Understanding the Financial Analysis Summary

Article #492 by Edward Rizzo - Published Weekly

In last week’s article I explained the background behind the demise of callable bonds and the increased popularity of plain vanilla ‘bullet bonds’, generally of a tenure of 10 years.

Most of the companies issuing new bonds at present need to publish a Financial Analysis Summary (FAS). Moreover, most companies which had issued bonds over recent years also need to issue an updated FAS on an annual basis. In recent weeks, some investors may have realised that several companies issued announcements via the Malta Stock Exchange informing the market that they published their updated FAS.

Although in the past I had mentioned the purpose of the FAS, I believe it is worth repeating the background of this relatively new requirement.

The requirement to publish a FAS appended to the prospectus at the time of a launch of a new bond issue came into force with the revision to the Listing Policies on 5 March 2013. Few investors may know that the FAS is based on a financial due-diligence report prepared by the company’s reporting accountant, which very often is the same firm of auditors contracted by the company.

Apart from the obligation to publish a FAS at the time of the launch of a new bond issue, the Listing Policies also stipulate that this report must be updated annually and published within two months from the publication of a company’s annual financial results.

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.

The Lisitng Policies also include certain exemptions from the obligation to publish a FAS. There are only three instances where companies are exempt from publishing such reports, namely: (i) where the issuer is subject to capital requirements as laid down in the EU Capital Requirements Directive or the EU Solvency II Directive (namely banks and insurance companies); (ii) where the bond issue has a recognised credit rating that is regulated in terms of the EU Regulation on Credit Rating Agencies; and (iii) where the minimum subscription amount and subsequent minimum holding of the bonds is at least €50,000. In the latter case, this was the exemption applicable to last year’s bond issue by Plaza Centres plc.

The overriding 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 the financial strength and credit worthiness of an issuer. In the case where the bond is guaranteed by another 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 onlend 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. When companies publish the updated FAS on an annual basis, investors should mainly look out for the reasons behind any major discrepancies between the actual results achieved and the previous projections, the new financial projections, 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.

Several companies issued their updated FAS in recent weeks and it is worth highlighting some of the main items of interest.

Premier Capital plc operates a large number of McDonald’s restaurants in Estonia, Greece, Latvia, Lithuania, Malta and Romania. As at the end of 2016, Premier operated a total of 133 restaurants with just over 50% of these in Romania. Premier Capital entered the Romanian market in early 2016 following the acquisition of the previous franchisee for over €60 million. 2017 is the first full financial year incorporating the Romanian subsidiary and therefore the 2017 financial projections should be of great interest to the numerous investors who had subscribed to the €65 million bond issue in late 2016. The FAS indicates that the Directors are projecting total revenue of over €255 million in 2017 which is expected to translate into earnings before interest, tax, depreciation and amortisation (EBITDA) of €35.7 million compared to €32.7 million in 2016. The FAS also includes the projections for 2018 showing a further revenue growth of 8% to €274.7 million and EBITDA of €38.9 million (+9%) mainly in view of the new stores anticipated in the months ahead. The interest cover is expected to exceed 11 times in 2018, while the increase in shareholders’ funds coupled with the planned reduction in overall indebtedness in view of the expected repayment of some bank loans and other liabilities, should translate into an improved gearing level. Moreover, the net debt to EBITDA multiple is also expected to improve to 0.93 times in 2018 implying that the company can repay its total debt from less than 1 year’s operating profits. This would place Premier Capital as the safest local issuer when considering this credit metric.

Hili Properties plc also forms part of the Hili Ventures Group and the 2017 FAS was published earlier this week. Investors ought to pay particular attention to the 2017 financial projections following last month’s acquisition of the ART Business Centre in Romania for a value of €30.6 million. The company expects to generate €4.8 million in EBITDA which represents a significant increase compared to the €3.1 million registered in the previous year as a result of the inclusion of the new property as from May 2017 which is fully leased out. The interest cover is expected to improve to 1.6 times. The FAS also states that the Group is projecting to purchase another property during 2017 for circa €8 million, thereby increasing the property portfolio to 27 properties with an aggregate value of €110.2 million.

The other company forming part of the Hili Ventures Group which also has bonds in issue, namely PTL Holdings plc, had not yet published its updated FAS by the time of going to print.

Mariner Finance plc issued its FAS on 10 May 2017. The company registered an EBITDA of €8.6 million in 2016 (representing an increase of 9.4% over the previous year and 6.2% higher than expected). Mariner is expecting revenues to increase by 3.1% during the current financial year to a three-year high of €16 million, which should translate in an EBITDA of €8.82 million. The interest cover is expected to remain unchanged at 3.5 times and the net debt to EBITDA multiple is anticipated to improve marginally to 3.7 times.

Hal Mann Vella Group plc registered a negative EBITDA in 2016. However, the Group is expected to register a positive EBITDA of €3 million during the current financial year ending 31 December 2017. Depsite this, the interest cover would still remain below 2 times while the net debt to EBITDA would amount to 13 times.

The publication of an annual Financial Analysis Summary which includes a company’s financial projections is a very beneficial document which enables investors to take a more informed decision on a company’s risk profile and its ablity to honour its obligations. Investors and financial analysts should make good use of the information available in these documents.

From an equity perspective, Medserv plc, International Hotel Investments plc and MIDI plc are the only three companies that have their shares listed on the MSE and are also obliged to prepare a FAS due to their recent bond issues. Grand Harbour Marina plc will also fall into this category following the announcement that took place earlier this week. Unfortunately, apart from these companies, only Malta International Airport plc publishes key financial projections. Other equity issuers should also follow this pattern of providing forward looking financial guidance, which is considered best practice in international financial markets, since this assists analysts and investors to take more informed investment decisions.

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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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