The Business Observer Newspaper - 27th August Issue

INTERVIEW

Issue 32

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August 13, 2015

Distributed with Times of Malta

As he prepares to bow out, GWU general secretary Tony Zarb looks at the high and low points of his 16-year career. see pages 10 and 11 >

NEWS Betfair has agreed on a £5bn merger with Paddy Power which would create one of the world’s largest betting and gaming groups. see page 3 >

NEWS

GO Forthnet shares worth €14m GO’s shareholding in Forthnet is currently valued at approximately €14 million, according to the current share price of Forthnet on the Athens Stock Exchange – a far cry from the estimated €125 million it invested in the Greek telecoms company in past years.

Over the past year rival Greek firm OTE showed interest to buy Forthnet’s TV business while Wind and Vodafone, which own 40 per cent of Forthnet, made a joint bid to buy the rest of its shares. Both OTE and Wind/Vodafone made non-binding bids which could result in as much as €40 million for GO’s share.

However, the process to turn these into formal bids has been held up by the political and economic turmoil in Greece.

This is the reason why GO, which holds the shares in Forthnet through its 50 per cent stake in Forgendo, last year reclassified the investment as being “held for sale” and said that the “highly

“e process to turn nonbinding bids into formal ones has been held up by the turmoil in Greece” probable” sale was expected to be completed within 12 months. On its books, the investment in Forthnet is only valued at €6.6 million – and even that is subject to impairment testing.

Save for €6.6 million, all the amount invested has been written off. Any money beyond €6.6 million that might be recovered from the eventual sale of Forthnet will be a bonus to shareholders. It remains to be seen how things will

develop now that GO’s majority owners, EIT, have declared that they intend to sell out their 60 per cent stake.

Sources told The Business Observer that Forthnet would be incredibly difficult to value in the current situation – which might influence a prospective buyer for GO. GO recently transferred around €50 million worth of property into a separate company – Malta Properties Co. Ltd – which will be listed separately on the Malta Stock Exchange. EIT said it intends to retain its shareholding in this new company.

EIT is the primary investment vehicle in telecommunications for Dubai Holding. In 2011 it divested 14 per cent of the 40 per cent shareholding which it then held in Axiom, the UAE-based mobile handset retailer and distributor, and earlier this year it sold its investment in Interoute.

A report will be published soon which analyses Malta’s vulnerability to money laundering – and will recommend what needs to be changed. see pages 5

CASE STUDY Chris Bartolo may be only 22 but that has not stopped him from founding a vehicle tracking company so successful he has already had offers to buy it. see pages 12 and 13 >

e Business OBSERVER

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NEWS

More petrol stations to accept card payments The number of petrol stations that accept card payments is expected to grow considerably once their owners start to install new equipment as part of major upgrades that have to be concluded by 2019.

So far only around one in six of the petrol stations in Malta accept debit or credit cards – either through point-of-sale at the till or at the self-service 24/7 modules.

Petrol station owners have resisted installing the equipment in spite of the fact that the banks’ fee for local cards has been cut to 0.5 per cent.

“Retailers have to pay at least three times that, but banks acknowledged that this is a different sector as both the cost of fuel and the profit margin of four per cent are regulated,” GRTU chief executive officer Abigail Mamo explained.

“Even so, the owners were reluctant. However, we anticipate

that once they start to invest in the upgrade, they will take the opportunity to add the service as there is no doubt that cash handling has its own costs and security risks. And as a customer service, accepting cards is also a competitive advantage – especially for foreigners,” she said.

Petrol stations will be spending an estimated €21 million to bring their sites into line with an EU directive aimed at making them safer, as well as more environmentally friendly, by cutting down on fumes, leakages and emissions.

According to a GRTU study, around 80 of the 90 petrol stations in Malta need to change all their equipment, from the underground storage tanks and petrol pumps to all the piping. At the moment, plans for the upgrades are on hold until the Mepa demerger determines which department will issue the appropriate authorisations.

