The year ahead for local equities

At this time of the year, it is customary for international financial analysts and investment research houses to issue their expectations for the coming twelve months. Although such forecasts must always be weighed against the major evolving events shaping the world’s economies and financial markets, the theses supporting the initial outlooks typically serve as an important backdrop for the investment decisions to be taken throughout the rest of the year.

For investors with exposure to shares listed on the Malta Stock Exchange, such an exercise might be even more imperative to undertake when considering the lack of liquidity and the relatively small size of the market. Consequently, investors would need to think ahead and evaluate any necessary options in a timely manner.

After three consecutive years of decline, in 2023, the MSE Equity Price Index rebounded by 11.4 per cent to just under 3,690 points. However, at this level, the index is still 19.4 per cent lower than its most recent high of 4,912.452 points recorded on 30th September 2019. The positive performance registered by the index in 2023 was driven by HSBC Bank Malta plc (+80.3 per cent) and Bank of Valletta plc (+75.3 per cent), which, during the nine-month period ending on 30th September 2023 generated pre-tax profits of €100.8 million and €163.5 million respectively – the highest levels in several years. Besides the good financial performances which even led the two banks register double-digit return on equity, during the first half of 2023, HSBC Bank Malta paid the highest interim dividend in seven years. On BOV’s part, during 2023 the Bank secured a new correspondent banking relationship with Citi, saw its S&P credit-rating outlook upgraded to “Stable,” restored the distribution of dividends, and concluded an agreement for the sale of a portfolio of long-standing non-performing loans for €26 million.

Although the share prices of both APS Bank plc (-5.7 per cent) and Lombard Bank Malta plc (-15.1 per cent) drifted lower in 2023, the two smaller retail banks also had a milestone year, primarily due to their successful efforts in strengthening their capital base through the issuance of new shares (via scrip dividends for APS and a rights issue for Lombard) and unsecured subordinated bonds (APS).

Building on the achievements of 2023, the four retail banks are now in a stronger position to continue pursuing their respective strategies. Furthermore, it will be interesting to observe the dividend payout ratios that the two largest banks will adopt for the full 2023 financial year and the extent to which they can commit to this for 2024 and beyond. On the other hand, APS will be closely monitored for any additional capital requirements, while Lombard will be evaluated against the targets outlined in its three-year growth plan (until 2026) set out at the time of the rights issue in September 2023.

In the property segment, Malita Investments plc is planning a €33 million rights issue in Q1 2024. The funds are intended for the completion of the €120 million ‘Affordable Housing Project’ by the end of 2026. This year, AX Real Estate will inaugurate the much-anticipated Hotel Verdala, while news is expected from MIDI plc and VBL plc regarding their projects in Manoel Island and Valletta respectively. With respect to the other principal property companies, investors will likely focus on the continued international growth trajectory of Hili Properties plc and the success or otherwise of Trident Estates plc in achieving full occupancy of Trident Park besides any developments related to Trident House. In addition, investors will monitor any updates from Malta Properties Company plc with regards to the expiry of the lease agreements covering circa 18,500 sqm of the company’s net leasable area representing 46 per cent of MPC’s total stock of office and commercial space.

No significant developments are foreseen from Main Street Complex plc, Plaza Centres plc, and Tigné Mall plc. Nevertheless, it remains imperative for investors to continue gauging the financial performances of these companies in light of their reliance on the underlying strength of consumer spending amid a very high and intensifying level of competition in the sector within an environment of elevated inflation.

The erosion of real disposable income due to inflationary pressures is also a matter that is central to companies like Simonds Farsons Cisk plc, M&Z plc, PG plc, and The Convenience Shop (Holding) plc. Despite the resilience shown by the Maltese economy over the past months and years in the wake of the COVID-19 pandemic and the wars in Ukraine and the Middle East, there are concerns about how consumer spending patterns and profit margins are shifting which could dampen overall investment sentiment. Fortunately, however, the tourism sector is thriving, and this positive trend should be confirmed when Malta International Airport plc publishes its traffic and financial forecasts for 2024.

This year is expected to be important for International Hotel Investments plc as the Group will be inaugurating four new Corinthia hotels (located in Brussels, Bucharest, Rome, and New York) ahead of further expansion in 2025 (Doha) and 2026 (Diriyah and Maldives). Moreover, IHI is in the process of obtaining the necessary permits for the proposed redevelopment of a large tract of land measuring over 83,000 sqm situated in an area known as ‘Ħal-Ferħ’ in proximity to the Radisson Blu Resort & Spa, Golden Sands. The Group intends to construct a low-rise, mixed-use complex – ‘Corinthia Oasis’ – comprising a 162-key luxury hotel and 25 detached and serviced villas, supported by a top-tier wellness centre and spa, food and beverage outlets, as well as a host of ancillary resort amenities. Investors in IHI will also be watchful for any other major initiatives that the Group might pursue to further enhance its profile, including opportunities to crystallise value accumulated over the years, extend its global outreach through new agreements with third-party investors, as well as leverage its strong connections with prominent investment firms and sovereign wealth funds.

The international aspirations of RS2 Software plc and MedservRegis plc are also expected to remain in focus amongst local investors. Equally intriguing are the endeavours of GO plc in Cyprus (through its 70.22 per cent equity stake in Cablenet Communications Systems plc) where the Group is gaining notable market share and considerably broadening its network footprint. Meanwhile, BMIT Technologies plc will be tested on its ability to continue responding to the fast-changing dynamics of the market and, at the same time, assimilate the passive telecom infrastructure recently acquired from its parent company.

The upcoming reporting season will be crucial for the revival of investor sentiment across the local equity market. Moreover, it should also serve as an opportunity for the various companies to communicate their respective strategies clearly and effectively, along with their targets for the foreseeable future. More serious concerted efforts need to be taken in this respect, involving all market participants, regulators, and other institutions with a view of achieving a deeper and better-functioning local equity market.

This article was written by Josef Cutajar, Financial Analyst at M.Z. Investment Services Limited (“MZI”). The author has obtained the information contained in this article from sources believed to be reliable and has not verified independently the information contained herein. The contents of the article are the author’s views and may not reflect the other opinions in the organisation. The article is being published solely for information purposes and should not be construed as investment, legal, or tax advice, or as a recommendation to buy, sell, or hold any security, investment strategy or market sector. The financial instrument referred to in this article may not be suitable or appropriate for every investor. Prospective investors are urged to consult their Investment Advisor prior to making an investment. Past performance is no guarantee of future results, and the value of investments may go down as well as up. MZI accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this article. No part of this article may be shared, reproduced, or distributed at any time without the prior consent of MZI.

MZI is a member of the Malta Stock Exchange and is licensed by the Malta Financial Services Authority to conduct investment services business under the Investment Services Act (Cap. 370) (License N° IS23936). M.Z. Investment Services Limited, 63 ‘MZ House’, St Rita Street, Rabat RBT 1523. Telephone: +356 21453739; Email: [email protected]; Website: www.mzinvestments.com.