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Looking for opportunities in the local equity market

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This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri.

Looking for opportunities in the local equity market sell-off

The rapid spread of the coronavirus (COVID-19) has been a major shock globally, resulting in an unprecedented health crisis. In addition to the human and health aspects, the COVID-19 outbreak has also contributed towards a significant commercial impact, being felt at a global level. The Maltese economy has not been immune to this outbreak. The openness of our economy up until the start of March 2020, has enabled us to progress economically, however, this has also made us vulnerable to events that might occur beyond our shores.

The travel ban recently implemented by the local government on all flights to and from Malta, the implementation of a partial lockdown to specific groups of people, the cancellation of all public events, together with the closure of non-essential service offerings have all made a significant impact on the local market. This has been a particular threat to, the banking, hotel and catering, as well as the transport and aviation industries.

In such delicate situations, based on previous crises, we need to keep in mind that the current conditions are expected to reverse/recover in the longer term as the virus is either contained or through the development of a vaccine or cure.

In light of all this turmoil and the associated significant market disturbance, investors should be on the lookout for potential investment opportunities, and capitalise from the current wave of volatility that they are currently faced with. This argument is not only valid in foreign financial markets, but is also crucial in both the local equity and fixed income context.

We have carried out an exercise to illustrate the price movements witnessed in the local equity market from when the first local COVID-19 case was reported (07/03/20), up until the last trading day as of the time of this writing (30/03/20). The resulting outcome signifies a market sell-off, with the MSE Equity Price Index down 16.9% over the reporting period. The equities selected for the purpose of this exercise are those in which large trading volumes have been observed. Having said that, we believe these equities have the necessary characteristics to weather the storm in these unprecedented times. As such, we believe that this type of market turbulence can provide opportunities for active investors who dare to swim against the tide.

Malta International Airport plc

With MIA at the centre of the COVID-19 storm, we have recently seen a large degree of volatility in the Group’s share price, with a low point at €3.52 level in recent weeks, as the number of coronavirus cases in Malta continued to increase on a daily basis, eventually resulting into the temporary closure of the airport.

As per FY19 latest results (excluding the COVID-19 headwinds), MIA had once again outperformed expectations, with passenger traffic increasing by 7.4%, contributing towards a growth in revenue of 8.7%. Despite generating higher revenues, MIA was able to control and contain its costs and has recorded an increase in profit before tax of 11.7%.

With the Government suspending all inbound and outbound commercial flights and given the lack of visibility as to when flights might resume, MIA expects the situation to deteriorate further over the coming weeks. The full impact of COVID-19 on the Company’s business is not yet fully known. Notwithstanding the current situation, investors should keep in mind that MIA has a very strong balance sheet and has a great ability to contain its costs as witnessed in the Company’s latest results. We believe that investors who have benefited from the recent drop in the Company’s share price will be further rewarded in the long run.

RS2 Software p.l.c.

Post COVID-19 outbreak in Malta, we have also seen a substantial degree of volatility in the shares of RS2, with the price dropping to €1.70 over the past couple of weeks. Given that RS2 operates in multiple jurisdictions, it is important to keep in mind that the Group is subject to multiple COVID-19 scenarios.

During FY19, the Group had successfully secured new contracts and opened up new verticals within several regions concerning managed services as well as generating revenue for the first time through its US operation. During Q1 2020, RS2 continued reaping the benefits implemented in prior years and achieved two important milestones. The first being an acquisition of a commercial network operator for electronic, card-based payment systems in Germany and the second relates to a partnership agreement entered into with MoviiRed based in Colombia. Both milestones are expected to boost the Group’s acquiring business segment moving forward.

Although the pandemics impact on RS2’s financial and operational performance is still unknown, the Group confirmed that all its business lines are operating at normal levels. They also stated that pursuant with the RS2’s healthy pipeline, the Group is confident to be able to meet the challenges that the pandemic might present. We believe that with the Groups unique business model, those investors who have capitalised on the recent sharp decline in RS2’s share price will also be further rewarded in the longer term.

Malita Investments p.l.c.

MLT’s rental income streams are secured through long-term rental agreements with relatively low risk tenants. Apart from the fact that MLT’s cash flows from rental income are regular and predictable, these are expected to increase once the affordable housing project is fully finalised. With MLT’s relatively low risk business model, we believe that those investors who have benefited from the levels at which MLT’s share price is currently trading, will also be rewarded moving forward.

Malta Properties Company p.l.c.

MPC has steady rental inflows in place, backed by long-term lease agreements, mainly with its anchor tenant GO plc. This is expected to further improve during Q4 2020 due to the initiation of operations of the Zejtun Exchange. Moreover, the Group recently entered into an agreement to purchase HSBC’s Call Centre in Swatar, with MPC retaining the current tenants, after concluding the final deed of acquisition. Taking these factors into consideration, we deem these current price levels as attractive.

PG p.l.c.

In the short term, the Group’s supermarket business segment is expected to benefit from the increased consumption and stocking up brought about by the COVID-19 outbreak. However, due to the Government’s recent closure of non-essential service offerings, PG is expected to experience a material adverse impact in terms of its retail segment. However, it is crucial to point out that, as per FY19 results, the Group’s retail business only accounts for 14% of PG’s total revenue, therefore the Group is still expected to retain its strong cash position.

With the daily COVID-19 developments, the outlook of the local equity market still remains relatively uncertain. However, this does not mean that long-term investors shouldn’t consider building up positions in companies with strong balance sheets. In the medium to long term, once all of this is over, we expect prices of certain companies which are heavily discounted to reflect their intrinsic value.

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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