PTL Holdings plc, a subsidiary of Hili Ventures Ltd, published its updated Financial Analysis Summary (FAS) on August 21. Since the FAS was published after July 1, PTL was not only obliged to update its forecasts for 2015 but was also required to provide its projections for 2016.
PTL Holdings was established in 2013 as a holding company and financing arm of three IT companies which were acquired by Hili Ventures recently. Initially, PTL Ltd (formerly Philip Toledo Ltd) was acquired in 2012 and two larger acquisitions took place in 2014: SAD in June 2014 for €40.35 million and Apco in August 2014 for €8.8 million.
Although the prospectus published at the time of the bond issue of PTL Holdings in November 2014 provided financial statements for 2013 and 2014, these were drawn up on a pro-forma basis and were useful for illustrative purposes only since they assumed that PTL Holdings had control over both SAD and Apco during the review period.
As such, the 2014 audited financial statements of PTL Holdings published on April 30, 2015, should not be compared to the figures found in the prospectus.
On the other hand, one can compare the 2015 projections published in November 2014 to the FAS update of a few weeks ago. In November 2014, PTL had expected revenue to amount to €117.4 million during 2015 and it now expects this to rise to €143.4 million. Notwithstanding the 22 per cent additional revenue for 2015, PTL expects to generate earnings before interest, tax, depreciation and amortisation (Ebitda) of only €6 million which is 20 per cent below the figure of €7.5 million projected in November 2014. In fact, the 2015 Ebitda margin is expected to shrink to 4.2 per cent compared to the earlier expectations of 6.4 per cent.
Unfortunately, the FAS does not provide justification for this wide variance. This would have been useful information for the many investors who invested in PTL bonds during the primary market offering in November 2014 as well as those who continued to support this bond despite the rally in the bond price on the secondary market to above 111 per cent.
One of the major reasons for the expected dilution in Ebitda could be due to the termination of the SAD export business, comprising the distribution of electronic goods across a number of European countries.
In the 2015 interim financial statements, it was disclosed that this business was being discontinued due to a change in Vat regulations and the risks associated with cross-border sales of technology items. During the first few months of 2015, this line of business generated total revenue of €34.8 million. The updated FAS provides the Ebitda breakdown across the different business units for both 2015 and 2016. The Ebitda contribution of the SAD export business during the first few months of 2015 was €1.9 million, representing a margin of 5.5 per cent.
Meanwhile, the core business of SAD, comprising the resale of Apple products through the various iSpot outlets across Poland together with the business-to-business offering, is expected to generate €95.4 million in revenue in 2015 and Ebitda of €3.8 million, giving a margin of only 3.9 per cent. The contribution from PTL Ltd and Apco is expected to be minimal in 2015 with Ebitda of €0.4 million and €0.3 million respectively.
However, the directors expect the Ebitda of both PTL Ltd and Apco to rise significantly in 2016 despite a minor improvement in revenue generation. The Ebitda of PTL Ltd is expected to jump to €1.4 million in 2016 from only €0.4 million in 2015 (with the Ebitda margin rising to 12.4 per cent from 3.8 per cent in 2015) and Apco’s Ebitda is anticipated to reach €0.9 million in 2016 from €0.3 million in 2015 (with the Ebitda margin surging to 37.4 per cent from 11.4 per cent in 2015).
The FAS does not explain the assumptions behind the significant improvement expected by both PTL Ltd and Apco in 2016. Should PTL Ltd and Apco succeed in achieving this projected growth, the contribution of these two entities to overall Ebitda of PTL Holdings will improve from 11.3 per cent in 2015 to 37 per cent in 2016. Furthermore, SAD’s revenue is expected to grow by 9.8 per cent in 2016 to €104.8 million and Ebitda to rise by 15.8 per cent to €4.4 million with the Ebitda margin edging up to 4.2 per cent from 3.9 per cent in 2015.
Despite the expected improvement from PTL Ltd and Apco, PTL Holdings remains highly dependent on SAD to generate sufficient cash to cover its interest payment obligations and the repayment of the bonds upon maturity. As such, a lot depends on the Apple brand and SAD’s ability to maintain its non-exclusive franchise agreement with Apple Inc.
The more important ratios for bond investors to follow from one review period to the next are the interest cover and the gearing ratio. Notwithstanding the weaker-than-expected Ebitda contribution in 2015 compared to the original forecasts, the interest cover is still anticipated to amount to 2.3 times in 2015 and this is expected to improve to 2.5 times in 2016. On the other hand, PTL Holdings remains one of the most highly-leveraged companies among the bond issuers on the Malta Stock Exchange. The gearing ratio forecasted as at the end of the current financial year is expected to remain above 86 per cent, represented by shareholders’ funds in excess of €7 million and total debt of almost €45 million.
The Financial Analysis Summary has once again proved to be a useful document to enable investors to monitor the performance of bond issuers. However, such companies should also convene meetings with financial analysts to discuss industry trends and to provide more in-depth explanation on the financial statements, including the variances within the forecasts. This would greatly assist investors in their decision-making.
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.
© 2015 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.