NEWS | Wednesday, 10 October 2007

Business Today looks at the PAVI bond offer

Buying Bonds and investing in a Supermarket

BusinessToday supports the private sector and welcomes a thriving market for funds. However, we feel it is our duty to weigh the pros and cons and leave it to the regulated financial advisors to give their advice to investors. We only feel that an investment on an information memorandum must also be coupled with an analysis of the environment whether current, past or future.

It is relatively easy in Malta to identify which company is about to list its shares or Bonds on the Malta Stock Exchange. When you start to see a series of full page adverts on the newspapers and articles in the business pages, you are right in assuming that this company shall be soon coming out to the market to gather funds for its own plans, be it to refinance their debts or offloading from their holding and cash in on their investment in a venture.
This summer, our newspapers were regaled with full page adverts promoting the PAVI Shopping Complex. This supermarket which is unique with 6,000 square meters retail space and further land used for parking and storage was not a regular advertiser. It banked on its market presence through word of mouth rather than regular adverts. Being the largest supermarket with 45,000 stock items, the Maltese got acquainted to shopping all from one site and finding the major brands they were used to as well as the Auchan brand. Maltese have been regularly going for shopping trips to Catania in nearby Sicily and nearly every tour promotes a visit to the Auchan hypermarket, situated near the Airport Terminal. Not only but the multitude of Italian TV stations regularly advertise the Auchan markets. The typical set up of an Auchan market is a large complex full of shelves, wide aisles and thousands of products. PAVI, a shopping complex in Qormi, has taken over land previously occupied by a manufacturing factory that closed its doors after it provided jobs to a number of Maltese.
So PAVI is inviting investors to take on its offer for Lm5 million in Bonds. These bonds are being offered at a secure coupon of 7%. A rate that is considered as a high – yield bond and once sold will be traded in the Alternative Companies List of the Malta Stock Exchange. This section termed Alternative is reserved for those companies which are seeking funding from investors and they operate either in a high risk area or do not have a history. In fact PAVI has been trading for less than a year and operates in a high turnover but low margin business of retailing.
Supermarkets in Malta are considered as the retail outlets that everyone flocks to as it serves the daily needs. However Malta has experienced one major casualty which is still fresh in the minds of the business community. The Price Club was a chain of supermarkets with a turnover of over Lm20 million in a year but when it went bust it left millions of liri owed to creditors and a definite negative effect on the Maltese economy. The firms that were owed money ranged from large importers, local manufacturers and the small enterprises. All were regular suppliers to the Price Club and through offering their goods at an extended credit period ended up bearing the brunt when no-one was around to pay them. When Price Club did not meet its commitments, it left a vacuum in the books of the suppliers and in some cases the amount owing had to be considered as probably uncollectable debts, and equivalent to some year’s profits. It is best not to continue this debate on the Price Club as the case is still being evaluated in Court. However, one must highlight the statement made earlier this year financial obsever; that the estimated amount of unpaid debts by the Price Club neared the Lm8 million mark. To put it in perspective, Lm8 Million is equivalent to 10 months revenue of PAVI.
PAVI have registered a turnover of Lm4.7 million during their first six months and this is expected to double by the year end. The complex is worth Lm8.4 million and PAVI is the freehold owner of the site and complex with the Bond being backed by the property.
So will investors take up the offer? Of course they will! First of all, some institutions have cash in hand and are looking for opportunities to invest and get a handsome return. 7% annual interest is a high return and there are not much investment opportunities at present which offer this annual interest or dividend rate. Even the Government will be issuing bonds at a much lower interest rate. The government is out to seek Lm50 Million in stock at practically the same time private entrepreneurs under the aegis of PAVI are offering their Lm5 million worth of Bonds. Yet comparing the coupon given by government and that offered by the Private entrepreneur, the latter offered by PAVI provides an adequate margin for the risk. The 7% coupon on this bond is equivalent to that offered by GAP a property development, earlier on this year. But what is the difference other than the obvious fact that PAVI and GAP operate in different markets and with different risks? The only difference is that PAVI’s 7% bond is for a longer period and redeemable from 2014 to 2017. A pure ten year bond. The GAP Bond is a medium term bond.
Moreover, it is not only the Institutional investors that have the cash to invest but private individuals termed as the retail market for bonds will also invest. Why? PAVI boasts that it services 30,000 customers every week and no less the 200 new applications are received for the store bonus card loyalty scheme. If Bond holders are given added incentives in due course as part of the loyalty scheme than these investors will retain their investment for a long term to get an added benefit other than the yearly interest. Buying from PAVI, earning bonus points and redeeming them for discounts or freebies is an attraction in itself. But will anyone have a second though on the risk factors such as other future competitors in sight such as Lidl or the cut-throat competition being offered by existing chains o supermarkets? Will one ponder on the purchasing power of the local consumer? Are Mega supermarkets an attraction in themselves as much as the Maltese think they are when they visit Auchan in regular trips to Catania? Will the fact that 5 years ago a major chain lost out its business come into it? Where have the ex-Price Club’s clients gone? Will the investor have any doubts? Is the value of a property a secure investment in itself? All these are some of the thought that cross the mind of the prospective investor.
But then, this newspaper notes that the reporting accountants of PAVI are the same firm out of whom one partner was expert witness in court on the Price Club saga. Now, if there is someone who has analysed, evaluated and explained the mechanics of a supermarket operation it is this firm that is signing off its responsible report on PAVI. This is in itself is a comfort.
Even though this does not mean that PriceWaterhouse Coopers is sticking its neck out or running the show for future revenue streams that are needed to service the coupon and replace the capital, yet it is heartening to know that someone very knowledgeable did carry out due diligence exercise.