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Globe Financial Stockbrokers Limited Capital Market Survey
on Maltacom plc
Buy recommended for
Maltacom stock
by a staff reporter
A Capital Market Survey on Maltacom plc will be released in
the coming days and gives a thumbs up to Maltacom stock and
recommends a Buy, Andrew Zarb Mizzi, director of Globe Financial
Stockbrokers Limited told The Malta Business Weekly yesterday.
The survey which analyses Maltacom plc’s performance and
future strategy, says that with the eventual recovery of international
telecom markets, Maltacom will recover some loss in share value,
which is still believed to be undervalued at this point in time.
Thus, Globe’s current recommendation on the stock is Buy.
In their analysis on Maltacom plc, Globe Financial Stockbrokers
Limited found that Maltacom displayed a strong performance for
the financial year 2000. With profit before tax increasing from
Lm13.1m in 1999 to Lm13.7m in 2000, representing a return of
28.6 per cent on average shareholders funds and a return of
14.6 per cent of total assets employed. The profit before tax
for the quarter ended March 2001 was reported at Lm2.6m (March
2000: Lm3.0m).
The material performance differentials between last year and
the first quarter of this year, are primarily attributable to
the different accounting treatments awarded to their Vodafone
investment. The share of profits from this investment, while
previously taken into the Profit & Loss Account, are now
only taken into the Balance Sheet.
The tax liability has also increased from 30 per cent, during
the first three years of being a listed company, however the
company has succeeded, through tax planning measures, to reduce
the tax liability down from the 35 per cent rate. Another factor
was the Capital Expenditure incurred as a result of the establishment
of Go Mobile operations.
Total group assets as at March 2001 stood at Lm107.9m, a considerable
increase from the Lm87.6m reported for the March 2000 quarter.
Shareholders funds amounted to Lm57m (March 2000: Lm42.7m) and
finance 52.8 per cent of the group’s total assets. The
Group NAV per share has increased from Lm0.42 (March 2000) to
Lm0.56 (March 2001). This is higher than the target of Lm0.45
for the year ending 2001. (HSBC analyst forecast issued in August
1999)
The EBITDA has improved from the Lm4.1 million in March 2000
to Lm4.6 million in March 2001.Lines per employee have increased
from 133 in March 2000 to 143 in March 2001. Maltacom is expected
to reach the 150 mark by the end of this year. (HSBC analyst
forecasts issued in August 1999)
Maltacom’s headcount levels have also been reduced by a
further 50 employees who voluntarily applied in the latest early
retirement take-up.
This brings the headcount of Maltacom to 1,320. It is interesting
to note that, in line with the IPO document, Maltacom had planned
to achieve the level of 1,300 by the year ending 2003.
Maltacom CEO Stephen Muscat said that “Maltacom still aims
to reduce the headcount by a further 200 employees.” The
gratuity pay out for these employees through voluntarily early
retirement schemes has already been provided for in the Financial
Statements of previous years.
Therefore when these employees will voluntarily retire the payments
as gratuity on termination pay to them are not expected to effect
negatively the financial results in the future.
Group Return on Capital Employed as at March 2001 was 5.86 per
cent. This is lower than 7.43 per cent reported for March 2000,
however, the reduction is the result of the investments in new
technologies, both by the company and partic-
ularly by its subsidiary companies including the cellular telephony
operation. Nonetheless, Globe feels that Maltacom’s annualised
return on capital employed for the quarter, which stands at
20.3 per cent, will still meet the target of 15.5 per cent for
the year ended 2001. (HSBC analyst forecast issued in August
1999).
Mr Muscat said the first quarter of the Financial Year is not
usually the best quarter to rely on to extrapolate annualised
figures. In telecommunications there is the effect of seasonality.
Maltacom operates in a difficult sector mainly as a result of
the continual liberalisation of the market, however Globe believes
that this presents opportunities for the company to enter new
markets.
Go Mobile is proving to be a success with over 42,000 since
the launch of its operations in December 2000.
It is expected that Maltacom’s future market share will
be maintained in the future in spite of the stiff competition
it may face. This is due to their long established presence
and expertise in the telecommunications field.
In their analysis of Maltacom
plc, Globe Financial Stockbrokers Limited found that the Group
still maintains strength in their overall operations. In particular,
both the local and international fixed line telephony segments
remain profitable, local data services, although having been
liberalised, have not suffered for any material loss in market
share, and subsidiaries in general, are beginning to contribute
to the bottom-line, moving away from being start-ups to growth
stage companies.