Gambling firms Betfair and Paddy Power in £5bn merger talks Online gambling company Betfair and Irish rival Paddy Power said yesterday they had reached an agreement in principle on a £5 billion merger, marking the latest in a string of deals in the sector.

The two firms said discussions were ongoing regarding some terms of the all-share merger that would create one of the world’s largest online betting and gaming groups with revenues of over £1.1 billion.

“We think this is a very attractive opportunity, the scale and capability are unsurpassed and would leave us in a much better place to compete in our current markets where competition is intense,” Paddy Power chief financial officer Cormac McCarthy told Reuters in a telephone interview.

Under the terms, Paddy Power shareholders would own 52 per cent of the group with Betfair shareholders owning the rest. Immediately prior to completion – expected by December or January because of regulatory issues – Paddy Power shareholders would receive a special dividend of €80 million, the firms said.

The tie-up would be the latest in a flurry of M&A deals in a sector where companies are responding to higher tax bills in Britain and tighter regulation by seeking to bulk up and better compete in the fastgrowing online market.

During FY2014 Betfair obtained a gaming licence in the UK and began paying Point of Consumption tax following its introduction in December 2014 – £19.2 million in financial year ended April 30, 2015 and £12.8 million in the first quarter.

“Although timing remains uncertain, we expect a new gaming tax regime for Ireland to be in place by

August 2015 and are seeking to obtain a licence. If both taxes had been in place for the whole of FY15, we estimate that the cost would have been approximately £47 million,” Betfair chief executive Breon Corcoran said in the annual report.

Paddy Power is the larger of the two firms with a market capitalisation of €3.46 billion, versus £2.43 billion for Betfair, which has seen its shares rise by 140 per cent in a year on the back of strong revenue growth.

Betfair was founded in 1999 and holds gambling licences in the UK, Gibraltar, Malta, Spain, Italy, the United States, Australia, Bulgaria and Denmark. It has more than 1.7 million active customers and reported revenues of £476.5 million for the financial year ended April 30, 2015, and profit before tax of £101.2 million.

The chairman of the Malta Gaming Authority Joseph Cuschieri was not surprised by the development but said that it was too early to ascertain the impact on Betfair’s sizeable operations: “We have been seeing this consolidation trend in the industry for quite some time now. This has been happening at the ‘big player’ level mainly to increase scale and scope.

“It is of course a very interesting development to see two large gaming players like Betfair and Paddy Power engaging in merger talks. However, it is too early to say how this will affect Betfair's status in Malta because it depends on their eventual postconsolidation strategy. At this stage we are monitoring developments but cannot comment any further.” (Additional reporting by Reuters)

e Business OBSERVER

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NEWS

Report to hone in on money laundering weaknesses A report due to be completed shortly will point out the structural risks and weakness in Malta’s attempts to prevent money laundering. The so-called National Risk Assessment is an exercise that is aimed at assessing the money laundering risks prevalent within a jurisdiction through a study of the threats and vulnerabilities.

Since Malta’s legislation is largely in place, the focus of the report will be on determining whether the country’s institutional set-up is adequate in terms of monitoring, law enforcement capabilities, prosecutorial resources, asset tracing and asset management capabilities and other related areas. The report should also hone in on the main internal and external threats, identifying also those services and sectors that expose the country to higher risks and would therefore require more robust due diligence.

“Do the statistics available on the type of prosecutions and convictions, and figures for confiscations convince us that the systems are working effectively in practice,” the FIAU director Manfred Galdes asked during a recent Powerpoint presentation on the progress of the report.

“Results must lead to action!” he concluded, referring specifically to the fact that this exercise will now place the authorities in a much better position to allocate human and other resources to the areas where vulnerabilities are identified. Financial operators and practitioners will also be able to focus their efforts on the areas that pose a higher risk.

Since this exercise is mandated by the revised FATF Recommendations, similar reports are being prepared in a number of jurisdictions, with Malta being among the first to complete the exercise.

