Equity market coming back to life

Article #626 by Edward Rizzo - Published Weekly

In mid-December I had written an article about the impact on the Maltese capital market from the political developments that suddenly erupted the previous month. I had stated that as a result of evident investor lethargy, the MSE Equity Price Index had shed almost 5% within a few weeks and the average weekly volume across the equity market shrunk to under €1.1 million from an average of almost €1.9 million during the course of 2019 until the start of the political crisis. I had also highlighted that the aggregate market capitalisation of the local equity market had contracted by €250 million since the shocking political revelations came about.

Since then however, some announcements by a number of companies whose equity is listed on the Malta Stock Exchange indicate a mild revival of the equity market as these companies continued to focus on their long-term strategic initiatives.

In fact, trading activity since the start of the year has increased in certain specific equities indicating a slight improvement in market sentiment especially as a result of these interesting and at times positively surprising announcements.

One of the unexpected announcements in recent weeks came from Plaza Centres plc who informed the market on 18 December that it entered into a preliminary agreement in connection with the sale of Tigné Place in Sliema which had only been acquired in September 2016 for €9.5 million. Plaza stated that the preliminary agreement is subject to a number of conditions that need to be satisfied prior to the execution of a definite deed of sale scheduled for June 2020. The investing public now awaits additional details from the company in respect of the rationale for such a proposed sale given that the overall strategy for the company was evidently to continue to build its property portfolio.

On its part, RS2 Software plc announced on 8 January 2020 that it purchased a company in Germany called KALICOM Liebers Zahlungssysteme KG (“Kalicom”) for an undisclosed amount which it described as being one of the most successful commercial network operators for electronic, card-based payment systems in Germany. In its company announcement, RS2 explained that the business of Kalicom is a perfect fit for it to enhance its product portfolio as the acquisition will enable RS2 a quick start into the direct acquiring business with immediate capabilities of selling, installing and servicing terminals and processing card transactions in the German market for small and medium-sized accounts. Moreover, RS2 stated that Kalicom will provide it with an attractive entry portfolio of more than 4,000 terminals and an existing merchant book.

RS2 also argued that the acquisition of Kalicom is in line with its recent strategic shift. The change in the company’s business model in recent years had been well documented in its previous company announcements and just before the end of 2019, RS2 issued a detailed Interim Directors Statement in which it again indicated that it aims to obtain its financial institution licence from the German regulator by mid-2020. Moreover, in order to launch its acquiring business in the months ahead, RS2 confirmed that it signed a sponsorship agreement with a European acquirer in order to utilise their relationship with the card organisations (such as Mastercard and Visa) for the new acquiring subsidiary RS2 Financial Services. In the most recent Interim Directors Statement, RS2 also reiterated that (i) current customers of RS2 Smart Processing Ltd have been ramping up their volumes and consolidating their entire cross-regional business on the platform; (ii) new customers in Europe are concluding processing agreements to launch their services during H2 2020 and (iii) in the US, RS2’s subsidiary is in the final stages of signing several agreements in different industries. These two announcements by RS2 had the most material impact on the market as the share price advanced by a further 6.5% since the start of the year following the 72% rally during 2019. This enabled RS2’s market capitalisation to exceed €440 million, thus surpassing both GO plc and HSBC Bank Malta plc to become the fourth largest company listed on the Malta Stock Exchange after Malta International Airport plc, Bank of Valletta plc and International Hotel Investments plc.

A further interesting announcement was published last week by Malta Properties Company plc in which it stated that it entered into a promise of sale agreement with HSBC Bank Malta plc to purchase the HSBC Contact Centre in Swatar for a total consideration of €8.1 million. The property being acquired, originally known as ‘Price Club’, measures 1,339 sqm. The announcement also confirmed that the property is being sold subject to a lease agreement in favour of HSBC Global Services (UK) Limited whereby following the final deed of sale and purchase, MPC will be recognised as the landlord and will begin to receive lease payments in line with the lease agreement. Furthermore, HSBC Global Services (UK) Limited has undertaken to carry out refurbishment works to the Property for an amount of not less than €1 million. Should the final deed of sale be executed in the months ahead, the property in Swatar would widen the current property portfolio of MPC consisting of 12 properties. Meanwhile, the market continues to await any news with respect to the company’s plan to acquire the 91% shareholding of Dubai Holding in SmartCity (Malta) Limited.

In an evident sign of the continuing long-term investment horizon by companies irrespective of the worrying political developments that unfolded during the final quarter of 2019, PG plc explained during the publication of its interim financial statements to 31 October 2019 that following the very successful performance of PAVI and PAMA, it is seeking further opportunities for expansion in the supermarket and retail business. In fact, during an analyst meeting PG confirmed that it is currently in intense negotiations on two potential projects in the supermarkets and associate retail business with the intention of developing something similar to the PAVI and PAMA complexes but on a smaller scale. The projects identified could translate into an area of circa 1,500 sqm dedicated to the supermarket business compared to circa 5,000 sqm at both PAMA and PAVI. The positive financial performance and enthusiasm by investors anticipating further growth by PG held the company’s market capitalisation exceed €200 million this week compared to €108 million at the time of the IPO in the first half of 2017.

Recently, Malta International Airport plc issued its now customary monthly announcement with its traffic statistics confirming that it exceeded its forecasts once again during 2019. In fact, this time last year, the airport operator had stated that it was expecting passenger movements to increase by 5.8% in 2019 to 7.2 million with the actual figures showing a 7.4% increase in passenger movements to yet another record of just over 7.3 million (the tenth consecutive yearly increase). MIA is very shortly expected to publish its traffic and financial forecasts for 2020, indicating the airline capacity being deployed to the Maltese Islands and the company’s expectations on how this will translate into passenger volumes and on its 2020 financial performance.

Barring any further unexpected announcements in the weeks ahead, the investing public now eagerly awaits the start of the annual financial reporting season which commences with HSBC Bank Malta plc on 18 February followed by Malta International Airport plc on 26 February.

The market will be particularly attentive to indications from management of the various companies regarding their current trading performances to gauge any impact from the recent political developments on the financial outlook of the respective companies. Given the events that unfolded in recent weeks, companies should undertake an added effort to provide more clarity on their future outlook for their shareholders and to assist the investing public accordingly.

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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.

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