An eventful first quarter

The first quarter of the year is already over and today’s article will review the main developments across the local equity market during the past three months. At the start of the year, the main focus among many local financial market practitioners was the impact of the new requirements and procedures following the introduction of MiFID II across capital markets throughout Europe. While the new requirements and procedures directly impact both the investment services providers as well as investors and getting accustomed to the numerous changes will take time, one of the evident changes across the local equity market was the amendment in the tick sizes which I had explained in one of my articles in January.

The market seems to have now adapted to the tick size regime and investors’ attention quickly moved away from the regulatory changes taking place towards the developments across the various companies. It was a rather eventful first quarter of the year with various important announcements in addition to the start of the annual reporting season. Generally, the financial statements published so far were particularly encouraging with strong financial performances reflecting the robust dynamics of the local economy. This translated into a notable increase in dividend recommendations by four companies in particular, namely HSBC Bank Malta plc, GO plc, Mapfre Middlesea plc and Malita Investments plc.

Lombard Bank Malta plc and GlobalCapital plc dominated the headlines in recent weeks. It was initially reported in the media that Malta’s National Social and Development Fund was seeking to purchase the 49.01 per cent shareholding in Lombard Bank currently held by the Special Administrator of Cyprus Popular Bank. GlobalCapital plc then surprised the market when it announced that it placed a bid for this sizeable shareholding in Lombard.

Given GlobalCapital’s 5.54 per cent stake already held in Lombard, should this have materialised, it would have resulted in a takeover bid by GlobalCapital for all of the shares in the bank. However, barely 24 hours after the announcement by GlobalCapital, it was then revealed that the private equity fund that had been intimated to have been backing GlobalCapital’s bid was not involved in the bidding process. Following a very eventful week, on March 16, an official announcement confirmed that the National Development and Social Fund had signed an agreement with the Special Administrator for the purchase of the 49.01 per cent shareholding.

Lombard Bank Malta plc and GlobalCapital plc dominated the headlines in recent weeks

Although this transaction is still subject to regulatory approvals, the pricing terms have not been disclosed to the market leaving shareholders in the dark on the actual price of the eventual transfer of shares should the regulators approve the transfer of shares. On the other hand, however, the National Development and Social Fund indicated that its 49.01 per cent acquisition of Lombard is based on a number of principles, namely: that it does not intend to increase its holding in Lombard any further; that it shall not act in concert with any other shareholders; that it will seek to reduce its shareholding in Lombard in an orderly manner and by agreement with the regulatory authorities; that it has no intention of exerting any influence on the operations of the bank; and that the acquisition will not result in a change in control of Lombard.

GlobalCapital was again in the news shortly afterwards when it announced that it will be seeking regulatory approval in April for a €6 million rights issue. This again surprised the minority shareholders of GlobalCapital since on December 28, 2017, the company had announced that it was postponing its intention of conducting a rights issue of an amount of shares not exceeding €15 million in nominal value amid a redefinition of the company’s business strategy during the first half of 2018 in the context of its plans to strengthen its position in the local insurance market and to passport its insurance products in other EU jurisdictions, while at the same time preparing itself for the implementation of the Insurance Distribution Directive.

Another rights issue taking place is that of Fimbank plc. The $115 million rights issue was approved on March 23 and shareholders have until April 18 to exercise their entitlement of two new shares for every three shares held at a price of $0.55. In this respect, the two principal shareholders of Fimbank – Burgan Bank S.A.K. and United Gulf Holdings Company B.S.C. – committed themselves to exercise their right to subscribe to the new shares. Moreover, United Gulf Holding Company B.S.C. is also undertaking to underwrite up to USD105 million of the overall rights issue.

The approval by the Planning Authority of the master plan of Malta International Airport plc was another noteworthy development during the first quarter of the year. This approval was announced on February 22 shortly after the airport operator had published its 2017 financial statements showing a record pre-tax profit of €37.6 million. PG’s acquisition of the United Macaroni Factory in Qormi and the listing of the shares of Trident Estates plc were other notable developments during the first quarter of 2018.

