The technology and telecom sub-industries, which fall under the information and communication industry, are two key drivers of Malta’s economic growth, collectively contributing five per cent to Malta’s GDP during 2018.
Malta has become a favoured destination for foreign direct investment within the technology industry, attracting both large and small global brands from several countries across Europe. Notable success was also registered from home grown technology companies.
In addition, Malta has seen a steady growth in this industry due to the progression of other industries, such as the iGaming industry and the financial services industry, whereby number of companies are expanding their technology-based departments in an attempt to operate within the growing sector of Fintech.
More specifically, growth was also witnessed in terms of the payment services industry in Malta, case in point through the expansion strategy in which RS2 Software plc is currently undergoing, which will be discussed in further detail below. It is crucial to point out that there is still room for further strengthening of the local technology sector, in line with current government backing for such companies to prosper.
As in the case of the local technology sector, the telecom industry also underpins the success of other sectors since it is a crucial enabler of the knowledge-based economy. It is key to note that this industry is a capital intensive industry and limited in terms of market size, with specific reference to the local context. In fact, this sector in Malta is mainly dominated by three large players, together with a number of other smaller players.
Insight on local technology and telecom companies covered by Calamatta Cuschieri
BMIT plc
In January 2020, BMIT announced that it has completed the acquisition of the Ħandaq data centre. This coupled with the new data centre in Żejtun will increase the Group’s capacity and will ensure that BMIT is well positioned for abnormal growth. Nevertheless, management is not anticipating a significant growth in revenue to outweigh the expected rise in operational costs.
Despite the lower margins in the short-term, we expect the circa four per cent dividend yield to be maintained (90 per cent dividend pay-out ratio). We are cautiously optimistic that their financials will improve in the medium to long term. Subsequently, we believe that the stock is fairly valued at its current price.
RS2 Software plc
During 2019, the Group has successfully secured new contracts and opened up new verticals within several regions concerning managed services and also generated revenue for the first time from the US operation. In line with RS2’s strategy to focus on the acquiring business segment going forward, during Q1 2020 the Group concluded two important milestones in this regard. The first being the acquisition of KALICOM Liebers Zahlungssysteme KG, which is a commercial network operator for electronic, card-based payment systems in Germany. Secondly, RS2 also entered into a partnership agreement with MoviiRed based in Colombia, to offer customers and merchants direct issuing and acquiring services.
We are of the view that the Group can continue building on its growth momentum, leveraging further its unique business model. Based on this, combined with the continued development of RS2’s products offering and its unique position in terms of the acquiring business, we believe RS2 is well positioned to achieve super normal growth by attracting leading financial organizations, processors and merchants, and as such we believe these are all meaningful reasons to justify the buying interest we have recently seen in the stock. However, in order to see continued improvement in the share price we need a more concise direction by the Group in terms of projections moving forward.
GO plc
GO is well positioned in the local telecom industry and hence its revenue growth is restricted to that of the local market, which we believe has reached saturation point. GO’s management embarked on a cost savings exercise and this should positively affect the Group in the long-term, at the expense of incurring short-term costs.
We expect Cablenet’s revenues to continue on the current growth trajectory, sustained by the growth of the Cypriot economy. GO holds 51 per cent ownership in BMIT and the Group will be positively impacted by the potential abnormal growth of this subsidiary, which might come to fruition given the strategically important sector in which BMIT operates. We are of the opinion that the maintained dividend yield of circa 3 per cent together with the factors discussed above, are all meaningful reasons to hold the stock.
Disclaimer: This article was issued by Andrew Fenech and Rowen Bonello, research analysts 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.