In last month’s article we reviewed the three bond issuers which are mainly dependent on the local tourism industry and made reference to the obligation for most bond issuers to publish an updated Financial Analysis Summary (FAS) on an annual basis. The principal objective of an FAS is that of assisting investors to obtain a better understanding of the financial strength and creditworthiness of an issuer and, in the case where the bond is guaranteed by another entity, of the guarantor of the bonds.
On June 27, 2016, Hal Mann Vella Group plc announced that it published its updated FAS dated May 31, 2016. This report provides a review of the 2015 financial statements, an analysis showing the variance between the actual results for 2015 and the original forecasts, the projections for 2016 and some important changes to the group’s business model.
It is worth recalling that when Hal Mann Vella published its prospectus in connection with the €30 million secured bond issue in October 2014, the intention was to (i) refinance €13.7 million in bank loans; (ii) finance the modernisation of the Lija factory at a cost of €5 million; and (iii) finance the construction of a mixed-use development in Lija earmarked for lease to third parties at a cost of €7 million. The remaining net balance of €3.6 million was intended for general corporate funding purposes.
The prospectus detailed the group’s business strategy and the efforts to continue diversifying into the hospitality sector as well as the fashion retail business. Although the revenue and profit contributions at the time were still very immaterial in the context of the overall business activities, the group had some interesting plans in both these sectors.
Ebitda fell drastically to just €57,000,significantly below the forecasted figure of €2.1 million
In the hospitality sector, the Hal Mann Vella Group owns two aparthotels (Mavina and Huli) and the Lovage Bistro, all located in Buġibba. At the time of the bond issue, an application had been submitted to the planning authority for the refurbishment of the Mavina hotel at an envisaged cost of €2.5 million, which was intended to be financed via new bank borrowings. However, the FAS published a few months ago revealed that the Hal Mann Vella Group has now leased out its two hotels as well as the restaurant to third parties for a period of 10 years.
In the fashion retail industry, at the time of the bond issue in October 2014, the Hal Mann Vella Group operated three Guess outlets and one outlet of Brooks Brothers. During the first quarter of 2015, the group acquired two further retail stores operating under the brand 7 Camicie and another outlet was opened as a warehouse clearance store.
Until last year, the directors were projecting that revenues from the fashion retail sector would increase to €2.4 million in 2016, thereby contributing circa 15 per cent of overall group revenues. However, the FAS dated May 31, 2016 confirmed that the group transferred the franchise/licence agreements of the various brands to a third party and also sold its inventories to the new operator of the three brands, thereby exiting this area of operation as the group was suffering losses in this business segment.
The recent changes to the overall business strategy of the Hal Mann Group are possibly a result of the disappointing financial performance in 2015 which is expected to deteriorate further during the current financial year.
The 2015 financial statements were first published on April 28, 2016 and the FAS gives much more detail than the annual report available online. The 2015 performance was well below the forecasts first published in the Prospectus dated October 6, 2014 and later reconfirmed in the FAS dated July 27, 2015.
While the group generated slightly higher revenues at €14.1 million when compared to FY2014 (or +1.9 per cent over the 2015 forecasts), this did not translate into higher earnings before interest, tax, depreciation and amortisation. Ebitda fell drastically to just €57,000, which is 88.5 per cent lower than the corresponding figure of 2014 of €497,000 and significantly below the forecasted figure of €2.1 million.
The 2016 projections were first available in the FAS published on July 28, 2015. At the time, the group was expected to generate revenue of €15.7 million and an Ebitda of €2.7 million. However, the FAS dated May 31, 2016 showed a significant revision to the 2016 projections. Revenues are now expected to amount to €15.1 million while Ebitda is now estimated at a negative €2.9 million.
The operating loss before depreciation and finance costs expected during 2016 is mainly due to three one-off items, namely (i) a €2.5 million write-off in inventories; (ii) a provision for works-in-progress of €0.6 million; and (iii) a provision of bad debts of €0.5 million. Furthermore, the overall financial performance of the Hal Mann Group in 2016 is also expected to be negatively impacted by a €0.5 million loss related to the fashion retail business unit which was discontinued earlier this year and therefore does not feature within the Ebitda figure.
No mention of the leasing of two factories – both major developments – was made during the bond issue
Another reason for the weakening performance in 2015 and 2016 is the additional costs incurred with respect to the new factories leased out in Ħal Far. Last year, Hal Mann Vella Group disclosed that it leased out a 14,000-square-metre factory situated in Ħal Far for a period of 65 years. Moreover, the FAS dated May 31, 2016 reports that a second factory was leased out in close proximity to the initial factory.
No mention of these two major developments had been made during the bond issue.
The annual reports published over the past two years as well as the FASs failed to indicate the annual cost of the lease or the investment required by the group to deploy these factories. The reports simply stated that “the scope for acquiring this factory is to ease the operational flow at the Lija factory and to have sufficient capacity to consider new projects as and when they arise”.
The reconsideration of the diversification strategy into hospitality and fashion retail are comprehensible decisions in the circumstances. On the one hand, the fashion retail businesses were not profitable, while on the other hand, the group was about to embark on a €2.5 million refurbishment of one of its aparthotels. Thus, through the leasing out of these hotels, Hal Mann Vella Group has now managed to save on this capital expenditure at a time when it is performing negatively, thereby giving it more flexibility in concentrating further on its core business while constructing the commercial premises for eventual leasing.
The information provided in the FAS was very useful for financial analysts and investors to keep abreast of developments within the Hal Mann Vella Group.
The senior executive management of the group, however, ought to have convened a meeting for financial analysts to provide further background behind the recent financial performance and future projections and the rationale for the important decisions taken in less than two years since the launch of the bond issue.
Given the higher number of companies using the bond market as well as the wider participation by the investing public due to the low interest rate environment, investor relations should start taking a more prominent role across most of the bond and equity issuers. The continuous flow of information to investors is fundamental for companies using the capital markets and the recent developments at Hal Mann Vella Group are a clear signal of the importance for investors and financial analysts to keep track of the financial strength of an issuer on a continuous basis.
Edward Rizzo is a director at Rizzo, Farrugia & Co (Stockbrokers) Ltd.
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.
© 2016 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.