Malita Investments plc was set up in June last year by the government as an investment holding company with the mandate to acquire, develop and manage both public and commercial real estate properties.

The projected growth in revenues and profits … the company will generate in terms of its lease agreements could be considered a natural hedge against inflation- Edward Rizzo

The government holds 118,108,062 ordinary ‘A’ shares in the company. Malita is issuing 20 million new ordinary ‘B’ shares for subscription by the public at a price of €0.50 per share. While the ‘B’ shares will be listed on the Official List of the Malta Stock Exchange, the ‘A’ shares will not be listed and publicly traded. However, the market capitalisation based on the total issued share capital of the company, excluding the over-allotment option, will be €69 million, representing a weighting of 2.5 per cent in the MSE Share Index.

Malita currently owns two tracts of land and has a temporary emphyteusis over another two properties. The company acquired the Malta International Airport site and the Valletta Cruise Port site for a combined €34.05 million by issuing 68.1 million ‘A’ shares to the government at the nominal value of €0.50 each. Malita also acquired a 65-year lease agreement over the two new projects within the City Gate development (the parliament building and the open-air theatre) through a payment to the government of a premium of €82 million and an annual ground rent of €100,000.

Malita is issuing these new ‘B’ shares for a value of €10 million (subject to an over-allotment option of a maximum of €5 million) to partly finance the premium due by Malita to the government, representing the upfront payment for the ownership of future income to be generated from the City Gate properties.

In many initial public offerings, existing shareholders generally offer some of their shares to cash in on part of their investment. However, the government will not be selling any of its shares. On the contrary, the company is creating additional shares to partly fund the payment due to the government.

The remaining funding will be available through a cash injection of €25 million by the government, €40 million in two loans from the European Investment Bank, €4.6 million in bank funding from two local commercial banks and €3.1 million from operating cash flows expected to be generated by the company this year and next. Any additional ‘B’ shares that may be allotted through the over-allotment option will be used to repay the €4.6 million local bank funding. The issue is underwritten by the government, so any ‘B’ shares which may remain unsubscribed by the close of the subscription period on Friday, July 27, will be taken up by the government.

Undoubtedly, Malita Investments has a very simple business model with visibility of both its revenue streams and cost structures. Revenues are easily quantifiable given the long-term contracts in place with Malita’s three tenants, namely the government, Malta International Airport plc and Valletta Cruise Port plc (previously VISET). Similarly, the company’s expenses are straightforward and predominantly fixed. The main cost item is the interest expense related to the loans provided by the European Investment Bank. These two loans are fixed over a 20-year and a 25-year period at very favourable rates of 3.195 per cent and 3.452 per cent per annum. Having a supranational agency such as the EIB provide such long-term financing undoubtedly represents a strong vote of confidence in the business model of Malita.

The relative ease with which the future revenue and cost items can be forecast is one of the key determinants for the company establishing such a clear dividend policy in its prospectus. From the financial year ending December 31, 2013, Malita forecasts to generate annual revenues in excess of €6.7 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of over €6 million supporting the dividend policy of a distribution of between 60 to 75 per cent of its annual profits. The dividends will be distributed as two semi-annual payments in April (representing the final dividend in respect of the previous financial year) and in September as an interim dividend.

Malita is planning to pay its first dividend in April 2013 being the final dividend for the year ending December 31, 2012. The three-year moratorium on capital repayments to the EIB and the agreement with the government to waive its right to receive a dividend until December 31, 2014, supports the cash flow projections enabling the company to distribute dividends to the public immediately.

During a recent presentation to the financial community, chairman Kenneth Farrugia explained that both the interim and final dividends paid during any calendar year, commencing in 2013, will represent a gross dividend yield of seven per cent per annum (4.55 per cent after 35 per cent tax) on the share issue price of €0.50 per share. This would currently place Malita as the highest dividend paying equity on the local market. It is worthwhile noting that the dividend yield will be higher for those investors whose effective tax rate is less than 35 per cent since they can obtain a tax credit/refund depending on their personal circumstances.

As with all investments, Malita faces its own specific business risks. The prospectus provides an extensive description of the risk factors attributable to the operation of the company and prospective investors should read these risk factors before contemplating any investment in Malita.

A prospective shareholder should consider the credit risk emanating from the possibility of the company’s tenants not honouring their payment obligations. Although the possibility of late payment or non-payment always exists, on the other hand, prospective investors should feel comforted by the strong business profile of the two corporate tenants MIA and VCP.

The government should have every intention to honour its obligations on the leases of parliament and the open air theatre given its majority stake in Malita.

Possibly, one of the more significant risks for Malita at first glance is the political risk arising from the significant shareholding held by the government which, according to the company’s articles of association, will be maintained at not less than 70 per cent at all times. Although the current political party in opposition voted against the project itself and its financing structure in Parliament, the comments in The Times of July 6 attributed to a spokesperson of the opposition party indicating its intention to support the current venture when in government should ease some concerns for prospective shareholders.

Property investment companies generally entail project-related risk through the incidence of delays and cost over-runs. However, Malita should not be subject to these risks with the City Gate project since there are compensation mechanisms in place to safeguard the company. The payment consideration for the City Gate project is capped at €82 million and if the project is delayed, the government will be obliged to pay a daily fine almost equivalent to the rent to be generated from the two properties at City Gate, which form part of the lease agreements.

Furthermore, independently of Malita’s business, as with most equities in Malta, the shares of Malita are likely to be thinly traded given the fact that no market making mechanism is in place for shares listed on the Malta Stock Exchange. On the other hand, in recent months, many local investors have rushed to obtain increased exposures to Malta Government Stocks bearing in mind the liquid nature of this market. Unfortunately, the financial market regulators have yet to agree on the mechanics necessary to introduce market makers in shares and corporate bonds, features which are available not only in all developed stock exchanges overseas but even those that are still developing and younger than our Malta Stock Exchange.

It is surprising that such a key necessity which would enhance investor interest in listed securities has not yet been introduced despite the many years of debate on the subject by the authorities concerned.

Although Malita can be mainly regarded as a ‘dividend play’, the projected growth in revenues and therefore profits in future years through the automatic periodical increase in income that the company will generate in terms of its lease agreements could be considered a natural hedge against inflation.

Most local and international investors are now seeking increased exposure to high dividend yielding equities especially from companies which can easily sustain a regular and attractive dividend irrespective of the economic cycle. During the recent presentation to the financial community, Malita’s chairman argued that the Malita issue would fit such an objective given the stable financials and the dividend expectations. While many other local companies have been consistent dividend payers over the years, the closest listed peer of Malita is undoubtedly Plaza Centres plc, a commercial property company having various retail outlets and a number of offices for rent. Incidentally, Plaza’s gross dividend yield is currently at 6.9% per annum based on the current share price of €0.565 per share. However, the credit risk related to the tenants of Plaza can be considered to be higher when compared to Malita’s three tenants.

At a time of generally weak investor sentiment, investor response to the Malita equity issue will be interesting from the point of view of gauging the appetite for equity investments by the public. It is known that some private companies would consider going public when they feel the conditions to do so are right.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd acted as joint sponsors to Malita Investments plc.

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 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.

© 2012 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.