The process for the nationwide analysis was started in November 2013, led by the FIAU, which brought together 60 people in seven working groups. The methodology being used is the World Bank’s, which is widely used and provides an effective basis for comparison.

The Malta exercise, however, differs from many of the others

being carried out as it involves participation by operators within the private sector, enriching the results through their granular knowledge of the sectors as well as their understanding of product flaws.

In fact, the World Bank has asked the FIAU to present the model to other financial intelligence units as a clear example of best practice.

The report is also necessary for the country to make the major shift envisaged under the EU’s 4th AntiMoney Laundering Directive, which came in force last June, towards risk-based customer due diligence and risk-based supervision.

Member states have two years in which to implement these changes.

The directive brings about numerous other changes, one of which will be the imposition of strict anti-money laundering obligations on remote gaming companies.

Although land-based casinos were covered by the 3th Directive as an obvious potential channel for illegal funds, online activity was simply not on the radar at the time.

It will also clamp down much more tightly on the identity of the

FIAU: 2014 AT A GLANCE • In 2014, the Financial Intelligence Analysis Unit received 233 reports of suspicious transactions, of which 27 were passed on to the police for further investigation.

• During 2014, there were six money laundering convictions involving seven persons.

• 81 per cent of all the reports involved at least one foreign natural person or legal entity, of 55 different nationalities.

• Over 74 per cent of the cases referred to the police in 2014 involved the use of bank accounts in Malta.

• One or more companies registered in Malta were noted in a third of the cases referred to the Police.

• In nearly half the cases, the subjects had received services from Maltese professionals and service providers.

beneficial owners of companies and the beneficiaries of trusts.

An information register of beneficial owners will have to be set up and its contents will have to be made available to not only the police and the FIAU, but also to service providers like banks, lawyers and other entities carrying out customer due diligence together with the somewhat vague category of those persons or organisations that can demonstrate a “legitimate interest”.

“There is no doubt that the aim of the initiative is to encourage transparency and to mitigate the risks posed by the misuse of corporate structures or trusts by persons having criminal intentions.

“Fiduciary services in themselves are not the problem. The issue is that the possibility of obscuring the ownership structure of a company through the use of a fiduciary company holding shares on behalf of others opens a win-

dow of opportunity for those persons wanting to use the corporate structure for illicit purposes,” Dr Galdes said.

“There are, of course, other risk factors that we need to keep an eye on, including the influx of the proceeds of crime through cash-based businesses that may be set up in Malta or that may be transferring funds to Malta from other jurisdictions. Our job, along with other supervisory authorities, is to ensure that Malta is a tightly-controlled jurisdiction and that it is not used for criminal purposes.

“The report will look at the internal and external threats and vulnerabilities, with the aim of identify the main areas of risk.

“Our assessment started by looking at the policy-making and supervisory structures, but it also looked at how many prosecutions and investigations there were, how many of these had an international dimension, and at the value of frozen and confiscated assets. The report will conclude whether these figures are satisfactory for a jurisdiction that has become an important financial centre.”

The FIAU has strengthened its resources significantly over the years.

When it was set up in 2002, it only had four staff members whereas it now has 25. And while the unit had no compliance officers in 2008, a team is now well established.

The FIAU, with the assistance of the Malta Financial Services Authority, is required to monitor close to 2,000 entities and individuals, assessing whether their anti-money laundering obligations are being met through off-site examinations and onsite inspections.

At the same time, the FIAU is also involved in the analysis of information received through STRs and from foreign financial intelligence units and in instigating its own investigations.

The risk assessment report should be submitted to government in the coming weeks.

The exercise will be repeated in three to four years to ensure any new trends are picked up as promptly as possible.

e Business OBSERVER

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INDUSTRY FOCUS

Taking a byte from the IT sector The IT sector in Malta is flourishing, with revenues of €694 million in 2014, an increase of 10.2 per cent over the previous year. Over the past decade, its share of Malta’s gross value added has more than quadrupled, from 2.18 per cent to 10.09 per cent. But this success has brought with it intense competition, with many firms seeking niche markets in order to survive and grow.

