30 August 2006

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Business Today

Market goes through a correction phase

The ups and downs of the market during the first half of this year are analysed for Business Today by a financial observer.

The Malta Stock Exchange Index has over the past months experienced a correction that has nearly wiped out the 33 per cent gain witnessed in the first quarter of this year.
Investors have been asking their stockbrokers to explain what is happening. Was this a natural correction after a bullish run in transactions or is this the result of excess supply of shares on sale?
There have been a number of factors throughout the first half of this year that may have led to this situation.
The companies in the financial sector have contributed to this state of affairs having carried out share splits, which left investors with more shares in their hands and some just took the opportunity to liquidate profits.
Share splits increased the number of transactions but then had a negative impact when results were published and investors did not understand the reduction in the monetary value of the dividend announced and earnings per share registered.
It was just a question of a lower value in EPS and dividend for more shares meaning the investor was not worse off.
We also had bonus issues and special dividends being proposed. These by their nature are unique events and have to be understood to be so. It is not probable that these will be recurring.
Analysing the two telecommunications equities that trade on the stock exchange reveals a story in itself.

Maltacom plc in May of this year experienced a change in the majority shareholder with the Government of Malta selling off its 60 per cent stake to TECOM of UAE. This transaction had its own peculiarities. It started off with snippets in newspapers on the high valuation of the share price Maltacom was trading at when the transaction was in its final stages. The stock exchange had stated they were to investigate how details of confidential transactions were published prominently on a front page of a Sunday newspaper. No further news was given after this statement.
Then there was the clumsy way government announced the starting selling price of its divestment in Maltacom plc, which was first announced in the media before being issued through a company announcement.
To add to this conundrum, the government sold off its shares at a price well below the market price. Although some soothsayers predicted that “fingers will be burnt” the investor was savvy enough not to start a panic selling session and the share price has till now held on to a price much higher than what the government got for relinquishing majority control. This was probably a result of the strong financial results published for 2005.
The other telecom equity is Datatrak that came out with improved results but has seen its share price lately slide down. Observers comment that this is a company that should address more frequently the market with news.

Malta International Airport
The company operating in the transport sector, Malta International Airport saw a change in ownership after the largest single shareholder purchased more shares through a local company indirectly owned by it.
This transaction put the company at the centre of the debate on low-cost airlines since the foreign shareholders held sway over the conditions that could be offered to attract low-cost operations to Malta.
As the NSO and the MHRA published their results depicting decreasing number of tourists visiting Malta, investors read into these results as affecting the income of the company and through selling pressure the share price lately hit Lm1.35 being less than the Lm1.40 price when in October last year, government divested 20 per cent of its shareholding through sale on the market.
The low price is the direct result of low tourist arrival figures that passed through MIA and the share price has yet to respond to the announcement that two major low-cost carriers have handed in their proposals to operate flights to and from Malta thus possibly raising the number of flights and visitors to this island.

On the other hand, a company in the hospitality sector, IHI (Corinthia Hotels) announced positive results and also reached agreements with new overseas partners ready to inject more capital into the company at a price higher than the current trading share price. Moreover an agreement is in the offing whereby the group will be handling the management of hotels under franchise of a leading Hotel chain.
All this good news together with the fact that the overseas hotels all have a good valuation of the property which will be enhanced with increased prospects of use has not yet pushed up the price to an acceptable level. Possibly it is the lack of a dividend history that is holding back new investors to include IHI in their portfolio.
During the first eight months of this year the bond market saw government issuing its medium term bonds at an attractive coupon and two companies issue foreign currency denominated bonds for overseas projects. All these calls for capital were oversubscribed.

Lombard Bank
In the banking sector, Lombard Bank plc saw its share price slide after announcing earlier this month that it bought 35 per cent shareholding into Maltapost plc, the postal operator having government as a majority shareholder.
The market was informed of the positive financials registered by the company as well as a change in the ultimate beneficial owner of the largest shareholder prior to the Maltapost announcement.
Whilst this transaction pleased the government since it strategically fit its plans for Maltapost plc, the private shareholders in Lombard were left perplexed and some started to shed off their shareholding bringing the price down to LM4.44c5 on Monday.
The positive results were quickly forgotten once the announcement of the Bank’s investment in Maltapost was given. In fact the share price dropped by 6.4% on top of another drop of 15.8% experienced last week. The slide in the share price continued on Monday of this week.
The question remains: what has Lombard bought into?
Other then an entity that receives regular complaints on its service, Maltapost’s last published financials show that it is cash rich, has Lm1.3 million of assets, consisting mainly of branch offices which if turned to sell Lombard Financial services may add up to a strategic expansion move realising increased income to the listed company. Otherwise if the profit before tax figure of Lm330,00 is repeated than it will not influence any of Lombard’s results. Maltapost has a share capital of Lm2.8 million of which 35% are now Lombard’s, and a cash pile of over Lm2.2 million.
Lombard’s management needs to clearly explain its strategy on this investment.
Lombard Bank plc bought the 980,000 shares at a nominal value of Lm1 each from Transend of New Zealand through a newly set up fully-owned subsidiary called Redbox Ltd.
The latter was registered as a company on the day of the transaction with an issued share capital of Lm1,150,000. It was reported that in 2002, Transend had bought their 35% shareholding in Maltapost for Lm1.2 million. The acquisition price of the shares and other related details of the transaction have not been announced. In the absence of a specific announcement on the transaction, Lombard’s shareholders will be informed of such details when the company reports its full year results sometime in Quarter 1 of 2007.
Approaching the last month of the third quarter investors are waiting in earnest to be informed of more interim results and announcements on the bonds that are to be redeemed before year’s end.

Bank of Valletta
Bank of Valletta will be the first bank to set off the series of full financial results, which together with information published by the Government of Malta will give a preview of how the economy fared this year.
The indications on how the local economy is faring, exclude the operations of FIMBank that is deriving its majority revenue from worldwide operations as part of its growth strategy.
Board directors have to bear in mind that they represent the interests of all shareholders and so they need to constantly feed the market with information as otherwise the new Corporate Governance Guidelines will simply be an appendix to the annual reports.
The last frontier for a new chapter is reached when the government divests its 25 per cent shareholding in Bank of Valletta together with the 16 per cent shares held by Capitalia. If it is the same buyer for these shares, we expect to have the first experience of the new Takeover Code.
The market will also wait to see how the 20 per cent government shareholding in MIA is disposed of. The income from these sales would improve government finances and the market will have private entities as the largest shareholders in listed equities.

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