It is now six months since the onset of the pandemic. During this time, the world as we knew it has changed, both from a commercial as well as a social perspective. Within the commercial sector, some industries, most especially the hospitality and property sectors, have been hit much harder than others, and in a more direct manner. Others, such as the banks, have also been affected but more in terms of second-round effects.
With the passage of time we are able to begin to build a clearer picture of the impact the pandemic is now having on the financial strength of companies that have securities listed on the Malta Stock Exchange. After the end of June, local companies reported their financial results for the first six months of the year.
These results included almost four months of post-pandemic operations. Investors would do well to review the results closely to better understand the strength of companies they invested in, and the risks they now face. Both these aspects have changed materially since March.
Let’s look at each characteristic individually. A company’s strength emanates from various aspects, each of which adds to or detracts from its overall strength. It could be the robustness of the business model, its balance sheet, its ability to generate cash profits, size, geographic location and diversity of its market, quality of its management and even the level of its corporate governance and transparency.
As these aspects grow or subside, one expects that the risk associated with the company also changes. The price at which its securities trade, whether they are bonds or equities, is the translation of that change in risk into monetary value. It reflects a statement by investors who, by purchasing or selling such a security, are saying that that is the value they ascribe to that investment, taking into account the current risk, and the expectation of how that will change in future.
With that in mind it is interesting to see how some local securities have traded throughout the pandemic. Take the shares of MIA, a company right in the pandemic’s cross hairs. Its shares traded at a high of €7.65 in October 2019, only to fall to €3.52 in March 2020. One can rationalise this in the context of the deterioration in prospects for this company in the short and medium term. No travelling for a few months, minimal travelling for an unknown period thereafter. It is quite straightforward to see why there was such a move.
MIA shares traded at a high of €7.65 per share in October 2019, only to fall to €3.52 in the March 2020
Longer term one could also argue that Malta has only one airport and that at some point business will pick up again. This is also true, but behind this assumption is the fact that MIA will remain a viable company. One can make this assumption on the basis of the strength of MIA’s balance sheet and the company’s ability to steer its way through the pandemic, avoiding any terminal damage.
Similarly, one can look at a number of fixed income securities on the MSE. Here the moves have been far more controlled, bar the odd exception, and yet this may be somewhat surprising, especially when a comparison is made to the price movements on international markets. Is this because local companies are more resilient?
Is it because there is a limited understanding of the risks such companies are facing, or perhaps a reluctance to exit an investment below the original issue price of par (100)? Or perhaps there is a solid belief, mistaken in my opinion, that companies that have bonds on the MSE do not and will not default? In fact, it is probably a mixture of these, to a lesser or greater degree.
With fixed income securities it is important to remember that, unlike with equities, there is a contractual commitment to pay regular interest, as set out in the prospectus. Any failure to pay this is likely to lead to the company being wound down or restructured. Fortunately, we have not had any such situations locally, and hopefully this will be avoided, but the risks are certainly rising as the pandemic stretches out.
Sadly, there is real pain out there in certain sectors. Pain that will only be reflected once the year-end accounts are published. Investors should therefore pre-empt this and assess the risks their portfolios are carrying and, given their current predicament, decide whether they ought to continue holding such risks or perhaps exit completely, or even switch to lower risk investments, where although the coupon may be lower, the risk of default is also much lower.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
David Curmi, Managing Director, Curmi and Partners Ltd