from the concessionaires within the air terminal while fees earned from the car parking facilities and the use of the VIP lounge are other important sources.
Market observers and financial analysts also ought to have taken note of some other strong financial indicators that emerge from the financial statements of MIA. Earnings before interest, tax, depreciation and amortisation (Ebitda) improved by 13.2 per cent to €33.8 million with the Ebitda margin climbing to 52.6 per cent. The progress achieved by the company is evident from the strong increase in Ebitda of 63.4 per cent between 2009 and 2014, equivalent to 12.7 per cent per annum.
The return on equity (ROE) is among the most common used ratios by financial analysts worldwide to gauge a company’s performance. MIA has consistently registered double-digits returns on equity for the past 11 years and this increased to just below 24 per cent during 2014 – an impressive figure which is not matched by any of the other companies listed on the Malta Stock Exchange and also ranks well among other international airport operators.
Although it is not appropriate to compare such ratios across different industries, market observers should take note of the trends across specific sectors. As an example, the ROE’s across the banking sector are in decline both as a result of the challenging environment which is resulting in weaker profitability as well as due to the regulatory requirements to maintain increased levels of capital. HSBC Bank Malta plc published its financial statements last week and this showed that the ROE dropped to 7.8 per cent in 2014 from over 22 per cent in 2008.
While the improving trend in MIA’s financial performance and profitability ratios has been steady over recent years, the real surprise last week was the extent of the increase in dividends. The recommended payment of a final gross dividend of €0.1231 per share (net dividend of €0.08 per share) represents a 77.8 per cent increase over the final gross dividend paid out in respect of the previous financial year.
The extent of the increase in the final dividend at +77 per cent was very much unpredicted
Shareholders as at close of trading on April 16 will be eligible to receive this dividend which will be paid by not later than June 8 subject to shareholder approval at the upcoming annual general meeting on May 20.
MIA distributes a semi-annual dividend to its shareholders, and in September 2014 the company paid a gross dividend of €0.0462 per share. The interim dividend has been unchanged for several years and the final dividend is normally amended to at least partly reflect the financial performance of the company during the entire financial year.
Following the strong upturn in profits, the final dividend almost tripled since 2009 from €0.0438 to €0.1231 per share. The total dividend in respect of 2014 of €0.1693 per share (+46.6%) represents a dividend payout ratio of 88.5 per cent. While this may be surprising to many following the more conservative distribution in 2011, 2012 and 2013, such a decision is comprehensible given the company’s balance sheet structure and current market circumstances.
As at December 31, 2014, MIA’s cash balance amounted to €30.7 million and while the final dividend payment in June will represent a cash outflow of €16.7 million, the cash flow generation is strong and amounted to almost €20 million in 2014 so a large part of this cash buffer will be replaced in the months ahead. Moreover, the gearing level has also improved substantially during the years as net debt dropped to €28.8 million in 2014 from over €51 million in 2009 while shareholders’ funds strengthened to €73 million.
The conservative leverage ratio provides the company with the ability to take on additional debt should the remaining cash buffer after the dividend payment prove to be insufficient to fund the next major development, possibly the long-awaited property investment often referred to as SkyParks 2.
The local equity market has clearly become more responsive to company announcements and overall market circumstances, especially news related to dividend distributions. In fact, the reaction in the market to the dividend announcement of MIA was immediate and very strong. The equity climbed by 16.1 per cent over the past week on strong volumes to €3.05 with the share price reaching new record levels almost on a daily basis. This upturn spearheaded MIA to a year-to-date increase of 29.8 per cent, the second best performer this year.
MIA is the only company on the MSE with three different classes of shares. Although only the ‘A’ shares are listed (the ‘B’ shares representing 40 per cent of the issued share capital held by the Malta Mediterranean Link Consortium were not listed at the time of the Initial Public Offering in October 2002 and there are only 10 ‘C’ shares held by the government of Malta), the market capitalisation should be calculated using all the shares, amounting to 135.3 million. Based on the total, the market capitalisation of the airport operator, of just over €412 million, places MIA as the third largest company on the MSE.
Company executives ought to remain firmly focused on growing their business while at the same time adjusting their funding strategy to changing market dynamics. Given the current interest rate environment and expectations that eurozone interest rates will remain at low levels for a few more years, companies should take advantage of this situation and seek debt funding to partly fund large investments and not resort solely to internally generated funds in order to retain an optimal capital structure with an appropriate mix of equity and debt funding.
In the current circumstances, companies could lock in an attractive interest rate on new borrowings for the coming years while also meeting shareholder expectations through regular and growing dividend payments.
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 (Stockbrokers) Limited.