Friday, 19 January 2001

How to lose millions without really trying

The Malta Independent

Losing millions without really trying

The destruction of value on Malta`s capital market which has occurred since the last budget is a cause for serious concern to Maltese investors. This loss of value has occurred very widely across the board and` it is fairly easy to conclude that this is not a fault in the underlying value of the investment but a consequence` of the sombre outlook which has befallen Maltese investors since last November.

In the two months since budget day the most popular banking shares are off 8%, Maltacom shares are down 13% and Middles Sea` shares are down 23%. On these four quoted companies alone the market has shed off a value of nearly Lm85 million in just 2 months.

One cannot but compare this sad result to the value which was added to the markets during 1999. I consider it one of my major achievements having helped to add so much value to the market during 1999.

During my 2 year tenure as Chairman of Mid-Med Bank I saw the share price climb from Lm1.40 to Lm2.00, an increase of 40% which cannot be bad by any standard. I did however realise that even at` the increased level the share price was showing a minimal premium over the net asset value of the shares and this cannot be justified for an organisation which was producing over 20% return on capital.` The hidden value of the shares was evident for whoever wanted to see it but apparently investors were` put off by the illiquidity of the local market.` That the prospected` capital gain would also be tax free was the cherry on the cake but the lethargy in the market was so big that not even this fiscal` incentive strong enough to bring life to the market.

I did what any management that seriously considers it its business to add value to` shareholders would do. The bank proposed to buy-back part of its own shares. This was meant as a signal to the market of the severe under-valuation of the shares. The market re-acted immediately making the buy-back unnecessary even if it were approved by the Bank`s General meeting, which it was not.

By the time the shares were suspended in relations with the HSBC deal the market price increased from Lm2 to Lm2.71 in the space of less than 4 months eventually proceeding to touch a high of Lm7.62 in the ensuing months.` I always maintained that` a realistic price for these shares would have been around Lm5.50 so there is no doubt that the superior valuation carries with it the brand premium of the new majority shareholders.

The HSBC deal pulled the whole market ahead and brought new investors to the market thinking that making money by the bucketful in share trading` was simple and easy. Consequently the correction which happened on the market during the year 2000 was healthy and appropriate in teaching the market that it is not a one way road to riches.

But the acceleration of this trend in the first two weeks of 2001 is not a market correction.` It is` destruction of market value by a badly thought out and confusedly explained withholding tax on investment funds which was the vehicle preferred mostly by small investors to access the market. These investors are now pulling out of these funds forcing their managers to dump shares on an illiquid market and bringing a totally avoidable meltdown on the Maltese capital markets.

Add to these the farcical affair of sale of Middle Sea shares being sold at prices different from the market price and you have a perfect recipe for destruction of value. The Withholding Tax on investment funds needs urgent revision. Its` implementation needs to be linked with EU plans in this area. This would lift the current uncertainty and bring back life to a dull market.

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