At the start of every year, global investment banks and research houses issue forecasts on the expected performances of the main benchmark indices in the US, Europe, Asia and also emerging markets. Analysts also highlight the main investment themes likely to dominate financial markets, and the principal sectors that would be likely to outperform.
The Maltese equity market is dominated by six companies which account for over 60 per cent of the overall value of the MSE Equity Price Index. Since most of these companies do not publish financial projections, it is hard to estimate the performance of the index for any calendar year. This is even harder now given the current circumstances and the uncertainty on when COVID-19 vaccines will be successfully rolled out across a large percentage of the global population which would lead to an improved economic outlook. The six largest companies comprising the index are Bank of Valletta plc, Malta International Airport plc, International Hotel Investments plc (IHI), RS2 Software plc, GO plc and HSBC Bank Malta plc.
Unfortunately, the two equity indices drawn up by the MSE (namely the Equity Price Index and the Equity Total Return Index) only take into consideration the number of shares listed by each company on the Regulated Main Market. It is worth pointing out that Malta International Airport plc and Malita Investments plc have different classes of shares and not all of their issued share capital is listed on the MSE. So the two equity indices do not take into consideration the entire market value of MIA and Malita in the computation of the overall market capitalisation of the local equity market. Similarly, the indices do not reflect in full any movements in the share prices of the two companies. This is especially important for MIA as the 40 per cent of unlisted shares is valued at over €300 million, which would place MIA as the largest company accounting for 18.6 per cent of the adjusted index compared to the weighting of just 12.2 per cent in the present computation of the index.
The outlook for the Maltese equity market is largely driven by the expectations of the six largest companies. MIA was, undoubtedly, one of the hardest-hit companies by COVID-19, and as a result of the fluidity of the current situation, it is unsurprising that MIA withdrew its traffic and financial guidance for the current financial year. MIA’s near-term performance is entirely dependent on the resumption of air travel which, in turn, is reliant on the successful global rollout of vaccines, especially in Europe.
MIA’s parent company, Flughafen Wien, published a press release last week providing traffic results for 2020 and traffic and financial projections for 2021. The Vienna airport operator expects a substantial rise in passenger volumes in the second half of 2021 and it is evident from their overall traffic projections that they also anticipate that MIA will register around three million passenger movements this year. Should this be achieved, it would represent a substantial rise from the 1.7 million passenger movements in 2020 but well below the record of 7.3 million passengers welcomed in 2019. Such an estimated figure of passenger movements would also be in line with the expectations of ACI Europe which last week noted that it anticipates a drop of 56 per cent in passengers across Europe’s airports when compared to 2019 numbers.
Malta’s two largest retail banks have a combined market capitalisation equivalent to that of MIA. The outlook for Bank of Valletta and HSBC Bank Malta will be conditional on the extent of the credit loss provisions required due to the pandemic as well as the timing when dividend payments can be resumed. It is worth recalling that at the start of 2020, both banks had published their 2019 financial statements and recommended the payments of dividends. But after the COVID-19 outbreak, the European Central Bank asked all eurozone banks to refrain from distributing dividends to shareholders and conduct share buy-backs with the aim of pushing banks’ capital levels up and provide additional cushion and support to the economy.
Most of the companies do not publish financial projections
Similar to MIA, IHI was also materially negatively impacted by COVID-19. In view of its regulatory obligations as an issuer of bonds, IHI publishes its financial projections annually. On August 31, 2020, IHI reported that revenues in 2020 are anticipated to drop 65.3 per cent (or -€175.1m) to €93.2 million, which would translate into a negative EBITDA of €5.19 milion and a net loss of €57.4 million. Despite the extraordinary dent to business, IHI also confirmed that it had forecast to end the 2020 financial year with a robust cash balance of €44.7 million. While the actual results for 2020 published in the months ahead are important for the market, investors will naturally be more interested in the extent of the recovery anticipated for the second half of 2021 and how the pandemic may have impacted the book values of its vast property portfolio.
Last week, RS2 Software plc issued an announcement providing an update on the various business developments that took place in 2020 and the expectations for 2021. RS2 said 2020 was a successful year as it managed to secure significant revenue contracts and transition a number of strategic clients across various regions to live processing. It is worth highlighting that in the US, RS2 confirmed that it signed one of the largest banks on a hybrid licensing and processing model which will “take revenue generation for the group to a new level”.
Also in the US, it concluded major processing outsourcing agreements with various payment providers.
RS2 also provided an update on client relationships in other regions; in Brazil, for example, it continued to expand its customer base and rolled out its omnichannel acquiring services to new clients where it expects to process over 200 million transactions in 2021.
RS2 also referred to recent changes in its memorandum of association following two extraordinary general meetings that took place last month. RS2 explained that the increase in capital in the near future will enable it “to react in a timely manner to opportunities and be able to bring on board strategic investors which will enhance shareholder value, if and as needed”. At the EGM on December 15, CEO Radi El Haj indicated that the prospectus being published in conjunction with the issuance of the preference shares will include financial projections for the next two to three financial years where circa 80 per cent of the forecasts relates to business already committed to the company. The publication of these financial projections could truly be a ‘game changer’ for the company and the Maltese equity market at large as the investing community will have the possibility of obtaining a clearer indication of RS2’s future potential. In last week’s announcement, RS2 concluded by stating that “it expects to reap the benefits on the investments it has made in prior years and show markable top-line growth and improved profitability in the years to come”.
Despite the relative resilience of the telecommunications industry and the decision by GO plc to distribute a dividend, albeit at a lower amount than originally recommended, the company’s share price suffered a 17 per cent drop in 2020. Unfortunately, the company did not publish an announcement in recent months to update the market on its performance since the issuance of the interim financial statements in August.
In the first half of 2020, the group’s EBITDA was relatively unchanged at just above €35m but pre-tax profits fell 30 per cent on account of higher amortisation and depreciation charges mainly related to its telecoms subsidiary in Cyprus. One of the major milestones in 2020 was the successful bond issue by the Cypriot subsidiary Cablenet Communication Systems plc. In fact, following the growth in first-half revenues of almost 32 per cent in Cyprus to €23.2m, the performance of this subsidiary will be one of the key focus areas by the investing public once GO publishes its financial statements in the weeks ahead. The cash flow generation during the pandemic will be a major item of interest especially as this will possibly influence the decision by the directors on the extent of the upcoming dividend distribution.
The reporting season starting in the weeks ahead will provide important signals about the direction that the Maltese equity market could take in the upcoming months. As financial markets are widely regarded as ‘forward pricing mechanisms’, it is imperative for the various companies to provide as much information and guidance as possible as these would not only serve to instil further confidence in the market, but also provide indications about the underlying strength of Malta’s economic revival.
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