The same rate of demand for fixed line telephony services is
not being achieved as in the past. Although domestic traffic
volumes are down by 1.36 per cent in the first quarter of this
year, this has been compensated for by the substantial increase,
both the international cellular interconnection traffic, up
by 70.2 per cent, and also in the local interconnection traffic,
up by 67.7 per cent.
Mr Muscat explained that “if one talks of saturation, this
may be the case in terms of new contracts, but the quality of
the revenue streams is however much better. The average duration
of calls is now even longer than in the past.”
With regard to the pricing of fixed telephony services, both
local and international, Globe found that Maltacom is considering
the possibility of undertaking a rebalancing of tariffs.
Globe is of the opinion that Maltacom will remain a very strong
competitor for any new entrant in the fixed line telephony market
segment. This is the result of the EU directives which “mandate
CATV (Cable TV) operators operating in the Telecom sector to
keep the CATV business separate from the telecom business”.
We believe that should this not occur, Maltacom could only benefit
further by being able to offer very attractive packages to its
extensive client base.
Globe is concerned with the threat represented by Voice-Over
IP. In this respect, Mr Muscat explained
that “Maltacom was following very closely the developments
in this new
technology”.
Considering that most revenues of any telecom company are typically
achieved from few corporate clients, Globe believes this may
represent a threat by new entrants to the market.
Mr Muscat explained that “key clients of Maltacom are already
offered a loyalty scheme. Clients view Maltacom, not simply
are a telecom service provider, but as a one-stop-shop telecom
service provider, which others cannot provide for”.
It is remarkable how the market has seen such a strong increase
in the penetration levels over the last few months. With the
liberalisation of the mobile sector, not only has Go Mobile
managed to achieve an astonishing 42,000 subscriber base in
just six months, but so has Vodafone increased its own client
base
considerably during the same period.
Mr Muscat explained that “the mobile sector is very important
to Maltacom. The launch of Go Mobile has been seen to be able
to provide an affordable mobile phone service to the consumer,
not only based on price, but also value-added, in terms of customer
service and SMS rates, which are the lowest in Europe”.
The roaming agreements signed with Go Mobile have increased
considerably since the launch of their operations in December
2000. Mr Muscat explained that “Malta currently has over
140,000 mobile subscribers, but one must not exclude the tourists
visiting the island, some of which may not only be utilising
Vodafone roaming agreements”.
It is Globe’s opinion that Datastream remains a strategically
very important company to Maltacom, since the share of income
from the subsidiary is constant, and as a result of the ever-present
need for data
services, it is not expected to drop. Maltacom believe that
Datastream is turning copper into gold through ADSL provisions.
With the forthcoming change in both the fixed line telephony
numbers and Vodafone subscriber numbers, Globe believes that
Maltacom should exploit this opportunity to further increase
its market share.
Mr Muscat explained that “Go Mobile have the facility of
allowing the subscriber to choose his own number. Since both
the fixed and mobile numbers (of Vodafone as the Go Mobile numbers
will not change) are expected to change shortly, subscribers
may opt to utilise a one-
number-fits-all facility. The difference between one’s
mobile number and fixed line number would be the prefix”.
Businesses would need to reprint their stationery, this would
allow Maltacom and Go Mobile, in particular, the opportunity
of increasing their market share.
Globe remains concerned with the delay in disposing of the Vodafone
investment. With respect to the current negotiations with Vodafone
regarding Maltacom’s 20 per cent shareholding, Mr Muscat
comm-ented that “Maltacom is committed to achieving the
best value for their shareholders and the company”.
When analysing the effects of the liberalisation of the local
telecom market, Globe have come to the conclusion that too much
importance is being made on receiving a full cash consideration
for the early liberalisation of the fixed line telephony. This
consideration, as was stated by Mr Zarb Adami in an interview
carried in The Times of 15 June 2000, was “valued at Lm100m”.
Mr Zarb Adami stated in the same interview that “nobody
was saying whether the compensation needed to be paid in cash
or in kind”.
Globe believes that new opportunities have become available
to Maltacom, which may have made up, in part, for the compensation
due to Maltacom.
Globe has also taken into account the performance of the foreign
telecom markets and the local economic climate, both of which
do not seem to provide the best business conditions.
Globe believes however, that as a result of interest rates falling
both in the US and UK, it will not be too long before Europe,
and thereafter Malta, will follow suit. Furthermore, with the
eventual recovery of inter-
national telecom markets, Maltacom will recover some loss in
share value, which is still believed to be undervalued at this
point in time.
In consideration of all the above, Globe’s current recommendation
on the stock is Buy.
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