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Following the 5.8 per cent drop experienced during the first quarter of 2008, the MSE share index declined further by 8.1 per cent in the past three months, resulting in a total drop of over 13 per cent since the start of the year. This was mainly due to a steep decline in the share prices of the financial services companies ‒ in particular the two large bank equities. The index touched a multi-year low of 4,102.043 points on June 18 before recovering by 4.2 per cent to the end of June as the two big banks began to recover from their lows.

The decline in the share prices of the banking stocks gathered momentum following the publication of Bank of Valletta's disappointing interim results on April 29 and the interim directors' statement issued by HSBC on May 16, wherein it warned that the group's profitability since January 1 was lower than in the comparative period last year. These announcements impacted the share prices of both banks on constant, albeit small, selling pressure and lack of support in the market. HSBC and BoV dropped to fresh multi-year lows in mid-June of €3.55 and €4.60 respectively. But during the final two weeks of June, their share prices began to recover on renewed investor interest, possibly as a result of their dividend yields, both touching the 8.5 per cent level at their lows. BoV's interim dividend increased marginally over the previous year despite the sharp decline in its profitability, which was mainly impacted by the significant write-downs on the bank's overseas bond portfolio. The bank's chairman expects this profitability decline to be of a temporary nature because these write-downs should be clawed back in the coming years as the bonds are being held to maturity. As a result, the market is expecting the bank to at least maintain last year's final dividend, making the historic dividend yield of 7.9 per cent look very attractive. Possibly in view of such attractive dividend yields, fresh demand for bank shares entered the market towards mid-June, helping both banks to climb from their lows. HSBC recovered by 9.9 per cent and BoV traded up towards the €5 level, representing an 8.3 per cent rise from its low. The recent recovery helped trim the losses during the second quarter of the year to 11.7 per cent for largest-cap HSBC and 11.1 per cent for Bank of Valletta. These two equities are, however, still among the worst performing stocks in the first six months of the year with BoV down 26.5 per cent and HSBC 16.3 per cent lower compared to their value at the start of 2008.

The equities of other financial sector companies also suffered from this weak sentiment. Lombard Bank closed the quarter 8.6 per cent lower (17.8 per cent down from its all-time high reached in December 2007), Middlesea Insurance eased by 5.3 per cent (-11.3 per cent year to date) and Global Capital was the worst performer as its value halved during the past three months. Surprisingly, the downturn in the financials also affected two other companies, namely Go and Malta International Airport, with share price declines of 13.6 per cent and 6 per cent respectively.

While Go continued to suffer mainly from lack of support possibly as a result of the lack of communication with the market in recent months especially following the company's important expansion into the Greek market, the decline in MIA's equity is rather surprising given the strong growth in passenger numbers at the airport since the start of the year. This is expected to result in a further rise in the company's profitability as recently confirmed by MIA's directors. In fact in the interim statement issued on May 19, the directors stated that the financial results for the first six months of the financial year to June 30 are anticipated to be better than the projected estimates and significantly higher than those registered in the first half of 2007. Moreover, during the second quarter of the year MIA announced an important agreement with Nuance Malta Ltd. Nuance already operates outlets in the departures and arrivals halls and has agreed to increase its presence at MIA with a new retail outlet covering 670 square metres as from December. In the new agreement Nuance has guaranteed a minimum revenue of €25.5 million to MIA for a six-year period commencing in December.

On the other hand the strong outperformer during the second quarter of the year was Grand Harbour Marina with a share price appreciation of 17.5 per cent following the announcement of the surge in profitability and the generous dividend to shareholders. The strong performance during the past three months helped the equity rise to the third best performer in the first half of the year behind Maltapost and FIMBank.

The postal services operator closed the second quarter of the year minimally lower, thus holding on to the strong increase in the first three months registered shortly after the company's debut on the Malta Stock Exchange. MaltaPost's share price, at €0.83, is 66 per cent above the IPO level and remains very well supported in the secondary market following the publication of the company's interim results on May 22. Maltapost registered a pre-tax profit of €2.6 million in the first six months of its financial year to March 31, significantly higher than the €1 million generated in the comparative period last year and the directors' forecast of a full-year pre-tax profit of €2.3 million.

Following the 19 per cent increase in FIMBank's share price in the first quarter of the year, the US dollar denominated equity rose further by 9.3 per cent in the last three months, helping the equity to rank as second best performer so far in 2008 with an increase of 30.1 per cent. High volumes of FIMBank shares were traded in recent months especially following the stockbrokers' meeting of May 16 during which the bank's president, Margrith Lutschg-Emmenegger, announced that FIMBank is seeking to expand its factoring presence in Brazil, Mexico and China. The president also explained that FIMBank intends to dilute its shareholding in London Forfaiting Company by disposing of a stake to a strategic partner. FIMBank is due to report on its interim financial results on August 21, with the recent interim directors' statement claiming that the absence of the contribution from the Indian factoring joint-venture Global Trade Finance is not expected to have any material impact on the 2008 results since the increase in the group's other lines of business should have an overall compensating effect.

Overall trading activity in the equity market declined to €12.3 million during the second quarter of the year compared to €20.8 million in the previous quarter. While there was an overall drop in volumes in the larger cap stocks, the equities of the smaller companies were particularly active. Apart from FIMBank in which 2.2 million shares changed hands during the quarter, Middlesea Insurance and Plaza Centres experienced uncharacteristically high turnover levels. Over 160,000 Middlesea shares changed hands during six trading sessions between May 28 and June 28, which is more than the level of turnover experienced in 2007. These shares mainly changed hands at a multi-year low of €3.41, representing only a slight premium to the group's net asset value per share. Similarly in Plaza Centres over 265,000 shares changed hands during the second quarter of 2008 (compared to a total of 175,000 shares in 2007) helping the share price maintain the 9 per cent gain in the first quarter of the year.

On the bond market, Malta Government Stock prices dropped markedly in recent weeks as bond yields in the euro area rose in anticipation of a possible hike in interest rates to combat inflation. The Treasury issued two new fungible stocks during the second quarter of the year, partly to refinance the €23.3 million redemption of a government stock on June 10. A total of €106.9 million nominal were allotted in the two fungible issues with €61.2 million in the 5.1 per cent MGS 2014 (III) which was issued at 101.25 per cent for every €100 nominal and €45.7 million in the 5 per cent MGS 2021 (I) which was offered to the public at 98.99 per cent for every €100 nominal. Due to the rise in yields, these prices dropped shortly after commencement of trading with the 5 per cent MGS 2021 (I) closing the month at 95.86 per cent.

The encouraging reversal of the equity market's prolonged downward trend in the final fortnight of the second quarter may be sustained on buoyant company results during the interim reporting season due to kick-off in the coming weeks.

Moreover, the forthcoming interim dividend declarations and expectations of future dividend streams may also influence the overall direction of the market going forward. Dividend yields in several of the listed companies exceed the 6 per cent level with the two large banks and Go trading on yields of over 8 per cent. Such high dividend yields have never been experienced in the Maltese market. In fact, in the previous bear market which bottomed in October 2002, BoV and HSBC were trading on yields of around 6 per cent.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, "RFC", are members 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 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.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
• Mr Rizzo is director of Rizzo, Fagguria & Co. (Stockbrokers) Ltd.

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