Mid-tier audit and advisory firm Nexia BT identified the need for better IT governance in the local sector and saw an opportunity.

“Everyone recognises IT as important, but unfortunately it is often merely regarded as a cost centre. Often businesses engage in expensive IT investments or go to the other extreme where not enough investment to support business growth is undertaken,” the manager of its specialist advisory services Owen Baldacchino said.

“Everyone recognises IT as important, but unfortunately it is often merely regarded as a cost centre”

“Often, when disasters strike and not enough planning would have been done to mitigate the situations, it would be too late to salvage matters as the damage would already have been done. Through our approach, we analyse how IT strategy is aligned with business strategy and then we design controls to measure the effectiveness of this alignment. Clients that acted on the report findings have reported immediate benefits such as process efficiency, resource optimisation and therefore cost savings.”

Databyte has also focussed on security as one of its product ranges. Director Frederick Micallef said that companies tend to drag their feet when it comes to security instruments for their IT systems – with potentially dire consequences.

“Many a time, they need the services of security specialists and consultants or, worse still, an unwelcome mishap resulting in data or operational loss before they are nudged into taking security up a notch or two. There is no hard and fast rule to indicate a ‘set’ percentage as a guideline to IT investment in security products, but 10-15 per cent is a good indicator,” he said.

Vioside, on the other hand, has specialised in apps for a range of companies and organisations, aware that the ubiquitous mobile phone can be an invaluable tool.

“It is true that a mobile phone can easily be a distraction during both our work and personal lives,” Chris Borg, co-founder and software developer, said.

“However, at work, one can get into the habit of using apps only to plan ahead or to assist during the

current task. With this discipline in practice, mobile apps can prove to be a great tool to improve one’s life – as long as the phone is put back down so as to get back to the task at hand!”

DataTech Consulting (Malta) prides itself on its approach towards the all-important SME sector, which very often cannot afford – or justify – the systems designed for much larger companies.

Paul Baldacchino explained that there are enterprise resource planning solutions, such as SAP Business One, specifically designed for use by SMEs. “SMEs can opt for one application costing under €1,000, which will help them manage an entire business from sales and customer relationships to financials and operations. Such a system would help a small business streamline operations, act on timely and complete information, and accelerate profitable growth,” he said.

Websites have come a long way since the world wide web was

launched and The Other Guys has opted for creativity as its unique selling point, obvious from the moment one visits the company’s own website. However, standing out from the rest of the crowd cannot come at the expense of function.

“Corporate companies and businesses have, without a doubt, become more open to being creative or stepping outside the box. The web industry evidently shows that sometimes design can prevent function, and the key to finding the balance is understanding the business and its consumer. Every brand has a personality; our job is to project that in a cost-effective and engaging way,” founder and director Jason Potter explained.

As companies grow, the IT services required become ever more complex. This is where SG Solutions steps in, helping them to use the cloud to their advantage.

“Most SMEs rely on one or two IT administrators to manage their IT systems. These administrators generally do not have the special-

ist skills required to manage complex IT systems, such as e-mail, databases, business continuity etc and rely on ICT service providers like ourselves to help implement and manage their systems. At the same time IT budgets have become tighter, but requirements for IT systems to be ‘always online’ have become more critical,” the senior manager for enterprise solutions Kenneth Bowman said.

“We have therefore seen many of our customers beginning to look towards the cloud as an opportunity to reduce their ICT costs. We have invested in our own cloud infrastructure and hosting services – PlumCloud.com Hosting Service.

