The equity research team at Calamatta Cuschieri recently made available to its clients a report on Malita Investments plc “Malita”, whereby we issued a “Buy” recommendation on the stock, together with a one-year target price of €1.03, giving a capital upside potential of 24% as of this writing.

The basis for the recommendation was a portfolio of prime assets, with long-term contractual agreements providing a steady stream of income which is currently contributing towards an attractive gross dividend yield of 4.3%, coupled with excellent growth prospects with below average risk.

The main tenant of the assets is the Government of Malta, which increases the expected stability in the occupancy rates and reduces the risk of possible bad debts.

Currently Malita also receives a sum of ground rent for the land at the Gudja airport which is leased to Malta International Airport plc, whose financial health is unquestionable, as well as for the Valletta Cruise Port site.

For those who are unfamiliar with Malita, it is currently 80% owned by the Government of Malta. As has been widely reported in the media, the Government (via Malita plc) has announced its intention and is in the process of commencing several tendering processes for the building of 680 residential units spread over 16 sites to be made available to lower and medium income tenants.

The income from the leases to the tenants is expected to be largely subsidised by the Government in line with applicable schemes and there reportedly is a waiting list of over 3,000 tenants for social housing.

The company managed to secure a very low interest rate (c. 1.7% fixed) from the European Investment Bank and the Council of Europe Development Bank for this project, further bolstering the subsequent return on equity from the investment.

Due to the material social housing project being financed solely by debt, the significant leverage being applied on a relatively low risk project is expected to reward equity holders handsomely in the medium term.

Malita made clear that it is committed to distribute 60-75% of net earnings (excluding fair value movements and related deferred tax). It currently distributes a gross dividend yield of 4.3%, equivalent to 2.8% net for local investors, and expected to grow.

This compares favourably to other property companies listed on the Malta Stock Exchange who distribute a dividend, who average 2.5% net and yet have arguably more risk.

The contracts secured by Malita have embedded an increase in rental income in direct relation to the inflation rate, therefore investors would expect dividend yields to increase incrementally over time, or the share price to adjust upwards to reflect this reality, resulting in a capital gain or at the minimum compensation for any increases in interest rates.

This offers an element of protection, in contrast to other asset classes including fixed income, who on the other hand, given the longer term outlook for interest rates to rise, are expected to decline in price as yields rise, resulting in a capital loss to investors and diminished return on investment when marked-to-market.

In conclusion, investors should seriously consider Malita to form part of their portfolio if they are looking for a reliable dividend paying stock, with limited downside risk and good return potential. Caution should be taken, however, as the low liquidity of the stock could play a part in your investment decision, and as is a general theme on the Malta Stock Exchange be wary of potentially large bid-ask spreads when attempting to trade the stock.