However, the most unexpected announcements were issued by Bank of Valletta plc. On Monday, March 26, BOV announced that it had been informed by UniCredit S.p.A., the second largest shareholder in BOV with a remaining stake of 10.001 per cent, that it intended to dispose of its total shareholding in BOV to an investor that had already been identified.

Since UniCredit had not taken up its rights entitlement at the time of the rights issue late last year, its stake in BOV had been diluted to 11.64 per cent. As such, in recent weeks, UniCredit indirectly confirmed that it had already disposed of 1.64 per cent of the overall bank’s share capital in the market. However, the day after the announcement by UniCredit, BOV informed the market that it received notice of a precautionary warrant by an Italian Tribunal for €363 million.

Meanwhile, a few days earlier, BOV had issued its 15-month financial statements showing a pre-tax profit of €175 million. Although the bank reiterated that it has a strong legal case and is appealing the precautionary warrant and that it is firmly rebutting the claims instituted against it before an Italian Tribunal, this news negatively impacted the share price as it slipped by 3.2 per cent from €1.86 prior to the announcement related to the precautionary warrant to €1.80. The share price had previously traded up to the €1.90 level in anticipation of the 2017 financial statements.

Notwithstanding that the equity of BOV ended the quarter flat, the decline in BOV’s share price during the final week of March dampened the Q1 performance of the overall equity market. Since BOV is the largest component of the MSE with a market capitalisation approaching €1 billion, movements in BOV’s share price have a larger impact on the equity indices compared to movements in other equities. In fact, on March 26, the MSE Equity Price Index had reached a 2018 high of 4,539.833 points, representing a gain of 0.68 per cent since the start of the year.

However, following the drop in the share price of BOV, coupled with the declines in GO and RS2 during the final week of March, the MSE Equity Price Index ended Q1 at 4,474.087 points (-0.77 per cent). On the other hand, HSBC and MIA performed positively during the first quarter each advancing by 4.3 per cent. On the other hand, following the strong dividend increases by various companies, the MSE Total Return Index had a superior performance with a rise of 0.1 per cent.

The top gainer during the past three months was Trident Estates followed by Mapfre Middlesea. Volumes in both equities were relatively weak compared to most other equities. On the other hand, five equities suffered double-digit losses. The worst performer was Simonds Farsons Cisk plc with a decline of 18.4 per cent. Despite the fact that the cut-off date prior to the spin-off of Trident Estates plc was in early December 2017, the adjustment in the share price continued to take place over recent months even following the listing of Trident Estates.

Farsons will shortly be publishing its annual financial statements for the financial year to January 31, 2018. The other equities showing double-digit losses were Tigné Mall plc (-12.8 per cent), Medserv plc (-12.6 per cent) as well as Fimbank plc and MaltaPost plc as both each declined by -12.3 per cent. However, the drops in Tigné Mall and Medserv must also be seen in the context of the sudden upturn in the company’s share prices during the final trading session of 2017. In fact, on December 29, 2017, the equities had climbed by 8.9 per cent and 10.4 per cent respectively. Tigné Mall’s annual financial statements will be published on April 25.

Overall market trading activity improved by 19.8 per cent over the first quarter of last year to €23.3 million. BOV was once again the most actively traded equity as it accounted for 42.5 per cent of the value of trades in the past three months. A total of 5.47 million shares in BOV traded. The other most active equities were HSBC (accounting for 9.2 per cent of the overall value of trades), MIA (8.8 per cent), GO (6.6 per cent) and RS2 (6.5 per cent).

In the next few weeks, the annual reporting season will come to an end with the publication of financial statements by a further seven companies. While the announcements by each of these companies will be closely monitored by financial analysts and investors, sentiment may continue to be dominated by recent developments at BOV and any further announcements that may be issued in this respect. Moreover, following the publication of the indicative listing calendar on February 1, 2018, we are likely to experience a new entrant to the equity list of the regulated main market during the second quarter of the year.

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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