In this way they can benefit from enterprise-class solutions at a fraction of the cost required were they to invest in their own IT infrastructure. They also benefit from the expertise of a highly-skilled team of specialist engineers who monitor and manage the systems on a daily basis.”

e Business OBSERVER

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INTERVIEW

PHOTOS: CHRIS SANT FOURNIER

e right risks for the right strategy Fimbank posted an interim after-tax loss of $8.64 million, compared with a profit of $1.45 million registered in the same period in 2014, after an unprecedented clean-up of legacy cases and run-offs, which saw net impairment losses reach $8.56 million. Newly-appointed CEO MURALI SUBRAMANIAN spoke to VANESSA MACDONALD In most other jurisdictions, if a board had approved purchases of factoring operations overseas which resulted in much of the $53 million loss reported last year, they would have been forced to resign. Why did this not happen?

The results were the outcome of a thorough and conservative review, which took into account the possible direction this was taking – as opposed to a realised, crystallised number.

I fully agree that, if it had been a crystallised number, that would have resulted in some very abrupt endings for a lot of people, including those responsible for governance.

This was a bit different, to the best of my understanding. The initial estimation of the loss for that period was significantly lower, but a drastic revision of the books of the various subsidiaries resulted in a conservative assessment

which meant that it was prudent to take a much greater provision.

Was it necessary for Fimbank to embark on such an empirebuilding, spending spree over the last few years?

We will see whether that is proven. I would say the greatest issue was not the strategy but the execution.

If there is one thing that we have learned from these years of having invested, it is not that expanding or investing in subsidiaries, in and of its self, is to be avoided. Rather, any such investment must be preceded by a thorough assessment of our ability to govern it and to derive the results expected from it.

Fimbank will get another injection of $250 million from your majority shareholders. How is this going to be used? Which segments will you boost?

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INTERVIEW

Some of it is a matter of internal commercial practice, which I am not at liberty to disclose. But I would start by clarifying the word ‘injection’ as that is used for capital. This $250 million is just liquidity from our majority shareholding group, which will come in two tranches. We will use it for various purposes, including repayment of the expensive funding sources that we currently have. We will also allocate amounts across diverse parts of the group – including across various subsidiaries.

Factoring activities overseas seem to be at best breaking even, but otherwise lossmaking. Is this the best use of the bank’s capital?

Seeing the results as they are at this point in time, it would seem not. But, the reality is that these franchises have significant economic potential to perform far better. The reason that factoring continues to be interesting to us is that it offers a much better return on equity than more traditional businesses like trade finance and forfeiting.

It is a much riskier business, something which has been reflected in your Fitch ratings for years and years.

The Fitch credit ratings, to the best of my knowledge, reflect more how we have done it rather than the nature of the risk we incur in the businesses we are in.

Factoring as a business is riskier, for sure, but there are mitigants available, as with every business. Insurance and bank guarantees are two ways to do this – and working in industry sectors the technicality of which we understand, and where we recognise the relative stage in the business cycle. And then of course, there is operational practice. We have the necessary human capital and balance sheet capital to deal with all this.

It goes without saying that the level of expertise that Fimbank possesses in conducting factoring practice is quite professional. I have seen that for myself. But

I would say we have room for improvement. I can’t pretend that there are any easy wins but if we look carefully at our business model, factoring would require a lot more investment, given the right governance.

Trade finance and forfeiting would probably allow us to make those investments because they have the ability to scale up the balance sheet and therefore up the revenues.

Factoring, on the other hand, is a very slow build but a more sustained one. Once it starts building there is a tipping point at which the margins start to show the benefit of the business.

The current business mix allows us to reduce the cost-to-income ratio by growing revenues, without the need to significantly slash costs. It is important to resist the temptation to cut costs by doing away with control structures that we think are redundant – but which may come of use.

equally the market respects Fimbank for what it can do.

How it has delivered those results is another matter...

You had so many impairments in the factoring businesses, so many bad judgements. Is that something that we will no longer see going forward?

Hopefully, yes! And not entirely because I am here. We have evolved from simply acquiring geographic spread to one where the present geography needs consolidation. As you know, an area that is no longer seen as being part of our core operation – namely Russia – is being divested.

