The start of the financial reporting season

Article #526 by Edward Rizzo - Published Weekly

Earlier this week the financial reporting season commenced with the publication of the annual financial statements of HSBC Bank Malta plc while Malta International Airport plc released its results yesterday.

The purpose of today’s article is not to provide a detailed analysis of the financial statements of two of the largest companies listed on the Malta Stock Exchange but to explain the importance of the reporting season and highlight some of the more important aspects that investors should look out for in the upcoming releases from some of these companies.

The Listing Rules issued by the Malta Financial Services Authority stipulate that annual financial statements must be published within 4 months from the end of the company’s financial year while interim financial statements are due within two months. Moreover, an Annual General Meeting must take place within 6 months from the end of their financial year.

The majority of companies that have their shares listed on the main market of the MSE have a December year-end. The only companies which have different accounting reference dates are MaltaPost plc (30 September), PG plc (30 April) whilst Simonds Farsons Cisk plc and Trident Estates plc both have a 30 January year-end.

All other companies therefore have until 30 April to publish their annual financial statements and by 30 June to convene an Annual General Meeting.

The annual reporting season is normally broken down into two parts. On the one hand, there are a number of companies that generally publish their preliminary profits statement or annual financial statements between mid-February and mid-March. Over recent years, HSBC Bank Malta plc and Malta International Airport plc were always among the first to issue their results. Plaza Centres plc also used to form part of this category. However, no date has been announced as yet on the publication of their 2017 annual financial statements possibly in view of the sudden demise of their CEO in late December 2017. The other companies that fall into this category include Malita Investments plc, GO plc, Mapfre Middlesea plc and Lombard Bank Malta plc. In fact, these four companies all confirmed again that they will be publishing their 2017 financial statements between 5 and 8 March 2018.

Meanwhile, the second category of companies generally publish their financial statements between the end of March and the end of April deadline.

The next 10 weeks is therefore a very important period for financial analysts and investors since the various companies will be issuing their financial statements, publishing detailed reviews of their business performance and hopefully explaining their outlook for the next 12 months. Moreover, during the Annual General Meetings which must all take place by 30 June, investors have an opportunity to question management on the company’s financial performance and certain decisions related to the business strategy.

It may therefore be opportune for investors to be aware of some of the most important revelations that should be expected to be made by various companies in the weeks ahead.

In the banking sector, the most important highlights that may arise from the upcoming announcements will be on the capital levels held by the various banks as well as the impact of IFRS 9. This new reporting standard could possibly lead to significant changes in the treatment of loan impairment provisions as from 2018. In the first announcement earlier this week, HSBC Malta may have surprised many investors with the proposed payment of a special final net dividend of €0.0555 per share (in addition to the ordinary final net dividend of €0.0251 per share) as a result of the high capital ratios. Although no mention was made in the HSBC announcement with respect to IFRS9, the CFO clarified in a meeting with the press that this will be disclosed in the 2017 Annual Report available shortly.

The market now awaits the upcoming announcements from Bank of Valletta plc, Lombard Bank Malta plc and FIMBank plc. Following the successful €150 million rights issue of BOV, investors should be attentive to details on any changes to the dividend payout ratio and any plans by the bank with respect to the various bonds being redeemed in the months and years ahead.

On the other hand, FIMBank shareholders will be closely following whether the group has continued to register progress in its turnaround strategy and the outlook for 2018 especially as a result of the imminent rights issue.

Lombard Bank shareholders will possibly be mainly interested in any progress on the sale of the 49% shareholding held by the special administrator of Cyprus Popular Bank. However, this is something that the administrator himself needs to disclose rather than the bank.

Two of the companies that will be closely watched are RS2 Software plc and Medserv plc due to their internationalization strategy. RS2 had reported at its Annual General Meeting in June 2017 that the company applied with the Planning Authority to extend their existing head office in Malta since they require more space to cater for the additional business in the years ahead. In fact, the CEO then made reference to the growing business pipeline and indicated that negotiations were taking place with a number of very large customers from various regions including Argentina, Brazil, India, Europe, Australia and also the US. This was followed by an announcement in July that the company formed a strategic alliance with Quattro Processing Services (a global FinTech company that specializes in full-service payment processing) to offer credit card processing and an acquiring technology platform for banks and financial institutions in India. Moreover, in the Interim Directors Statement in November 2017, RS2 confirmed that it formed another alliance with a large corporation that provides 42% of the global travel market and it was also having discussions with the potential of securing some multi-million processing deals in different regions which were targeted to be concluded by the end of Q1 and Q2 2018. Investors will therefore be actively seeking added information from RS2 in the weeks ahead to check the progress on these various leads and the potential improvement to the financial performance once these contracts become operational.

As was widely already reported by Medserv and also by the UK research specialists Edison, the 2017 financial statements of Medserv will be very disappointing. In fact, Edison is expecting a loss of €2.8 million. During 2017, Medserv regularly communicated with the market and gave wide coverage of the reasons for this weak performance, namely the delay in the start of a number of projects. These projects are expected to have commenced during the last part of 2017. Meanwhile, the oil price has since jumped to a 2-year high leading to an evident level of optimism among the major international oil companies as well as the subcontractors and logistics firms. The market is therefore now awaiting news on whether the contracted work has since commenced and how this is likely to positively influence the 2018 financial performance. Incidentally, Edison has already reported that it anticipates a strong turnaround for Medserv with a pre-tax profit of €5.8 million during 2018. This is possibly on the back of the new 3-year contract announced by Medserv last month for a value in excess of €10 million in a new market which is regarded as the “big new energy source on Europe’s doorstep”. Moreover, the expected profitability hike being projected by Edison is also on the back of the resumption of activity in Cyprus. In November 2017, Medserv announced that it had opened its second base in Cyprus ahead of the drilling works across 4 to 5 wells in the waters offshore Cyprus in the next 12 months. Incidentally, on 8 February 2018, ENI SpA announced a gas discovery in Block 6 offshore Cyprus and Medserv supports ENI’s drilling operations from its onshore bases in Larnaca and Limassol.

Another company with an ambitious international expansion strategy and with equally bold plans in Malta is International Hotel Investments plc. On the international front, investors will be seeking progress on the business pipeline of the hotel management arm given the company’s target of having a total of 50 management agreements in the next few years as indicated by the company’s executives on various occasions last year. Moreover, with respect to the local expansion plans, the market will be seeking news with respect to the development of the Hal-Ferh  project as well as the San Gorg project including an indication of timing and the financing plans being contemplated.

Shareholders of MIDI plc will be awaiting news on any progress on the Manoel Island project as well as on the positive impact on the financial statements following the opening of ‘The Centre’.

GlobalCapital plc will be expected to provide firmer indications of the size of their upcoming rights issue following the announcement on 28 December 2017 explaining the change in the business strategy which is likely to affect GlobalCapital’s optimum capital levels.

As the various companies publish their financial statements, many companies generally convene meetings with financial analysts and institutional investors to provide the necessary explanations underpinning their respective financial performances and also to provide an update on their business strategy. It is important for institutional investors and analysts to actively participate in such meetings to ensure that the important information required for a proper analysis of a company’s business prospects are truly discussed. Across international markets, shareholder activism is one of the key reasons for certain strategic decisions taken by some companies. Unfortunately, shareholder activism is still very much lacking in Malta and given the importance of institutional investors, they need to become the driving force behind a more open dialogue between company executives and the investing public.

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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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