TreasuryMidi plc recently announced its maiden equity issue. This is Midi’s second foray into the capital markets after the company launched a bond issue in January 2009, from which they raised €40 million in the form of a seven per cent bond due for redemption between 2016 and 2018.
In our January 2009 report we expressed reservations about investing in these bonds, preferring instead to recommend a portfolio of low risk single A to triple A rated international bonds denominated in euros. This was not a reflection of the project per se but on the strength of the financials and the coupon/term of the bond.
A quick analysis of the recommendations made in our January 2009 report shows that despite the higher risk associated with the Midi bond it marginally underperformed the portfolio of bonds recommended. Given the fall in interest rates since 2009, the proposed equity issue which will strengthen the balance sheet and the performance outcome mentioned above, the Midi bonds are now looking more appealing at the current price of €102.5 versus their launch price of €100 nearly two years ago. So – what of the equity issue?
From a project perspective, the Midi development is situated on one of the best sites in Malta. This has served the company well, especially in the recent difficult property market. It is now looking to issue 44.4 million shares at a price of €0.45 per share with an over allotment option over a further 22.2 million shares. The proceeds, which are expected to approach €30 million will be used primarily to finance i) a number of phases at Tigne Point that are close to completion, ii) borrowings that are up for repayment shortly, iii) the construction and development of Blocks T15 and T16 and iv) minor infrastructural works on Manoel Island.
The project has a number of attractive elements to it besides its location. Primary amongst these is the company’s strategic flexibility to roll out the development in stages in an opportune manner rather than being hamstrung by the need to service interest on the land. This is a clear differentiator from other projects. Additionally, assuming take up of the shares (without the over allotment), then the balance sheet looks reasonable with borrowings at 50 per cent of funding.
Property companies, of which Midi is one, are not usually valued using price earnings ratios. Instead the key ratios to look at are the dividend yield and the underlying discount to net asset value. Management has tried to give some visibility on the expected dividend yield stating that it expects to pay an amount equivalent to four per cent of the current share price, in 2012.
From a cash flow perspective this looks achievable although there is still the question that the company’s bankers have effective veto over whether the dividend is payable or not. We would have preferred to see a more formulaic approach that is not subjective but management were optimistic that banking approval will not be unreasonably withheld. We are hopeful that this dividend commitment is achieved otherwise the company’s plans to come back to the market sometime in 2012 will have taken a severe dent and management’s credibility will probably be questioned.
Perhaps the most surprising and refreshing aspect to the equity issue is the reasonableness that appears to be present in the numbers provided, most especially the sober attitude to the state of the property market. In the past, IPOs have had a certain blue sky feel to them but on this occasion we detect an acknowledgement that a prudent and realistic approach is necessary for the valuation. Certainly the fact that the company knows it will have to re-visit the market in the years to come gives us the impression that the shares have been priced with this in mind.
Against this background, management have decided that despite the architect’s valuation of €0.71 per share, the shares will be offered to the public at €0.45. This is also the price at which present shareholders will convert their debt to equity, thereby underlining their confidence in the company.
Despite the above positives some concerns remain. The supply and demand imbalances within the property sector is high on this list. Midi use data sourced from the Central Bank, but since this is based on advertised prices we believe this is not an accurate assessment of the state of the property market. Cash flow can also be a concern. We are not completely sold on the notion that management always intended to come to the market with an issue of this sort so soon after their bond issue.
However set against the fact that Midi commands a prime location, and is being offered to investors at a substantial discount to a realistic value (albeit with some reservations), we are comfortable in looking at the bigger picture and believe the shares should have a successful debut on the market.
Curmi & Partners Ltd (C&P) are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business.
This article has been prepared by David Curmi of Curmi and Partners Ltd, and is the objective and independent opinion of the author. The information contained in the article is based on the research note issued by C&P, copies of which are available on request.
Any opinions that may be expressed here above should not be interpreted as investment advice, nor should they be considered as an offer to sell or buy an investment. The company and/or the author may hold positions in any securities that might have been mentioned in this report. The value of investments may fall as well as rise and past performance is no guarantee of future performance. Copies of the Midi Prospectus may be obtained from the offices of C&P.
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Mr Curmi is managing director of Curmi & Partners.