The current operations are seen as core to the bank’s identity and future. We are working on strengthening their governance and the CEOs of these firms come from backgrounds that we are comfortable with. The boards consist of people who are more interested – although on a nonexecutive basis – in observing and guiding on the courses of action, as opposed to relegating that responsibility to a small group of people who could take the company in a different direction.

With the best of intentions, there will still be occasional flare ups and surprises. But the systematic loss of value that we have seen in the past is, in my opinion, hopefully largely a thing of the past.

Are you going to keep Easisave? If so, why?

Easisave has traditionally provided us with a supply of retail liquidity, at pricing that is comparable to what we can source it at right now. We do not have a retail bank and we are not likely to change strategy significantly and set up a retail bank in the very short-term.

Hopefully, as operations improve and we start showing better results, our credit rating will eventually improve and the cost of funding will go down. That will then lead to a different discussion on new lines of funding.

FIMBANK CEO MURALI SUBRAMANIAN

“e current business mix allows us to reduce the cost-to-income ratio by growing revenues, without the need to significantly slash costs.”

Easisave is a stable funding source which has earned its place.

Our plan is to further enhance the platform by introducing new features going forward.

Then ad interim CEO Simon Lay had admitted when I interviewed him last April that your cost-to-income ratio was higher than that of your peers. What is it and what should it be?

Perhaps we should define who our peers might be because we operate in a unique space of our own. Our efficiency ratio – our

cost-to-income ratio – is probably higher than where we want it to be.

I find it hard to determine who our ‘peers’ might be. And even with factoring, it depends where we are talking about. In a developed country, we are probably on par or slightly higher. If you look at factoring businesses in an emerging market, like India, Indonesia or Chile, then we are probably significantly higher than them, as they are single country operations where costs – in human capital, for instance – are much lower.

Will Fimbank be rebranded as either Burgan Bank or United Gulf?

I would find it hard to comment on that for proprietary and practical reasons.

Our shareholders are very strongly committed to supporting us. A very telling indication of that is my being here.

Clearly, the strong support in terms of equity and funding does provide the market with significant comfort.

We are venturing into newer forms of customer funding, but they will involve testing the appetite for Fimbank standalones, knowing our support structure. What is the brand, on its own, able to command in the way of pricing for institutional wholesale deposits from professional markets?

Our focus is on returning to profitability and generating returns for our shareholders and we will do this by stabilising a platform from which Fimbank can grow and realise its true potential.

e Business OBSERVER

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INTERVIEW

Last port of call When general secretary TONY ZARB retires in a few weeks’ time, he will have been the longest-serving in the General Workers’ Union’s 72-year history. VANESSA MACDONALD asked about some of the controversial episodes of his 16 years.

Is it just my impression or have you been remarkably quiet since Labour came to power? In 2013 there were no strikes, compared to two or three in previous years.

We did not organise industrial action because we found a government that listens.

With the previous Nationalist governments, we used to have a lot of unrest which used to strain industrial relations. We would have to sweat blood just to get a meeting with the minister. Decisions were taken that we simply could not accept. One of the most important was the threat to ban sympathy strikes.

We have had disputes and strikes since this government came to power – for example, two strikes on public transport and directives to health workers – but they did not spread to a national level because we had no reason to stamp our feet! Should we object because the government reduced water and electricity rates? Because the economy is doing well?

But I can assure you with hand on heart that if there are any issues, we will do so.

Since the Drydocks shut down, the GWU has taken a much less militant stand...

Times have changed and we have changed.

The GWU has changed constantly in its 72 years; God forbid that were not the case.

Twenty years ago we would not have even dreamed of considering management to be a social partner; our members would have lynched us. It took perseverance to persuade them otherwise ...

The reduction in number of strikes is not a Maltese phenomenon but something seen in many countries. We are a modern trade union, one that negotiates around

a table, trying to get the best for its members.

But we make it clear when there is something we do not agree with, and will take industrial action if necessary.

The Drydocks closed in spite of a promise that it would not. The first time we met thenminister Tonio Fenech, he told us that the government did not intend to close the Drydocks – but that is exactly what it did. They were not honest with us. And this is why we had trouble: the government would say one thing but do another.

