A growing equity culture

At the official opening of the new ZARA store at the Alhambra Centre in Sliema on 11 December (one of the three operating units of PG plc), the Prime Minister Dr Joseph Muscat delivered a speech about the positive performance of the Maltese economy as well as the importance of PG’s €9 million investment in the Zara store for the overall retail industry.

Towards the end of his intervention, the Prime Minister seemed to have deviated from his script and spoke about the need for the local financial market to continue to develop further. The Prime Minister indicated that in recent meetings with foreign investors as well as with some international credit rating agencies, the size of the equity market was discussed as this is considered an important indicator of the overall development of any economy. The Prime Minister highlighted the success of the listing of the shares of PG plc on the Malta Stock Exchange in the first half of 2017 and argued that it was important for other companies to follow in this direction.

I am unaware whether this is the start of a more concerted effort by the Government of Malta together with the Malta Stock Exchange to encourage additional companies to have their shares listed on the MSE. However, it is very interesting that the Prime Minister himself highlighted this need following recent discussions with international investors as well as with credit rating agencies since it is a topic which I have regularly tackled in my weekly column.

Following the steep decline in interest rates to historically low levels, there has been a marked increase in investor appetite for investments in tradeable securities, most especially those listed on the Malta Stock Exchange.

Although many Maltese investors still have a general preference for bonds since they have similar characteristics to fixed-term bank deposits (which used to represent the bulk of their overall investments prior to the substantial decline in interest rates), it is evident that in more recent years several investors considered added exposure to the equity market in what has gradually been a growing equity culture in Malta.

I had written about ‘Lifestyling an investment portfolio’ in October 2012 when I explained the concept that as an investor ages, there is a general tendency for an increased allocation towards bonds and a lower allocation to equities. However, I had also highlighted that there should be an element of equity exposure in portfolios even for income-oriented investors as inflation reduces the purchasing power of bonds which offer a fixed rate of interest and no capital appreciation if held to maturity.

For the income-oriented investor, there are a growing number of companies whose equity is listed on the MSE offering steady and sustainable dividends. There are several companies involved in commercial property activities (namely Malita Investments plc, Plaza Centres plc, Tigné Mall plc and Main Street Complex plc), whose business model enables them to distribute consistent dividends to shareholders. Other companies such as HSBC Bank Malta plc, GO plc, Malta International Airport plc, Simonds Farsons Cisk plc and MaltaPost plc which have all been listed on the MSE for several years have also regularly paid dividends to shareholders. Admittedly, many investors may have recently become wary of assuming that dividends can always be paid due to the recent suspension of dividends by Bank of Valletta plc for the first time since their listing in 1992.

Although equity investors should consider the capital growth aspect apart from the stability of dividends (the 85% rally in the share price of MIDI plc following the under-performance in recent years is an interesting example), two of the most recent companies conducting an IPO have highlighted their dividend payment commitments to shareholders.

PG plc had stated in the Prospectus at the time of the Initial Public Offering in March 2017 that the company will distribute dividends on a semi-annual basis with a dividend payout ratio of not less than 50%. This commitment was highlighted once again in a recent interview with their CEO who argued that “every investment has to be sustainable and responsible. The board remains committed to the promise made to our shareholders that any future investment has to be made responsibly, and it has to be sustainable. This effectively means that we are not prepared to invest at the expense of not distributing an adequate return to our shareholders”. The company’s philosophy is a very important factor for all investors.

More recently, in the explanatory circular published by GO plc related to the upcoming IPO of BMIT Technologies plc, the expected dividend policy was disclosed. Dividend distributions by BMIT are expected to amount to a maximum of 90% of the company’s free cash flow but not exceeding 95% of distributable profits. The dividend is projected to amount to €0.0216 per share in respect of the 2019 financial year, representing a net dividend yield of 4.4% based on the IPO price of €0.49 per share. Moreover, BMIT is projecting a net dividend of €0.024 per share for the 2020 financial year.

As a result of the increasing appetite for equity investing in view of generally sustainable dividends as well as the historical superior performances of equities (on a total return basis representing dividends as well as capital growth) when compared to bonds, it is necessary for more companies to list on the MSE thereby creating further investment opportunities for the investing community. This will also help the financial market to develop further in line with the remarks made to the Prime Minister by international investors and credit rating agencies.

There are various reasons for obtaining a listing of a company’s shares on a stock exchange. The aspect of succession planning is one of the most common reasons and was the prime motivator for Mr Paul Gauci to sell 25% of PG plc in the first half of 2017. The transition from a typical family-owned company to a publicly traded company involves a number of added structures in line with the Code of Principles of Good Corporate Governance which are important elements within the evolution of a company.

An equity listing can also facilitate an eventual exit route by one or more of the dominant shareholders. The listing of Island Hotels Group Holdings plc in 2009 and the subsequent acquisition of the company by International Hotel Investments plc in 2015 is a very interesting case study for several Maltese companies since it also enabled IHG to acquire another company subsequent to its IPO and partly fund this acquisition via the creation of new shares in the publicly traded company. Another example was the listing of Crimsonwing plc in 2008 and its eventual takeover by KPMG and subsequent delisting from the MSE in 2015. Furthermore, earlier this year, Medserv’s two largest shareholders who together hold 65.5% of the company, had initiated a process to source a strategic purchaser for their shareholding creating a potential exit route from the company.

Moreover, an equity listing is also considered as a tax-efficient way of monetizing a minority stake in a company. Shareholders of existing companies who list their company via the issue and/or sale of equity on the MSE are not subject to capital gains tax on the sale as at the point of admission. This could be an added attraction for many businesses to conduct an Initial Public Offering and was one of the reasons cited by the CEO of GO plc when explaining the rationale for the sale of up to 49% of BMIT Technologies plc.

Another reason mentioned by GO’s CEO was to enable BMIT to access the capital markets in due course for its financing needs so as not to remain dependent on funding from its parent company. In fact, a listing on a stock exchange enables companies to diversify their sources of funding by resorting to the issuance of bonds to complement its banking facilities and also to raise additional equity capital from shareholders via a rights issue. There have been several instances in the past where companies opted for bonds or a rights issue to fund their continued growth.

The listing of a company’s shares on a stock exchange also increases awareness of a company’s products and services thereby helping a company to grow its client base.

Following the highly successful IPO of PG plc which attracted demand of over €110 million for the €28 million on offer, current potential candidates for a stock exchange listing will be eyeing the final result of the IPO of BMIT Technologies to gauge the appetite of investors. Another successful IPO may well instigate other companies to ‘go public’. Meanwhile, the recent pronouncements that regulatory changes will be implemented to enable Real Estate Investment Trusts (REITs) to be listed and traded on the Malta Stock Exchange could also help the local equity market to continue on its gradual growth path.

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