The start of the financial reporting season

Earlier this week the financial reporting season commenced with the publication of the annual financial statements of HSBC Bank Malta plc while Malta International Airport plc released its results yesterday.

The purpose of this article is not to provide a detailed analysis of the financial statements of two of the largest companies listed on the Malta Stock Exchange but to explain the importance of the reporting season and highlight some of the more important aspects that investors should look out for in the upcoming releases from some of these companies.

The Listing Rules issued by the Malta Financial Services Authority stipulate that annual financial statements must be published within four months from the end of the company’s financial year while interim financial statements are due within two months. Moreover, an Annual General Meeting must take place within six months from the end of their financial year.

The majority of companies that have their shares listed on the main market of the MSE have a December year-end. The only companies which have different accounting reference dates are MaltaPost plc (September 30), PG plc (April 30) while Simonds Farsons Cisk plc and Trident Estates plc both have a January 30 year-end.All other companies therefore have until April 30 to publish their annual financial statements and by June 30 to convene an Annual General Meeting.

The annual reporting season is normally broken down into two parts. On one hand, there are companies that generally publish their preliminary profits statement or annual financial statements between mid-February and mid-March. Over recent years, HSBC Bank Malta plc and Malta International Airport plc were always among the first to issue their results. Plaza Centres plc also used to form part of this category. However, no date has been announced yet on the publication of their 2017 annual financial statements.

The other companies in this category include Malita Investments plc, GO plc, Mapfre Middlesea plc and Lombard Bank Malta plc. In fact, these four companies all confirmed again that they will be publishing their 2017 financial statements between March 5-8, 2018. Meanwhile, the second category of companies generally publish their financial statements between the end of March and the end of April deadline.

The next 10 weeks is thus a very important period for financial analysts and investors since the various companies will be issuing their financial statements, publishing detailed reviews of their business performance and hopefully explaining their outlook. Moreover, during the AGMs which must all take place by June 30, investors have an opportunity to question management on the company’s financial performance and certain decisions related to the business strategy. It may therefore be opportune for investors to be aware of some important revelations that should be expected to be made by various companies in the weeks ahead.

In the banking sector, the most important highlights that may arise from the upcoming announcements will be on the capital levels held by the various banks as well as the impact of IFRS 9. This new reporting standard could possibly lead to significant changes in the treatment of loan impairment provisions as from 2018. In the first announcement earlier this week, HSBC Malta may have surprised many investors with the proposed payment of a special final net dividend of €0.0555 per share (in addition to the ordinary final net dividend of €0.0251 per share) as a result of the high capital ratios. Although no mention was made in the HSBC announcement with respect to IFRS9, the CFO clarified in a meeting with the press that this will be disclosed in the 2017 Annual Report available shortly.

The market now awaits the upcoming announcements from Bank of Valletta plc, Lombard Bank Malta plc and FIMBank plc. Following the successful €150 million rights issue of BOV, investors should be attentive to details on any changes to the dividend payout ratio and any plans by the bank with respect to the various bonds being redeemed in the months and years ahead.

FIMBank shareholders will be closely following whether the group has continued to register progress in its turnaround strategy and the outlook for 2018 especially as a result of the imminent rights issue. Lombard Bank shareholders will possibly be mainly interested in progress on the sale of the 49 per cent shareholding held by the special administrator of Cyprus Popular Bank. However, this is something that the administrator himself needs to disclose rather than the bank.

Oil price has jumped to a two-year high

Two of the companies that will be closely watched are RS2 Software plc and Medserv plc due to their internationalisation strategy. RS2 had reported at its June 2017 AGM that the company applied with the Planning Authority to extend their existing Malta head office since they require more space to cater for the additional business. In fact, the CEO then made reference to the growing business pipeline and indicated that negotiations were taking place with a number of very large customers from various regions including Argentina, Brazil, India, Europe, Australia and the US. This was followed by an announcement in July that the company formed a strategic alliance with Quattro Processing Services to offer credit card processing and an acquiring technology platform for banks and financial institutions in India. Moreover, in the Interim Directors Statement in November 2017, RS2 confirmed that it formed another alliance with a large corporation that provides 42 per cent of the global travel market and was having discussions with the potential of securing multi-million processing deals in regions which were targeted to be concluded by the end of Q1 and Q2 2018. Investors will therefore be actively seeking added information from RS2 in the weeks ahead to check the progress on these various leads and the potential improvement to the financial performance once these contracts become operational.

As reported by Medserv and UK research specialists Edison, the Medserv 2017 financial statements will be disappointing. Edison is expecting a loss of €2.8 million. During 2017, Medserv regularly communicated with the market and gave coverage of the reasons for this weak performance, namely the delay in the start of a number of projects. These projects are expected to have commenced during the last part of 2017. Meanwhile, the oil price has since jumped to a two-year high leading to optimism among the major international oil companies as well as the subcontractors and logistics firms.

The market is awaiting news on whether the contracted work has commenced and how this is likely to influence the 2018 financial performance. Edison already reported that it anticipates a strong turnaround for Medserv with a pre-tax profit of €5.8 million during 2018. This is possibly on the back of the new three-year contract announced by Medserv last month for a value in excess of €10 million in a new energy market. Also, the expected profitability hike projected by Edison is also on the back of the resumption of activity in Cyprus. In November 2017, Medserv announced it had opened its second base in Cyprus ahead of the drilling works across four to five wells in the waters offshore Cyprus in the next 12 months. On February 8, 2018, ENI SpA announced a gas discovery in Block 6 offshore Cyprus and Medserv supports ENI’s drilling operations from its onshore bases in Larnaca and Limassol.

Another company with an ambitious international expansion strategy and bold plans in Malta is International Hotel Investments plc. On the international front, investors will be seeking progress on the business pipeline of the hotel management arm given the company’s target of having 50 management agreements in the next few years as indicated by the company’s executives on various occasions. Moreover, with respect to the local expansion plans, the market will be seeking news with respect to the development of the Ħal-Ferh project as well as the San Ġorġ project including an indication of timing and the financing plans being contemplated.

MIDI plc shareholders will be awaiting news on progress on the Manoel Island project and on the positive impact on the financial statements following the opening of ‘The Centre’. GlobalCapital plc will be expected to provide firmer indications of the size of their upcoming rights issue following the announcement on December 28, 2017 explaining the change in the business strategy which is likely to affect GlobalCapital’s capital levels.

As various companies publish financial statements, many companies generally convene meetings with financial analysts and institutional investors to provide necessary explanations underpinning respective financial performances and provide an update on business strategy. It is important for institutional investors and analysts to actively participate in such meetings to ensure that the important information required for a proper analysis of a company’s business prospects are truly discussed. Across international markets, shareholder activism is one of the key reasons for certain strategic decisions taken by some companies. Unfortunately, shareholder activism is still lacking in Malta and given the importance of institutional investors, they need to become the driving force behind a more open dialogue between company executives and the investing public.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (Rizzo Farrugia) 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. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia 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 Rizzo Farrugia, 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.

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