You claim to have 43,000 members.

There is scepticism that membership reports are unsubstantiated or inflated by including veterans. What happened to the verification exercise by the Department of Industrial and Employment Relations?

Every year, we send a report to the Director of Labour, as we are bound to do by law.

The next register will show that we have added thousands of members. In the past two years, workers from no fewer than 68 companies have joined the GWU, such as Lufthansa and the Freeport.

We have taken a number of steps to attract other sectors. We have a section for professionals, for example, and we are accepting associated members, such as the police, soldiers and prison wardens, the Pork Breeders Cooperative and so on.

The GWU has to keep changing to keep up with the times, and that is what I will tell delegates when I leave.

There were disputes at both Freeport and Lufthansa over union recognition. How can

GWU GENERAL SECRETARY TONY ZARB. PHOTO: CHRIS SANT FOURNIER

the system improve? The MEA said that ballots are not proof of membership and wants the numbers of paid-up members.

Ballots are the best way. If two unions are both claiming recognition, then there should be a ballot, which takes only a few weeks. The ballots at the Freeport and Lufthansa were not organised by the unions – although they were able to monitor it – and the result was accepted by all involved.

We have forms to prove who was already a GWU member and also forms for those resigning from the UĦM and joining the GWU now that we won recognition.

The UĦM and the GWU are clearly rivals for membership. Are you negotiating to beat what other trade unions believe they can get – rather than what the business can sustain?

Not the GWU. We do not do such things; this is the UĦM’s tactic.

We take into consideration how the company is doing. I can assure you that there were times when – for the good of the company – we were talking to the management about certain measures and the UĦM came along to lobby for workers by promising that it would not accept these measures ...

A race for membership is not a problem – as long as it is a fair race. The Freeport was a UĦM stronghold, but a delegation of six

workers approached us. The first thing I asked them was why. And they said they believed that they were not getting what they wanted through the UĦM. That phrase alarms me... “what they wanted” ...

There are things that that had been pending for seven years without resolution. We sorted them out in a few weeks ... The same thing happened at Lufthansa Technik: they came to us ...

There have been calls to review the Employment and Industrial Relations Act. What is happening at MCESD? Next to nothing. It has not been reviewed since the 1990s and we should be talking about what needs to be changed. We can only cross our fingers and hope that there will be the sort of discussion we had in the 1990s, which resulted in consensus. This will probably be one of the first issues to be handled by my successor, Josef Bugeja.

GWU officials have not yet been summoned by the Permanent Commission Against Corruption to testify on claims that the contracts undertaken by Malta Shipyards on the Fairmount Fjell and the Fjord were shady. You claim that the shipyards made losses of €80 million.

e Business OBSERVER

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INTERVIEW

The Commission Against Corruption had summoned Sammy Meilaq, from the GWU’s Metal and Construction Section, where he laid before the Commission very important documents regarding the case.

Today, we have no idea if the Commission is even meeting. Nonetheless, we are still calling for a public and independent inquiry about the Fairmount.

We do not believe Air Malta is far from its ideal headcount. You cannot compare it to other airlines: it provides other services like engineering, and many of its workers are seasonal.

We heard it will start to use its planes for more hours every day – including night flights.

This means it will need more people. And Tourism Minister Edward Zammit Lewis has confirmed there would be no redundancies.

What are your relations now with Palumbo, which took over the ’yards?

Very bad. There was no communication with Palumbo since after the meeting we had in the presence of Malta Employers’ Association (MEA) officials. We are today convinced that yard workers are very reluctant to join the GWU as they fear repercussions on their employment.

Palumbo is employing a number of foreigners, even though there are competent Maltese. We also have major doubts as to whether he is complying with all the terms and obligations of the concession. Did he take equipment from the yards here to his other yards? I haven’t seen the agreement but I doubt that it would have allowed him to do so!

You have heard this so often before: do you believe this government?

