During August and so far into September, the local market index lost another six per cent. There were falls across all equities but, of course, falls in share prices of the bigger companies have greater impact on the index since they carry greater weight due to their higher capitalisation.
During the summer, we had HSBC, Farsons and Maltacom reporting interim figures. The results which were published varied in quality from very good for Farsons to rather poor for Maltacom. Overall, though, considering the state of the local and world economy, one could say they were better than many expected.
HSBC Bank Malta plc came out with half-year results to June 30, 2002. As expected, it also reported changes in top management.
Group results show net interest income expanding by 12 per cent due to interest payable falling more sharply than interest receivable. Interest receivable actually fell by nine per cent but interest payable was cut by 21 per cent.
It is good to have been left with more but one would have preferred to have the extra come from increased revenue. While not ideal, things could have been much worse had, for example, the bank not managed to cut interest payable rapidly.
Trading profits also suffered, down by 18 per cent, but then HSBC managed to push fees and commissions receivable by nearly six per cent, which is a sign of strength considering the circumstances under which it was working.
Administrative expenses were cut by six per cent, not easy in a country suffering from widespread cost sclerosis.
As a result, profit after tax for the six months were up from Lm5.3 million in the equivalent period last year to Lm7 million for the six months this year. The adjusted earnings per share is 41c1 and the shares are trading at nine times earnings, about half that of its parent.
The multiples of earnings at which the two major banks are trading at would, under normal circumstances, prove to be attractive to investors. Weighing on local banks, however, are the doubts expressed by credit rating agencies on the quality of local loan portfolios in view of possible further economic downturns and the impact of the removal of levies.
For the six months, for example, HSBC charged its income statement Lm1 million compared to the half-million in the comparable period in respect of net impairment losses which, however, may include investment impairments in addition to impairment to debtors.
Tighter accounting and supervisory regulations are also forcing banks to recognise doubt where such exists rather than suspend judgment while monitoring and assisting weak debtors. This also means that it is likely that loans and advances contracted today would be of better quality than those in the past and that the loan books would improve in quality.
It is interesting to look at the three reporting companies in terms of their preparedness for more open and global markets. HSBC is the local operation of a much bigger, very highly rated international bank. Its parent has products which compete on the international marketplace and state of the art management systems.
Importantly, at least according to Mr Robson, the outgoing CEO, the local operation has to a large extent been moulded into the right shape and therefore should be able to compete.
Farsons went about things in a different way. Its strategy can be said to be three pronged.
¤ First, a restructuring of management and the organisation which led to improvements in operations and the separation of the different business lines: beverages, property, food, etc.
¤ Second, continuous investment in manufacturing and export of its own products, eg Cisk, Kinnie.
¤ Third, very solid diversification via franchise, agency and distribution agreements with some of the world's best brands. Either way it goes, Simonds Farsons Cisk should be able to make headway.
Maltacom is very aware of the challenges, and in various ways tried to prepare itself, for a while by entering into a wide range of new projects, gradually becoming more discerning as it learnt that quality is better than quantity. It is not yet in a position to take on international competition albeit its position today is much better than in Telemalta days.
Its operating results, considering that the onslaught is still not on, should be better than they are. In the interim financial statements for the six months to June 30 published at the end of August, we see turnover and other operating income expanding Lm1.8 million, or seven per cent, but being dissipated in higher cost of sales (Lm1.2 million), higher administration, distribution, and other operating expenses (Lm0.2 million), a bigger tax take, which together with other miscellaneous items left the shareholder with a quarter of a million less in profit after tax for the six months. Maltacom is taking seven per cent more but was left with six per cent less in profit after tax.
Maltacom should seek to increase turnover by providing higher-value services or by increasing volumes rather than by increasing prices for the same services. Maltacom should seek both to increase turnover and to retain as much of that extra revenue as possible through improved efficiency and strict cost control.
With Farsons, which recently announced a rights and bonds issue, turnover for the six months to July 31 increased by five per cent to Lm12.4 million with gross profit increasing by seven per cent to Lm3.5 million. After an increase in the share of losses of associated companies, profit before tax increased from Lm469,000 in the comparable period to Lm581,000 (up by 24 per cent).
The group also benefited from tax benefits due to its investments and profit after tax jumped 71 per cent to Lm618,000 from Lm361,000.
In the next Market View, which will coincide with the securities issue, I will give a closer look at Simonds Farsons Cisk. The group is showing steadily improving results and the recent acquisition of the 7Up franchise, the closing of certain deficit food outlets and full control of the Galleria complex should help push Farsons further along this path.
Paul V. Azzopardi is joint sponsoring stockbroker of Simonds Farsons' Cisk forthcoming securities issues.
pvazzopardi@usa.net