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Malta Properties Company plc stock analysis

MPCandTOM

The coronavirus pandemic has impacted several industries, such as travel, hospitality and restaurants. The negative repercussions of the COVID-19 outbreak have also presented several challenges to the local real estate industry. This uncertainty has been undoubtedly been reflected in the recent local equity market sell-off, with MPC’s share price dropping to a low of €0.49 in recent weeks.

It is however important for investors to keep in mind that MPC currently has steady rental inflows in place, backed by long-term lease agreements, mainly with its anchor tenant GO plc (GO). It is therefore fundamental to point out that MPC is not expected to face the same challenges confronted by other local property companies.

Despite the fact that the COVID-19 pandemic had no meaningful impact on the local construction industry, MPC’s major and only threat stems from any potential delays in terms of their latest projects, being the developments carried out at the Zejtun Exchange and at the Marsa Spenser Hill Exchange. Additionally, MPC also announced that in line with its business continuity plans, the Group experienced no interruptions in terms of its ongoing operations.

Financial performance: FY19

As per 2019 results, MPC registered a 3.5% increase in revenue, which is apart from the yearly increases included in the tenants’ contracts, this increase is also attributable to the initiation of operations of the Birkirkara Exchange.

During the period, MPC also incurred an increase in administrative expenditure, which is attributable to specific increases in business development expenses. Upon confirmation by management, these are expected to remain at this level and marginally increase on a yearly basis, in line with the Group’s prospects to expand their business locally.

As a result of the increase in administrative expenses exclusive of depreciation (+26%) followed by the aforementioned increase in revenue (+3%), EBIT margin deteriorated to 62.6% as per FY19 results (FY18: 69%).

Notwithstanding the COVID-19 situation, MPC decided to proceed with the FY19 final net dividend payment of circa €1m or €0.01/share (FY18: €1m or €0.01/share). Although the Group paid dividends over the last two financial years, we believe that there are still low prospects for an increase in dividend distribution in the short term given the high capital expenditure requirements to fund future projects.

Outlook

MPC’s rental income is expected to further improve during Q4 2020 due to the initiation of operations of the Zejtun Exchange, which is expected to be occupied by its anchor tenant GO. Following MPC’s spin-off from GO, the Group’s strategy has been to reduce significantly its dependence on GO and adopt a multi-tenant strategy. Although this will possess its own challenges, such strategy will help to diversify the Group’s client base and potentially increase its returns. In line with the Group’s announcement issued during Q1 2020, MPC confirmed that it has entered into an agreement to purchase the HSBC Call Centre in Swatar, with MPC retaining the current tenants after concluding the final deed of acquisition. This transaction is expected to boost the Group’s revenue and net profit generation moving forward.

From a valuation point of view, we deem the Group’s current price levels as attractive. Although we believe that an increase in dividend distribution in the short term might be difficult given the high capital expenditure requirements to fund future projects, we still believe that investors who benefited from the recent dip in MPC’s share price, will be further rewarded in the longer term.

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