Assisting the investing community

Financial Article 407 by Edward Rizzo - Oct 29, 2015

A few weeks ago, I published my 400th article and this milestone made me reflect on whether my financial journalism duties have achieved the required objectives.

It was 8 years ago in 2007 when I penned my first article. I clearly remember having decided to do so after reading a rather short but misleading and incorrect analysis of a company’s financial statements in the local press. It was then that I understood the need to fill a void in financial journalism in Malta. My aim was to provide Maltese investors with regular and detailed information to help them understand the mechanics of the market and developments across the companies listed on the Malta Stock Exchange. Although my main intention was to cover topics on local investments, at times I also tackled international developments as well as some interesting events across multi-national companies.

I must admit that choosing a topic to write about every week is not easy and I have on numerous occasions over the past months, also as a result of work pressure, thought of giving up this weekly task. However, on further reflection and as a result of the very frequent messages and enquiries I receive as well as the questions that are asked by shareholders attending Annual General Meetings of listed companies, I continue to feel that there is still a need for such regular articles to assist some investors improve their financial literacy. The feedback received following my recent contribution entitled “Challenging times for Maltese savers”, especially from individuals whom I did not expect to be regular readers of my articles, again proved that my weekly contributions are regularly read by a wide cross-section of people who do so to keep track of financial matters.

When drafting today’s article and reflecting upon this milestone of my 400th publication, I recalled that just over 2 years ago when I had published my 300th contribution, I had written an article entitled “6 years of financial journalism”. The article had highlighted the objectives of my weekly contributions and how these had evolved over time. I had mentioned that my articles aimed to provide an unbiased view on the financial situation across many local companies and an insight into various developments impacting global financial markets. At times I criticised certain companies because in my opinion certain developments needed to be highlighted for the benefit of the retail investor who may not have the know-how to analyse certain figures found in the financial statements or prospectus. From the regular feedback I have been receiving over the years, it is clear that many readers appreciated the unbiased comments made since these assisted them in their deliberations. On the other hand, some companies that were on the receiving end of my critical analysis did express their disappointment at my comments. Although this is unfortunate, I continued providing a transparent analysis to assist my readers and I am pleased to say that a number of companies have since been including more information in their public announcements.

Some of my recent articles tackled a review of the annually updated Financial Analysis Summaries (FAS) of a few of the bond issuers. The requirement by some listed companies to publish such financial information annually, including financial projections, is a relatively new development which came into force in March 2013.

Ironically, it is only bond issuers that are required to publish FAS’s. Equity issuers do not. However, in my opinion, investors who acquire equities (which by their nature carry a higher level of risk than bonds) actually need to have such information too. Equity investors need to closely monitor the company’s financial performance as well as its strategic developments and future prospects, at least annually in my view, since any potential capital growth or loss in the value of an equity, as well as the extent of any dividend distribution, is dependent upon such developments.

On the other hand, bond issuers are obliged to pay their annual interest, which is fixed throughout the lifetime of the bond, irrespective of the amount of profits generated. Having said this, however, the projections of bond issuers are still very useful since they provide regular guidance to investors as to whether the company can easily honour its commitments or whether other financing is required due to a deteriorating financial situation.

Although equity issuers are not obliged to publish financial projections, directors and senior management executives should understand that this level of information is key to assist financial analysts in their duties towards investors and this will ultimately help retail investors obtain a clearer understanding of future developments. This is standard practice across international financial markets and should also become common practice among companies whose equity is listed on the MSE. While it may be true that it is difficult for certain companies to project financial developments for the upcoming financial year, certain assumptions should be taken to provide a base case scenario for investors.

The publication of an annual Financial Analysis Summary which includes a company’s financial projections is proving to be very beneficial to the few companies that have recently issued bonds and also have their equities listed on the MSE. Hopefully, new policies will be considered which will oblige all equity issuers to also prepare this detailed information on an annual basis. This will assist in the analysis of a company’s financial prospects and should enable retail investors take a more informed decision. This can also ultimately lead to improved trading activity across the local equity market for the benefit of investors and market participants.

In essence, more regular and detailed announcements, as is the norm overseas, are necessary to enable financial analysts perform their duties and continue assisting the investing community.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.