Thursday, 22 March 2012

GO has gone ....Greek


The pain of the private shareholders of GO plc is getting unbearable.   Go was privatised in 1998 with an IPO price of Lm0.90 cents equivalent to Eur 2.10 per share.   In the after market the GO share price had at one time reached a peak of about EUR 7.50

Current GO's share price is less than Eur0.80 cents i.e. 38% of the IPO price and less than 11% of its all time high price.

By all means the private shareholders in GO plc have been badly let down by the Government when it sold its 70% holding to the Dubai investors and by the Dubai investors who recklessly invested an imprudent amount of GO's resources in a doomed Greek venture.

The profits that GO makes from local operations, with all the economies and efficiency gains extracted from the workforce, has been more than lost in this reckless Greek venture whose losses are weighing down on GO's share price and denying the private shareholders from the dividend that they had grown accustomed to.

Am I being wise after the event?  Certainly not.

On 26th May 2006, shortly after the full privatisation of the then Maltacom I had written as hereunder in the Malta Independent on Sunday (Judging Maltacom - TMIS 26.05.2006)

The argument that the price of Lm1.55 per share is at a slight premium to international valuation of similar companies based on profitability criteria, indicates that no premium was included in the price to take into account the substantial assets that are not essential to the company’s profitability.   

The most obvious candidate here is the substantial liquidity of Maltacom including substantial cash balances and receivables. Should not these have been distributed to present shareholders before the share transfer was concluded at a price that was not arrived by asset valuation but by discounting future profitability? Should other assets, not essential for the company’s core business, including some valuable real estate, have been sold before the privatisation and profits there from distributed before executing the share transfer?

Then when GO's management embarked on their Greek venture I had written an article which is worth reproducing hereunder as it gave ample and timely warning about the situation that GO minority shareholders find themselves in today.

What a pity that after so successfully defending the minority shareholders of Mid-Med Bank from forced takeover by HSBC  in 1997, the Association I had founded with others to defend small shareholders did not find the necessary support to remain active as a permanent safeguard against abuse of the small shareholders.

GO Greek

27th March 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Normally I would not comment on the financial results and individual share performance of any public company quoted on the Malta Stock Exchange. On the rare occasions where I comment on local financial investments, I tend to restrict myself to the general market rather than focus on any particular company.

The financial results announced by GO plc last week merit an exception. Rarely have I seen a set of financial statements where what you see, at least at first glance, is not what you get; where you really have to make many mental adjustments to pass objective judgement on the company’s performance and still you are left gasping for more information to form a reliable opinion on the company’s future prospects.

If you start with the bottom line it is easy to get shocked. GO switched from a profit before tax of E28 million in 2007, to a loss, yes a loss, of e1 million last year. How can a company which returned steady profits in the region of e30 million each year before full blown liberalisation took effect, switch so suddenly from a substantial profit to a loss situation?

Further analysis shows that a series of one-off items are making first glance results extremely misrepresentative of the underlying performance from normal operations. 2007 results were flattered by a one-off credit of e9.6 million from a VAT case decided for the company. On the contrary 2008 results are penalised by an exceptional charge of e12.9 million related to pension obligations resulting from a court case decided against the company. These two items on their own explain e22.5 million of the e28.9 million variance between the bottom line results of 2008 compared to 2007.

2008 results are also penalised by another non-ordinary operational charge of e15.5 million related to booked losses on an investment which GO is making in a Greek operator licensed for fixed line, internet and media services. GO’s directors’ report issued with the financial statements emphasised that such losses were in line with expectations as the Greek investment is still maturing and consequently the impression one gains is that this should be a one-off charge. Indeed the directors’ report prompts an assumption that such losses should not only be reversed, but translate into positive new sources of profits in subsequent years as the Greek investee company reaches maturity.

Adjusting for these one-off charges it results that the Malta underlying business operations of GO improved by 14.6 per cent from e23.3 million in 2007 to e26.7 million in 2008. This is no mean feat considering that in 2008 the Company had to contend with EU price restrictions on mobile roaming charges, had to continue to register continued decline in its legacy fixed line services, and had to fight increasing competition in broadband and media services.

How then can one justify the dim view being taken by the market in marking down so heavily the value of the company’s share price? Last week the share price of GO closed at e1.40 which is 20 per cent down year-to-date following a 44 per cent loss last year, much worse than the overall index performance on both measures. At e1.40 the price is 33 per cent below the first IPO price of 1998 (at e2.10), 61 per cent below the privatisation price when government’s 60 per cent stake was sold to current majority owners, and 82 per cent below its all time high price.

Given that the company will soon achieve more room to manoeuvre additional cost cuts as the three year no-forced-redundancy provision expires, the share price should reflect the improving and potential core operational performance of the company, unless one of two things is happening.

Either investors are judging the book by its cover rather than by its contents in which case GO is failing in making its case properly in the eyes of investors and in keeping them properly informed of its strategy and its successes; or the investors are voting down the company’s foray in the Greek market, considering it a serious deflection from its core business, a risky investment exposing the company to further losses in future years and jeopardising recovery of the huge loan of e89 million which GO made to its overseas investment company.

This investment is nearly 50 per cent of the entire equity base of the company after distribution of proposed dividends from past reserves (there were no profits to distribute in 2008 so the proposed distribution of e12 million dividends will erode past reserves) and has not only drained away the comfortable cash resources of the company but has forced the company to leverage its balance to finance such investment through an external loan of e50 million.

I made informal contacts with some active investors in GO, investors who vote to elect directors on the board of the company, to enquire how much they were aware of GO’s Greek foray. The feedback I got from different sources was that the directors elected by the minority shareholders were as enthusiastic as the directors of the majority about this overseas investment and that there is still full confidence that this will turn out to be a very important investment for GO’s future profitability. I was further assured that the majority shareholders made no pressure on their local offshoot to undertake this investment and that the investment was made with the unanimous approval of the board.

On the other hand passive investors knew next to nothing on this large Greek exposure by their company and some even expressed surprise as they maintain that they invested in GO’s local operations and were at best hesitant about seeing their company take such significant stakes in overseas ventures.

Frankly I think that one of the reasons the market is punishing GO’s shareholders more than the index is that the company is not working as actively as it should to keep its investors informed enough to enable them to understand more deeply the strategy it is following under its new ownership. With deep pocket majority owners who have no interest in cashing out their investment, the market price of their shares may not be of great interest to them. But for the small investor the share price is important.

Even if the Greek investment were to be merely neutral and just provide recovery of the losses booked in 2008, the share price of GO deserves to be in another planet from where it is presently languishing.

Given the significant size of the Greek foray, GO’s management has a duty to explain to small investors what their expectations from this investment are, as this information could well change the Greek investment from a discount force to a premium force on the company’s share price. In due course GO should also consider placing such overseas forays in one holding “international” subsidiary and list it separately so that investors who consider such overseas ventures too risky for their liking will have an opportunity to exit such risk without having to exit their investment in GO’s domestic operations.

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