The retail industry featured among the most-impacted economic sectors during COVID-19 due to the restrictions imposed by the health authorities via a temporary closure of all retail areas from March 23 to May 3.
Even prior to the onset of COVID-19, there was a growing trend in recent years for more customers to opt for online shopping. The lockdowns imposed during the first wave of the pandemic resulted in a surge in online shopping, creating further pressures on retailers who were not well geared for online orders. A recent article in the Financial Times stated that Moody’s Investors Service expects online shopping to account for 15 per cent of retail sales in continental Europe in the future, compared with 10 per cent before the pandemic.
Among the companies whose bonds are listed on the Regulated Main Market of the Malta Stock Exchange, only two companies can be identified as being focused on the retail industry, namely Dizz Finance plc and Hudson Malta plc. However, I also included United Finance plc in view of the important contribution to the overall performance of United Group Ltd by their retailing segment (mainly Debenhams).
Dizz Finance plc issued a bond of €8 million in September 2016 at a coupon of five per cent on the Regulated Main Market guaranteed by Dizz Group of Companies Limited – the ultimate parent and holding company of the Dizz Group. Since then, other issuers forming part of the group issued additional debt instruments on other venues. On October 1, 2018, D Shopping Malls Finance plc issued a €7.5 million bond at 5.35 per cent via Prospects MTF, while earlier on this year D Foods Finance Ltd raised €3 million as part of a €10 million secured Convertible Notes Programme listed on the Institutional Financial Securities Market.
Overall revenue of Dizz Group during 2020 is expected to drop by 9.5 per cent to €13 million as the sharp drop in sales from fashion retail (-26 per cent to €9.4 million) is expected to be partly compensated by improved turnover from food and beverage outlets as well as rental income. In fact, EBITDA is only anticipated to ease by €0.1 million to €1.4 million. Despite this, the interest cover is expected to remain below one for the second consecutive year, implying that the group is not generating sufficient cash earnings to honour its finance costs. The issued share capital of the guarantor increased to €7.7 million during 2020 following the acquisition of DCaffe Holdings Ltd and D Kitchen Lab Ltd in exchange for an issue of ordinary shares to the ultimate beneficial owners of the group. This is anticipated to help the overall gearing ratio to improve slightly to 79.6 per cent compared to 86.5 per cent as at the end of 2019.
However, the net debt to EBITDA multiple will continue to rise to over 28 times in 2020. Moreover, it is noteworthy that the author of their Financial Analysis Summary stated that “the current situation of accumulated losses, together with minimal cash balances and increasing debt levels is unsustainable, and as such, the group requires a drastic improvement in profitability or a fresh injection of cash as equity or both”.
Hudson Malta plc is one of the main subsidiaries of the Hudson Group which, in turn, is involved in the retail and distribution of branded fashion and sportswear in Malta, Europe and Africa. Hudson Malta plc is the holding company for the group’s operations in Malta. The portfolio of brands managed by Hudson Malta plc include NIKE, Converse, Timberland, Crocs, Eastpak, New Era, Intersport, Kiabi, New Look, Ted Baker, Alcott and River Island. In early August, Hudson Malta plc announced that Hudson Holdings Limited (the ultimate parent company of the Hudson Group) is in advanced negotiations in connection with the acquisition of Trilogy Limited, a premium fashion retail company operating in Malta with brands such as Calvin Klein, Armani Exchange, Mango, Tommy Hilfiger and Tommy Jeans, through a share-for-share exchange process.
Fears of disruptions ahead of the important Christmas season for the retail industry
Hudson Malta issued its maiden bond in Q1 2018. The Financial Analysis Summary presents historical financials of Hudson Holdings Ltd since the issuer had advanced €4.5 million of the bond proceeds (totalling €11.8 million) to its parent company, while the 2020 projections for Hudson Malta reflect the expected performance of the issuer of the bonds. The forecasts for Hudson Malta take into account the actual trading results for the first half of 2020 and the projections for the remaining six months to December 31. The projections for the second half of the year assume that the Malta retail establishments will remain operational during the entire period. Revenue in 2020 is projected to decrease by 29 per cent (or €12.4 million) to €30.3 million mainly due to the complete shutdown of the retail sector between March 23 and May 3, 2020, and the expected curtailment of operations in fashion retail between June and December 2020 despite retail outlets still being operational. EBITDA is expected to drop by 43 per cent (equivalent to €2.0 million) to €2.5 million, resulting in a weaker forecasted interest cover of 3.2 times.
The report, however, highlighted that the Hudson Group has taken measures to safeguard its cash flow position (including moratoria on repayment of loan facilities with its bankers) and to ensure it can meet its obligations despite the downturn in revenues. The forecasts for 2020 also indicate that Hudson Malta will obtain a new bank-loan facility of €2.7 million. As a result of the increase in borrowings, the gearing ratio of the issuer is expected to increase to 86 per cent. Likewise, the additional borrowings, coupled with the projected reduction in EBITDA, will weaken the net debt to EBITDA to 12.2 times.
United Finance plc tapped the bond market for the third time in October 2014 with a bond issue of €8.5 million maturing in 2024. The retail segment accounted for almost 70 per cent of total revenue of the United Group, which also operates in the automotive and property sectors, during 2019. However, it is worth highlighting that the consolidated revenue and EBITDA of the United Group does not reflect the contribution from two important investments of the group, namely a 33.33 per cent shareholding of Motors Inc. Ltd and 19.23 per cent of Pender Ville Ltd. The results of these companies are accounted for as “share of results of associates and jointly controlled entities” below the operating profit line item.
Revenues of United Group Ltd are anticipated to drop by 42.5 per cent to €7.43 million largely due to the significant disruptions to the fashion retail (-43.5 per cent to €4.98 million) and automotive (-43.7 per cent to €1.76 million) operations brought about by the COVID-19 pandemic. EBITDA is expected to decline to €1.06 million compared to €1.78 million in the 2019 financial year, which will result in the interest cover dropping to only 0.8 times from 1.4 times in 2019. Total borrowings are expected to increase by 5.1 per cent to €22.2 million while the gearing ratio is anticipated to increase to 75.5 per cent and the net debt to EBITDA multiple is forecasted to deteriorate to 20.6 times compared to 11 times for the 2019 financial year. The contribution from associates and jointly-controlled entities is only anticipated to amount to €0.35 million compared to €0.9 million in 2019 and €2.2 million in 2018.
Two of the major assets of the United Group are commercial properties with a combined value of €12.5 million. GB Buildings in Ta’ Xbiex is a six-storey building valued at €6 million with a net floor area of 2,510sqm. GB Buildings is fully leased to third parties, except for one floor which is occupied by the group. The Pinto Business Centre in Qormi is in the final stages of completion, comprising circa 3,400sqm of office space valued at €6.5 million as at December 2019. The ground and first floors have been leased as from September 1, 2020, for a period of five years. The financial forecasts anticipate an uplift of €1.4 million in the value of Pinto Business Centre as at the end of 2020.
The resurgence of COVID-19 cases in recent weeks could lead to fears of renewed disruptions ahead of the important Christmas season for the retail industry. Given the evident impact from the pandemic on these bond issuers, it would be advisable if trading updates are provided to the market in early 2021 to assist investors to gauge how these companies fared during the Christmas season.
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