Statistics released by Malta International Airport (MIA) for the first two months of the year showed that 2020 was on course to be another year of growth for the local hospitality sector, with total passenger movements recorded by MIA during January and February showing increases of 14 per cent and 17 per cent respectively when compared to the prior year.
Local hoteliers also stated that there had been an overall increase in their business operations, echoing the expectation that 2020 would be another year of growth for the sector.
However, as we now know, a black swan event was about to unfold that few could have seen materialising. The first locally registered case of COVID-19 was reported on March 7 when three cases were registered. Contrary to the expectations at the beginning of the year, the local tourism industry subsequently experienced a significant deterioration in business activity.
The month of March saw a decline in total passenger movements of 65 per cent. Figures released by the airport for the month showed that total passenger movements fell to 169,389 compared to the same month during the prior year when the total amount of passenger movements registered was that of 477,533.
The closure of the airport between the months of April and June continued to dampen the prospects of the local hospitality sector as inbound travellers came to a complete standstill.
The reopening of the airport in July, which was welcomed by the local tourism industry, did little to improve business activity as the amount of inbound travellers were significantly lower than the figures registered in 2019 during the months of July, August and September as the airport reported a decline in total passenger movements of 81 per cent, 69 per cent and 83 per cent respectively on a year-on-year basis for each of the three months.
On average, the six local hospitality bond issuers are forecasting a drop of 62 per cent in revenues
Recently, local hospitality bond issuers (of which there are currently six) each published their respective projections for the current financial year. The projections show that the financial performance of these issuers is expected to weaken considerably.
On average, the six issuers are forecasting a drop of 62 per cent in revenues, while EBITDA is expected to decline by 93 per cent. Five of the six issuers are also forecasting that they will not be able to generate a profit during the current financial year.
Each issuer is also expecting a deterioration in financial leverage, as on average, total borrowings are set to climb by 12 per cent across the six bond issuers as they seek to obtain additional funding in an attempt to shore up liquidity and mitigate the pandemic’s effect on their respective businesses.
Given the weaker earnings, deterioration in financial strength and material re-levering, the expectation is for financial ratios to weaken across the six issuers.
Due to the uncertainty that still surrounds the industry, four of the six issuers have withdrawn forecasts that are usually provided for hotel metrics. The two issuers that have provided such metrics are forecasting an average occupancy level of circa 28 per cent for the current financial year, which is considerably lower when compared to the 78 per cent average occupancy achieved in 2019.
The local corporate bonds issued by these six issuers have reflected the weakness in earnings and challenging environment, as bond prices traded lower following the outbreak of the virus in Malta. The yield to maturity of local corporate bonds in this sector has, on average, increased by circa 151 bps (or 1.5 per cent) from the levels seen towards the end of March.
Undeniably, the local hospitality sector continues to face significant headwinds in the near-term, with uncertainties surrounding the duration of the pandemic, the creation and distribution of a potential vaccine and the continuation of government aid.
In the short term, each individual hospitality issuer will have to mitigate the effect of the pandemic on their business by exploring different avenues to generate revenue, controlling expenses and retaining high levels of liquidity to get through this difficult period.
At this stage, investors should assess whether the currently higher yields on such securities justify retaining exposure to the underlying risks of the sector.
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.
Simon Gauci Borda, Junior Research Analyst, Curmi and Partners Ltd