The COVID-19 outbreak is affecting virtually everyone worldwide. The pandemic which started in China has spread across the globe and is presenting new challenges to humanity. Governments are doing their utmost to control the virus spread and to ‘flatten the curve’ by placing half of the world’s population – more than 3.9 billion people – in lockdown. But naturally, such drastic measures come with consequences.
One industry which has been pushed into crisis mode by this outbreak is the aviation sector. Malta International Airport plc has been severely impacted by this virus, with the share price plummeting down to €3.52 from a recent high of €7.00, a drop of 50 per cent, followed by a recovery back to the €5.00 level (29 per cent down from recent high).
This volatility in the stock clearly shows the unprecedented situation we are currently facing and the fear brought about by the uncertainty of when life will return to normality. Predicting when all of this will be over is near to impossible since even experts seem to be divided as to whether the virus spread will slow down during summer as is generally the case with the seasonal flu or it will persist due to being immune to seasonality.
However, the general consensus is that the pandemic will only end once a so-called ‘herd immunity’ is established, that is when enough people are protected from the virus that it cannot spread as effectively and eventually dies out. But this can only happen if either a vaccine is developed or a large portion of a community has been infected with the virus and develops resistance to it. The first option is undoubtedly the preferred one, although this comes at a hefty price since it might take several months for the development and approval of a vaccine.
Consequently, investing with a short-term perspective is extremely difficult in such volatile markets, especially for novice investors. Nevertheless, this does not mean that investing in stocks with a strong financial position, such as MIA, will not be rewarding, particularly for those investors with at least a few years to wait things out.
MIA has a strong liquidity profile with cash reserves amounting to €28.2 million as of December 31, 2019 and a zero-leverage balance sheet. Thus, the latter puts the company in a better position to obtain financing if needs be.
Additionally, MIA is uniquely positioned in Malta and benefits from a monopoly in the local aviation market, with a remaining 47-year concession to operate Malta’s airport. Throughout the years, it has established a track record of outperforming expectations, with revenue during the past five years growing at a compounded annual growth rate (CAGR) of 10.6 per cent, and profitability growing at a CAGR of 15.2 per cent during the same period.
Furthermore, MIA was able to diversify its portfolio by investing in commercial real estate on the land adjacent to the airport, which will help it mitigate the burden of decreasing passenger traffic during 2020 and possibly 2021. The airport’s decrease in revenue could be partially netted off with the recently announced government financial aid package, where the government will be covering €800 of the employees’ monthly salary.
Additionally, MIA should be able to control a portion of its operating costs, especially in view of the fact that currently the airport is practically shut down. MIA’s management stated that it is still early to assess the full impact of COVID-19 due to the situation’s fluidity, although the general trend both locally and abroad is that companies/governments are taking a three-month forward view with major European airlines suspending all flights during April and May.
It is interesting to note that the International Air Transport Association (IATA) predicts a 46 per cent drop in European air traffic in 2020, while S&P Global is predicting a 35 per cent drop. Locally, it was reported that optimistic government advisers predict tourist arrivals to begin recovering in December, while in an adverse scenario the tourism drought could last until the summer of 2021.
This indicates that 2020 will be a hard year for MIA, however, in 2021 things should start to recover. Consequently, investors capitalising on MIA’s recent dip in share price (current share price €5.00), would be benefiting from a circa 30 per cent discount to the recent price of €7.00. Moreover, it is worth noting that in most cases stocks bounce long before the fundamentals return to normality.
Disclaimer: This article was issued by Rowen Bonello, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.