There was an unexpected rally in Q1 with the local equity market climbing by 13.4 per cent on the back of double-digit gains in 12 of the companies listed on the Malta Stock Exchange.

The MSE Share Index posted a marginal decline in April but the rally then gathered momentum during May and June to close the first six months of the year with a surprising increase of 22.8 per cent.

While the theme during the first three months of the year was the “search for yield” with investors turning their attention to the equity market for an improved income return following the significant decline in yields across the sovereign and corporate bond markets, the rationale behind the upturn during Q2 was mainly related to company specific developments. In fact, the three top performers in Q1, namely Malta International Airport plc, Plaza Centres plc and Malita Investments plc, all lost their ranking on the podium as they were surpassed by Mapfre Middlesea plc, Medserv plc and International Hotel Investments plc.

The share price of Mapfre Middlesea is the top performer so far in 2015 with an increase of 83.6 per cent after the equity jumped by 60.1 per cent during the second quarter of the year. This sudden surge must have caught many analysts and investors by surprise. The upturn in the share price materialised on weak volumes reflecting the very low free float of the company and – more surprisingly – with no obvious fundamental justification. Shortly before the sudden increase in the share price, the company confirmed speculative reports in the media that it will be taking over the general insurance portfolio of Allcare Insurance which had reportedly faced financial difficulties. No details have as yet been forthcoming by the company on the cost to acquire this portfolio, the size of the portfolio and the likely benefits that could accrue.

Medserv ranks as the second best performer during the first half of 2015 with an increase of 62.4 per cent. Following the 31 per cent increase in the share price during Q1, the equity advanced by a further 24 per cent during the past three months. While the positive performance during the first three months was due to market expectations that the company will match the forecast of €2.2 million in pre-tax profits during 2014 (in fact Medserv reported that pre-tax profits exceeded projections and amounted to €3 million), the rationale for the Q2 rally was presumably as a result of a combination of two factors, namely:

(i) investors sought to gain entitlement to the dividend following the recommendation on March 23 of a final dividend of €0.056 per share to those shareholders on the register as at 28 May and (ii) the publication of the Financial Analysis Summary on May 15 indicating that the directors of the company forecast pre-tax profits in 2015 to surge by a further 43 per cent to €4.4 million.

The three top performers in Q1 ...all lost their ranking on the podium as they were surpassed by Mapfre Middlesea plc, Medserv plc and International Hotel Investments plc

The share price of International Hotel Investments plc advanced by 22.6 per cent during the first quarter after the surprise announcement in mid-January that it agreed to acquire Island Hotels Group Holdings plc for a combination of €1 per share in cash and 0.246 IHI shares for each IHG share through the issuance of nine million IHI shares to IHG shareholders (although IHI recently revealed that IHG shareholders will also be offered an all-cash alternative).

After easing slightly during April, the equity began to rally once again in May and continued throughout the month of June after the company published its annual report wherein the chairman indicated that the company is in discussions with the Malta Financial Services Authority to offer alternative financial instruments to the free-float shareholders. However, to date, no specific details have been provided to the market including the possible timing for such a corporate action. Despite the slight decline in the last few days of June from its multi-year high of €0.93, IHI’s share price climbed by 22.5 per cent in Q2 resulting in a year-to-date appreciation of 50.3 per cent.

The other notable strong performers in the last three months were Simonds Farsons Cisk plc (+40.6 per cent), RS2 Software plc (+32.9 per cent), Midi plc (+25.2 per cent) and Go plc (+18.9 per cent). The gains registered during Q2 helped all these equities rank among the strong performers during the first half of the year. The share prices of these four companies all increased following company specific developments. Similar to Mapfre Middlesea, the shareholding structure of Farsons is also very tight resulting in a low free float.

In fact, the rally in the share price took place across very weak volumes following the announcement of another record financial year during the 12 months ended January 31, 2015, and the publication of the initial designs of the Farsons Business Park. Construction will commence next year ahead of the property spin-off taking place in July 2017.

The share price of RS2 Software continued to race to new record levels after the company announced that it signed a licence agreement in Vietnam and that it intends to intensify its efforts to penetrate the Asian and US markets possibly also by conducting an acquisition in the region. The 2-for-1 share split in mid-June could also be one of the reasons for the sharp rise in recent weeks.

Meanwhile, Midi plc advanced as the company confirmed that it is still in discussions with various third parties who have expressed an interest to invest in the Manoel Island project and that the financial performance for 2015 will be positive as a result of the final deeds of sale being entered into for the 39 apartments branded Q1.

The next few months could undoubtedly prove to be more volatile following the significant rally across most equities during the first six months

Go’s share price also accelerated to a fresh eight-year high following the announcement of the property spin-off taking place later on this year once shareholders approve the corporate action and a number of related changes to the company’s memorandum and articles of association during an extraordinary general meeting taking place on July 22.

Although the share prices of the three retail banks posted a mild positive performance during the past six months, these have clearly underperformed the wider market rally, possibly on increased awareness of the challenges being faced in the banking industry mainly related to more stringent regulatory requirements.

While the equity market seemed to have attracted most attention in the past six months, the bond market also had exciting moments. The extraordinary rally during the first three months of the year continued until mid-April but bond prices then began to decline sharply reflecting similar bond market movements evident across the German bond market as well as in other eurozone nations. The start of the QE programme by the European Central Bank in early March resulted in a significant decline in yields (and price hikes) in the euro area with the benchmark 10-year German bund yield dropping to a low of 0.05 per cent on April 17. However, the relentless fall in yields came to a sudden halt after data revealed stronger eurozone economic figures, improved credit conditions as well as inflationary expectations with the result that the 10-year German bund rallied to a high of 1.059 per cent on June 10 before easing back towards the 0.8 per cent level. The movements across eurozone bond markets impacted the Malta Government Stock market. In fact, long-term MGS prices (those with more than 10 years left to maturity) have declined by more than 11 per cent since the peak in April bringing the year-to-date performance of the Rizzo Farrugia MGS Index to a mere 0.9 per cent from 6.6 per cent on April 16, 2015.

While many market participants may have thought that the Central Bank of Malta may find it hard to adopt QE in Malta given the high levels of liquidity among both institutional and retail investors, statistics indicate otherwise. In fact, in its regular communications to the market on the progress of the QE programme, the ECB announced that after a weak start with only €5 million purchases of MGS during March, the momentum accelerated in April and May and the Central Bank of Malta acting on behalf of the ECB succeeded in acquiring €53 million and €85 million respectively during these two months. Statistics during the month of June are not yet available. However, given the market volatility in recent weeks, it will not come as a surprise that the Central Bank’s QE desk once again exceeded its monthly quota of €36 million in MGS purchases.

The next few months could undoubtedly prove to be more volatile following the significant rally across most equities during the first six months as well as the wild swings in the bond market. The interim financial reporting season commencing in a few weeks will dictate the direction of many individual equities in the short-term while MGS prices will continue to move in line with bond market developments across the eurozone.

Trends will also be impacted by the fluid developments in Greece as well as economic and inflation data across the larger eurozone economies. On the primary market, a higher number of corporate bond issues should be expected in the second half of the year. This should assist retail investors in placing some of their idle funds given the continued high levels of liquidity across the local financial system.

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.

© 2015 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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