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Central Business Centres plc credit analysis

CBCandTOM

The principal activity of CBC is to hold commercial property for investment purposes and generate returns from such properties through rental agreements. The Issuer currently operates three business centres in Zebbug, Gudja and St. Julian’s. The Issuer also owns Villa Fieres in St. Julian’s which is currently under restoration and is earmarked for rental to third parties either as a high-end restaurant location or as a residence for high net worth individuals. More recently, CBC acquired a site in Zebbug for developing a supermarket.

Debt securities in issue

CBC currently has three issued debt securities. During FY14, the Company issued a €6m (2021: 5.75% and 2025: 5.25%) bond issuance program to finance the development of the St. Julian’s business centre and to finance the acquisition of CBC’s properties. During FY17, the Company issued a further €10m programme (2027: 4.4%) primarily to finance the site in Zebbug.

Financial performance: FY19

As per FY19 results, CBC registered an increase in revenue of 205%. This upsurge in revenue is mainly attributable to higher occupancy achieved at the Gudja business centre (100%) and the St. Julian’s business centre (38%) respectively. The increase in rental income is also attributable to the commencement of rental income from LIDL in relation to CBC’s Zebbug site, which is envisaged to be developed in a supermarket.

Moreover, operating expenses incurred during the period declined by 22.1% to €198k. This is reflective of the fact that several expenses of a non-recurring nature incurred during FY18, were not re-expensed during FY19.

In furtherance, the decline in operating expenses exclusive of depreciation (-22.1%), followed by the aforementioned upsurge in revenue (+205%), led to an overall improvement in EBITDA margin from 28.9% during FY18 to 81.8% as per FY19 results.

Additionally, CBC’s FY19 improved performance which has positively impacted EBITDA, led towards an improvement in interest cover from 0.2x in FY18 to 1.4x as at FY19.

Outlook and COVID-19 impact

The agreement entered into with LIDL Immobiliare Malta Ltd (LIDL) regarding the Zebbug site has significantly improved CBC’s FY19 results and cash generation. However, following recent developments, the planning permit for the site has been postponed. Moreover, upon being granted the permit approval regarding Villa Fieres, the potential development of this site is also expected to further boost the profitability potential of the Company.

In terms of COVID-19 impact, to date, CBC has not seen a material impact on its operations. However, the COVID-19 pandemic could lead to reduced rental streams and therefore reduced future revenues and future cash flows. Given that the negative consequences brought about by COVID-19 on CBC are not yet fully known, the Company has evaluated the situation of each tenant closely and prepared several financial projections to assess the potential impact that the pandemic might have on the Company.

In light of the current circumstances, management explained that the Company granted favourable credit terms to some tenants such that rental payments pertaining to these tenants will be delayed. Management also confirmed that rental income up until May is up to date.

As part of CBC’s cost mitigation procedure, management stated that if such COVID-19 climate is prolonged, their planned capital expenditure on Villa Fieres, which is anticipated to commence following the relevant permit approvals, will be temporary halted. Additionally, management confirmed that other capital expenditure which was expected to take place throughout the course of 2020, namely referring to the signage installation on the St. Julian’s business centre, is currently halted until the COVID-19 situation turns back to normality.

In an attempt to further combat the implications brought about by COVID-19, management explained that CBC already has a liquidity contingency plan in place if the Company finds itself under increased pressure due to the aforementioned favourable credit terms given to its tenants. In fact, management confirmed that CBC already has the necessary access to short-term financing if required. More importantly, management has also confirmed that CBC has the sufficient resources at its disposal to honour its existing bond interest payment obligations.

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