Bullish sentiment across equity market during H1

Financial Article 390 by Edward Rizzo - Jul 02, 2015

Following the unexpected rally in Q1 with the local equity market climbing by 13.4% on the back of double-digit gains in 12 of the companies listed on the Malta Stock Exchange, the MSE Share Index posted a marginal decline in April but the rally then gathered momentum during May and June to close the first six months of the year with a surprising increase of 22.8%.

While the theme during the first three months of the year was the “search for yield” with investors turning their attention to the equity market for an improved income return following the significant decline in yields across the sovereign and corporate bond markets, the rationale behind the upturn during Q2 was mainly related to company specific developments. In fact, the three top performers in Q1, namely Malta International Airport plc, Plaza Centres plc and Malita Investments plc, all lost their ranking on the podium as they were surpassed by Mapfre Middlesea plc, Medserv plc and International Hotel Investments plc.

The share price of Mapfre Middlesea is the top performer so far in 2015 with an increase of 83.6% after the equity jumped by 60.1% during the second quarter of the year. This sudden surge must have caught many analysts and investors by surprise. The upturn in the share price materialized on weak volumes reflecting the very low free float of the company and more surprisingly with no obvious fundamental justification. Shortly before the sudden increase in the share price, the company confirmed speculative reports in the media that it will be taking over the general insurance portfolio of Allcare Insurance which had reportedly faced financial difficulties. No details have as yet been forthcoming by the company on the cost to acquire this portfolio, the size of the portfolio and the likely benefits that could accrue.

Medserv ranks as the second best performer during the first half of 2015 with an increase of 62.4%. Following the 31% increase in the share price during Q1, the equity advanced by a further 24% during the past three months. While the positive performance during the first three months was due to market expectations that the company will match the forecast of €2.2 million in pre-tax profits during 2014 (in fact Medserv reported that pre-tax profits exceeded projections and amounted to €3 million), the rationale for the Q2 rally was presumably as a result of a combination of two factors, namely: (i) investors sought to gain entitlement to the dividend following the recommendation on 23 March of a final dividend of €0.056 per share to those shareholders on the register as at 28 May and (ii) the publication of the Financial Analysis Summary on 15 May indicating that the Directors of the company forecast pre-tax profits in 2015 to surge by a further 43% to €4.4 million.

RF MGS Index

The share price of International Hotel Investments plc had advanced by 22.6% during the first quarter after the surprise announcement in mid-January that it agreed to acquire Island Hotels Group Holdings plc for a combination of €1 per share in cash and 0.246 IHI shares for each IHG share through the issuance of 9 million IHI shares to IHG shareholders (although IHI recently revealed that IHG shareholders will also be offered an all-cash alternative). After easing slightly during April, the equity began to rally once again in May and continued throughout the month of June after the company published its Annual Report wherein the Chairman indicated that the company is in discussions with the Malta Financial Services Authority to offer alternative financial instruments to the free-float shareholders. However, to date, no specific details have been provided to the market including the possible timing for such a corporate action. Despite the slight decline in the last few days of June from its multi-year high of €0.93, IHI’s share price climbed by 22.5% in Q2 resulting in a year-to-date appreciation of 50.3%.

The other notable strong performers in the last three months were Simonds Farsons Cisk plc (+40.6%), RS2 Software plc (+32.9%), MIDI plc (+25.2%) and GO plc (+18.9%), . The gains registered during Q2 helped all these equities rank among the strong performers during the first half of the year. The share prices of these four companies all increased following company specific developments. Similar to Mapfre Middlesea, the shareholding structure of Farsons is also very tight resulting in a low free float. In fact, the rally in the share price took place across very weak volumes following the announcement of another record financial year during the twelve months ended 31 January 2015 and the publication of the initial designs of the Farsons Business Park. Construction will commence next year ahead of the property spin-off taking place in July 2017.

The share price of RS2 Software continued to race to new record levels after the company announced that it signed a licence agreement in Vietnam and that it intends to intensify its efforts to penetrate the Asian and US markets possibly also by conducting an acquisition in the region. The 2-for-1 share split in mid-June could also be one of the reasons for the sharp rise in recent weeks. Meanwhile, MIDI plc advanced as the company confirmed that it is still in discussions with various third parties who have expressed an interest to invest in the Manoel Island project and that the financial performance for 2015 will be positive as a result of the final deeds of sale being entered into for the 39 apartments branded Q1.

GO’s share price also accelerated to a fresh 8-year high following the announcement of the property spin-off taking place later on this year once shareholders approve the corporate action and a number of related changes to the company’s memorandum and articles of association during an Extraordinary General Meeting taking place on 22 July.

Although the share prices of the three retail banks posted a mild positive performance during the past six months, these have clearly underperformed the wider market rally possibly on increased awareness of the challenges being faced in the banking industry mainly related to more stringent regulatory requirements.

“The next few months could undoubtedly prove to be more volatile…”

While the equity market seemed to have attracted most attention in the past six months, the bond market was also not shy of exciting moments. The extraordinary rally during the first three months of the year continued until mid-April but bond prices then began to decline sharply reflecting similar bond market movements evident across the German bond market as well as in other eurozone nations. The start of the QE programme by the European Central Bank in early March resulted in a significant decline in yields (and price hikes) in the euro area with the benchmark 10-year German bund yield dropping to a low of 0.05% on 17 April. However, the relentless fall in yields came to a sudden halt after data revealed stronger eurozone economic figures, improved credit conditions as well as inflationary expectations with the result that the 10-year German bund rallied to a high of 1.059% on 10 June before easing back towards the 0.8% level. The movements across eurozone bond markets impacted the Malta Government Stock market. In fact, long-term MGS prices (those with more than 10 years left to maturity) have declined by more than 11% since the peak in April bringing the year-to-date performance of the Rizzo Farrugia MGS Index to a mere 0.9% from 6.6% on 16 April 2015.

While many market participants may have thought that the Central Bank of Malta may find it hard to adopt QE in Malta given the high levels of liquidity among both institutional and retail investors, statistics indicate otherwise. In fact, in its regular communications to the market on the progress of the QE programme, the European Central Bank announced that after a weak start with only €5 million purchases of MGS during March, the momentum accelerated in April and May and the Central Bank of Malta acting on behalf of the ECB succeeded in acquiring €53 million and €85 million respectively during these two months. Statistics during the month of June are not yet available, however, given the market volatility in recent weeks, it will not come as a surprise that the Central Bank’s QE desk once again exceeded its monthly quota of €36 million in MGS purchases.

The next few months could undoubtedly prove to be more volatile following the significant rally across most equities during the first six months as well as the wild swings in the bond market. The interim financial reporting season commencing in a few weeks will dictate the direction of many individual equities in the short-term while MGS prices will continue to move in line with bond market developments across the eurozone. Trends will also be impacted by the fluid developments in Greece as well as economic and inflation data across the larger eurozone economies. On the primary market, a higher number of corporate bond issues should be expected in the second half of the year. This should assist retail investors in placing some of their idle funds given the continued high levels of liquidity across the local financial system.

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