Market overly optimistic in supporting share price

by David Kelleher

Maltacom is facing a colossal task in terms of managing its response to a changing business landscape in fixed-line and mobile telephony and data services, according to a strategic review of the company’s performance in 2000.
The research report, carried out by stockbrokers Curmi + Mallia, who also act as a corporate stockbroker to the telecoms company, concludes that Maltacom is fighting for its share of the new telecoms market and will face huge challenges as market trends and liberalisation of the sector in 2003 take effect.
While the report makes it very clear that Maltacom is facing an uphill struggle to manage its response to future challenges in an ever-changing telecoms business scenario, Curmi + Mallia feel that “in an industry where the size of the client base will be a key differentiator between successful and the also-rans, Maltacom holds the winning hand. If it plays its cards well, it will thrive.”
Another strong point in Maltacom’s favour vis-à-vis new players and barriers to entry is that “the telecoms industry demands deep pockets and technical expertise. Maltacom has both while others may not,” the report concludes.
However, Curmi + Mallia also warn that the future is not all that rosy unless the company responds positively to changes.
“With heavy capital expenditure required for maintaining the existing network and building new ones, coupled with threats to its core voice traffic revenues, Maltacom faces a colossal task in terms of managing its response to this changing business landscape,” the report says.
Curmi + Mallia’s view is that Maltacom’s earnings visibility has deteriorated considerably. “There is no established blueprint for winning in this turbulent environment. Although it has become more difficult to forecast future earnings, we nevertheless believe that the current share price discounts unrealistically high expectations in terms of long- term revenue growth and margins. Long-term investors who seek favourable risk/reward ratios should look elsewhere. (We recommend) sell,” the report says.

Giving its reasons for the ‘sell’ recommendation, the report in its recommendations says: “At the current (share) price of Lm1.77, the market is essentially assuming that if the current EBITDA (Earning Before Interest, Tax, Depreciation and Amortisation) margin (38 per cent) is maintained indefinitely, revenues will grow by 10 per cent per annum until 2009... Naturally, if one assumes that EBITDA margins will decline/rise, the required revenue growth rate would be higher/lower.”
Curmi + Malta also feel that the market is being overly optimistic in supporting the current share price.
“This is not a reflection on Maltacom’s management, who have years of experience behind them and seem doggedly determined not to let competition make inroads into their business. It is simply a reflection of the size of the market which Maltacom services and the nature of the industry in which it operates,” the report adds.
It goes on to say that Maltacom can never become a big fish because it lives in a small pond.
“Its core business is close to saturation point and is subject to long- term decline. We believe that international call revenues in particular will be decimated. Go Mobile and, to a lesser extent, Datastream, will be Maltacom’s growth engines in the future,” Curmi + Mallia say.
With regards to the share price, the report continues, this “cannot be justified by anything other than unrealistically high (in our view) expectations and/or the speculative appeal in case of a takeover.
The market seems to be looking forward to increase revenues from Go Mobile but not looking forward enough to falls in fixed line
revenues which will occur after liberalisation”.
Curmi + Mallia also warn investors not to look solely at the short-term profits and ignore long term trends.
“A number of investors may be inclined to ignore long-term trends in the hope of making a short-term profit, regardless of the possibility of a takeover. However, this is a risk strategy at the best of times and particularly so in the current climate.
“Long-term investors will only be interested in the fundamental picture. Based on our assessment of the fundamentals, Maltacom is overvalued. This should not really come as a surprise to the market. Maltacom has performed well since the IPO and has delivered on the targets it set. However, the monopoly has been lost much sooner than originally anticipated.”
As to the company’s long-term prospects, Curmi + Mallia say Maltacom is likely to retain its dominant position for a long time, especially in the local market, but lack of pricing power and falling international revenues will erode profitability and diminish the value of that dominance.
“The long-term outlook has deteriorated since IPO, yet the share price has doubled – something has to give. The shares have come down a long way from their stratospheric all-time high reached in early 2000. They have further to go. Sell,” the report concludes.
Curmi + Mallia also highlight the difficulties that Maltacom has had to face over the past year. The company has been affected by the government decision to liberalise the market by 2003, meaning that Maltacom will lose its monopoly seven years earlier than anticipated.
“No direct financial compensation has been given for the early loss of monopoly. The government seems to believe that the granting of a mobile licence is compensation enough – we are not convinced that this is the case,” the report says.
Another factor listed in the report is that Maltacom has given up the option to purchase a controlling interest in Vodafone. It will now also sell its 20 per cent stake in the company.
“Naturally, this 20 per cent stake is worth less now that the option for a controlling interest has been given up. These developments are of fundamental importance and highlight Maltacom’s dependence on the success of Go Mobile,” Curmi + Mallia say.