The annual publication of a Financial Analysis Summary

Financial Article 542 by Edward Rizzo - Jun 14, 2018

Last year I had published an article dealing with the Financial Analysis Summary (FAS) which became an obligation for most bond issuers on the Regulated Main Market of the Malta Stock Exchange following the Listing Policies of March 2013.

The main objective of a FAS, which is prepared by the Sponsor of the bond issue (the company’s stockbroker), is that of assisting a retail investor to obtain a better understanding of the company’s operations and the environment in which it is operating as well as to gauge the financial strength and creditworthiness of an issuer. In those cases when the bond is guaranteed by another company (usually the parent company), the FAS also presents all the information required of the guarantor of the bonds. When bonds are guaranteed, it is very important for investors to gauge the strength of the guarantor rather than the issuer, which is generally a finance vehicle whose sole purpose is to raise funds and lend them to the guarantor or sister companies within the same group.

Apart from the detailed business description and an industry analysis, one of the more interesting aspects of the FAS is the requirement to publish financial forecasts. This is one of the main sections that investors should look out for when reviewing such reports to understand the sustainability of a company’s financial performance.

The March 2013 Listing Policies stipulate that apart from the requirement for the publication of a FAS appended to a Prospectus for a new bond issue on the Regulated Main Market or the Official List, this report needs to be updated on an annual basis within two months from the publication of a company’s annual financial statements. In the annual update to the FAS, the company needs to provide an explanation for any major discrepancies between the actual results achieved in the previous financial year and the original projections. Moreover, the company must also publish its financial projections for the current financial year while some companies also go one step further and provide a forecast for the next financial year. Naturally, a company must also explain any major business developments that could alter the credit risk of the company and the resultant financial ratios that are derived from the financial projections.

Since the majority of companies have a December year-end, annual financial statements must be published by the end of April at the latest and therefore the deadline for the publication of the FAS for the majority of local bond issuers is the end of June.

As such, in recent weeks, some companies have issued announcements via the Malta Stock Exchange informing the market that they published their updated FAS. The issuers that recently published their updated FAS were AX Investments plc, Bortex Group Finance plc, Medserv plc, Mariner Finance plc, Stivala Group Finance plc, Hal Mann Vella Group plc and GAP Group plc.

Meanwhile, several other companies are due to publish their FAS by the end of this month and financial analysts are therefore expected to be flooded with notifications of the various company announcements informing them of the availability of these reports.

Since the publication of an annual FAS includes a company’s financial projections, it should be considered to be a very beneficial document enabling investors to make a more informed decision on a company’s risk profile and its ability to honour its obligations. Investors and financial analysts could extract some important financial metrics to gauge the creditworthiness of an issuer or its guarantor. As I mentioned in various articles over the years, the more important ratios for bond investors include the interest cover and the extent of leverage or gearing of a company. In the latter case, this can be measured in many ways such as the ratio of net debt to equity or the net debt to EBITDA multiple. It is also useful for financial analysts and investors to rank the ratios of the various companies to gauge which are the safest issuers across the local capital market and which issuers are deemed to be more risky due to weaker financial metrics. During the lifetime of a bond, it would be necessary for investors to monitor the progress or otherwise of a company’s financial strength and track the movements in these metrics from one year to the next.

In recent years, I have dedicated some of my articles to the publication of these ratios in order to assist the retail investing public in this respect.

Most interesting for investors is the fact that there are some issuers that have both bonds as well as their equity listed on the Regulated Main Market of the Malta Stock Exchange. Although it is important to monitor the creditworthiness of a bond issuer, investors need to simply gauge a company’s ability to have sufficient funds to honour their annual interest payment and accumulate sufficient cash to either repay the bonds or partly refinance upon maturity.

On the other hand, from an equity perspective, investors need to understand the trends in a company’s business performance in greater detail since the extent of growth in profitability will impact the ability of a company to issue any dividends. In turn, this influences share price movements and therefore overall returns to shareholders.

In previous years, Medserv plc, International Hotel Investments plc and MIDI plc were the only three companies that had their bonds and shares both listed on the MSE and therefore obliged to prepare a FAS. However, Simonds Farsons Cisk plc and Grand Harbour Marina plc will need to start publishing an annual FAS as from this year following their bond roll-overs last year.

In the case of equity issuers, investors and financial analysts should not only look out for the financial metrics used when analyzing bond issuers but should also look at the other ratios used to assess the strength of an equity issuer and the attractiveness of maintaining or increasing one’s exposure to that company. While the ratios that need to be analysed depend on the industry in which each of the companies operate, the return on equity is a common metric that is of great importance for all companies since it measures the profit generated by a company from the amount of money invested by shareholders. This ratio should therefore be published by these five equity issuers to also ensure that the FAS provides additional information to a wider section of the investing community.

Within the category of issuers having bonds and equities listed on the MSE, so far only Medserv published its FAS and therefore many equity investors should be eagerly awaiting the updated reports in the weeks ahead from International Hotel Investments plc, MIDI plc, Simonds Farsons Cisk plc and Grand Harbour Marina plc. Following the cash dividend declared last week by IHI, shareholders should look out for any indications in the projections which could indicate whether this dividend is sustainable in future years also taking into consideration the sizeable investment programme in various markets.

As a result of the increase in the number of companies listed on the Regulated Main Market of the MSE, there has been a corresponding increase in the amount of information being published by way of company announcements due to the various obligations imposed by the MFSA. This makes it more time consuming for investors to keep track of all developments related to the various companies in which they have an exposure to in their investment portfolios.

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