The start of the interim reporting season

Article #654 by Edward Rizzo - Published Weekly

In the midst of the shortened and different AGM season due to COVID-19, some companies began to publish their June 2020 interim financial statements showing the initial signs of the brutal impact of the pandemic.

Until a few months ago, it would have been unimaginable for anyone to think that Malta International Airport plc would report a loss in any financial reporting period. However, in the interim results published last week, the airport operator announced that it incurred a loss after tax of €2 million following the sharp drop in passenger numbers as a result of the imposition of travel bans on 21 March 2020 which translated into a decline of 68.7% in passenger movements during the first half of 2020. This contrasts sharply with the profit after tax of €13.9 million in the first half of 2019 and a profit of €33.9 million during the 2019 financial year. MIA had reported a strong start to 2020 with passenger volumes continuing to rise to record levels in both January (+14.2%) and February (+17.3%) before sliding to a 64.5% decline in March prior to the almost complete standstill of the airport in the subsequent three months. In line with customary practice, MIA had published its 2020 traffic and financial forecasts at the start of the year. On 29 January 2020, the company had announced that it was expecting an increase of 2% to 3% in passenger movements in 2020 to a new record of 7.5 million passengers (compared to 7.31 million in 2019) leading to revenues of over €102 million; an EBITDA of over €64 million and a profit after tax of over €35 million. Naturally, in view of the current extraordinary circumstances brought about by COVID-19, MIA announced last week that it does not have sufficiently reliable data to enable it provide forecasts which can give accurate guidance to the market. The situation is understandably too fluid for the company to gauge the extent of passenger flow and airline capacity for the remainder of the year especially following a resurgence of coronavirus cases in several countries including Malta. MIA’s financial position remains robust with no debt and cash reserves of €39.5 million as at 30 June 2020.

The financial results of the two large retail banks were also hugely impacted by the economic slowdown caused by COVID-19. Last Friday, Bank of Valletta plc reported a 75% drop in pre-tax profits to €13.8 million representing an overall decline in profits of €40.5 million. The bank indicated that the decline in profits due to the impact of COVID-19 amounts to circa €25 million related to lower income generation, higher impairments and a lower contribution from the insurance associates. Moreover, albeit to a lesser impact, the bank’s financial performance was also negatively impacted by the continuing restructuring exercise leading to higher costs and lower income from foreign exchange due to the de-risking strategy. The impact of the outbreak of coronavirus was also reflected in the balance sheet as customer deposits increased rapidly while loans only grew marginally. In fact, customer deposits jumped by over €500 million (+4.7%) to €11.1 billion while loans only grew by €90 million to €4.54 billion. This led to a worsening of the loan to deposit ratio to only 40.7%.

Meanwhile, on Monday morning, HSBC Bank Malta plc reported a pre-tax profit of only €1.81 million during the first half of 2020 compared to the corresponding figure of €20.9 million generated in H1 2019. It is worth recalling that on 29 April, HSBC Malta had reported that it incurred a loss before tax of €7 million during the first quarter of 2020. The sharp downturn in profitability during the first six months of 2020 was in the main due to  a €9.7 million increase in expected credit losses and the decline of €11.3 million in the performance of the life insurance subsidiary predominantly driven by revaluation losses as a result of adverse market movements and weaker trading activity.

On the positive side, the amount of costs incurred by HSBC declined by €2.5 million thereby helping the overall performance during the first half of the year. HSBC reported that customer loans increased by €32.3 million to €3.29 billion with deposits rising by €168.1 million to €5.14 billion thereby resulting in a slight deterioration in the loan-to-deposit ratio to just under 64% compared to around 65.5% in 2019. This ratio contrasts sharply to that of BOV which has a loan to deposit ratio of 40.7% reflecting the excessive levels of liquidity held by BOV.

Mapfre Middlesea plc commenced the interim reporting season on 15 July when it announced an 8.9% increase in pre-tax profits to €10.7 million. In its outlook, the company highlighted that its profit for the year will be well-below that recorded in the 2019 financial year of €15.5 million due to the non-recurrence of the dividend paid by Mapfre MSV Life plc to Mapfre Middlesea which, in 2019, amounted to €17.65 million.

The newest entrant to the equity market, Harvest Technology plc, issued its interim financial results on 28 July showing a near 20% increase in revenues to just under €9 million and a 25.4% surge in net profits to €1.2 million. The stronger performance was led by the company’s payment gateway subsidiary (APCO Systems Ltd) as well as the income from PTL Limited following a new contract in Mauritius related to the installation of the country’s border security system. Despite the very strong performance during the first half of the year, the company cautioned that future developments remain uncertain due to the prevailing situation related to COVID-19. Nonetheless, the Board of Directors resolved to distribute a net interim dividend of €0.024 per share.

Within the property segment, the first company to publish its interim financial results was Plaza Centres plc. The company registered a decline of almost 16% in revenue to €1.44 million despite an increase in occupancy levels from 87% to 93%. From the announcement it is immediately evident that the lower revenue emanated from the Plaza Commercial Centre while Tigné Place registered higher revenue figures. Plaza Centres plc registered an overall pre-tax profit of €0.61 million compared to €0.94 million in H1 2019. The company made reference to the offer for sale of Tigné Place which was announced on 18 December 2019 and noted that although a final deed was scheduled to take place by the end of June 2020 and a deposit was affected in line with the promise of sale agreement, the execution of the final deed of sale was extended following changes in the law due to COVID-19.

The interim reporting season has not been extended as a result of the pandemic and as such many more companies will be publishing their financial statements by the end of August. While the financial statements will undoubtedly continue to reflect the huge impact to the economy from the pandemic following the near closure of many economic sectors during most of Q2, the focus must turn to the extent of any recovery being registered during the start of the second half of the year. This is precisely what is taking place across international financial markets with share prices reacting to the information provided on the type of recovery being projected by the various companies. As such, companies should provide as much information as is reasonably possible in the circumstances to help investors gauge the strength of any recovery being during the start of the second half of the year. Additional guidance in the months ahead on the momentum of the recovery will also be fundamental for investors since the lack of newsflow until the 2020 annual results are published in April 2021 would be too lengthy and will inevitably lead to continued investor lethargy.

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