Heaven forbid they do not keep their word!

For years, the Drydocks made a loss. Now you have Palumbo who is getting contracts and making money. Isn’t that better? Isn’t this partly due to the fact that there was not enough flexibility before?

There is a difference between flexibility and exploiting workers. We have no problem with the former and had agreed with the Nationalist government on introducing this in the ‘yards.

In 2001 the union did not want to work on the US navy ship, the La Salle, because of concerns over the islands’ Constitutional neutrality, but in 2003 it had no reservations about the $7.7 million contract. What was different?

We agreed to do the work both in 2001 and 2003.

In 2001, only after a showdown with the Prime Minister ...

There was a long discussion within our national council about both contracts. And it was felt that the work could go ahead under certain conditions.

We are missing out on a considerable amount of navy ships because we have not signed the State of Forces Agreement with the US. Do you feel that the theoretical possibility of it being abused is worth the loss of revenue?

THE US NAVY SHIP, LA SALLE, AT THE DRYDOCKS IN 2003.

PHOTO: DARRIN ZAMMIT LUPI

“My most important achievement was keeping the GWU going through 25 years of Nationalist government” We need a discussion on this at a national level, not only with the government and Opposition but also with trade unions. A solution needs to be found so that revenue is not lost.

We should not accept work under all circumstances, nor at any cost ... Personally, I do not agree that ships and planes involved in a war – wherever it may be – should be repaired here. We should not rush things; the government should consult on this issue.

One of the lowest points of your career must surely have been the privatisation of the national shipping line Sea Malta in 2005, after 16 months of failed negotiations.

I always said that Sea Malta closed because of former minister Austin Gatt. We gave him our proposals on how it could be saved but he was negotiating behind our backs with Grimaldi. His intention was always to bring its back to the wall so that he could give it to them ... It was not my fault or the GWU’s.

So you are admitting that in both the Fairmount and the Sea Malta cases, the GWU was outmanoeuvred by the government. It means you were very naïve ...

One of my shortcomings was that we went there with an open mind to discuss and the Nationalist government was not genuine.

When they said that it wanted to sort things out, I believed them ... It always knew what it wanted, whether we were talking about Sea Malta, Air Malta or the Drydocks.

What is really happening at Air Malta?

We are ready to discuss with the government and the company, just as we did with the previous government. The discussions should find a way for it to carry on operating without workers losing their jobs.

We have not been contacted about the possibility of a strategic partner. If the government finds someone who could save the airline and its jobs as a minority shareholder, then we think we could find a way forward.

A strategic partner would almost certainly want to reduce the workforce, just as Go and HSBC did ... What would your stand be if the options were to reduce the workforce or shut down the airline ?

Over 800 workers had already been cut from the workforce over the past four years.

The setting up of the Malta Dockers’ Union in 2006 must also have been a thorn, representing the loss of 312 port workers previously your members ... What could have been done differently?

There were people within the union who wanted this exodus. They waited for the right moment – when I was not in Malta – and acted then.

Five years ago, there was a ballot among dockers, supervised by lawyer Ian Refalo, and they declared clearly that they wanted the GWU. But the government did not recognise the ballot and asked the Director of Labour to check on the situation, but no numbers were ever made public ...

We have now got very good relations with the MDU’s new council.

You were the first union to raise the issue of precarious work. Has anything changed?

I irst spoke about it in the context of the construction industry. It affected me personally as a number of threats were made, including death threats – I suspect by someone involved in the construction industry. There were many episodes during my tenure as general secretary when I had to have a policeman posted outside my door.

But I refused to back down and we started to try to sort things out with the Nationalist government. We have made significant inroads since the Labour government came to power. But there is much left to be done. I can assure you that the GWU will keep this issue on the front burner.

What was your greatest success? What was your greatest failure?

I will start with the second. There were occasions when I went to discuss important things with the Nationalist government and it said one thing but did something else. I think I trusted them more than I should have.

The most important achievement in my career was keeping the union going through 25 years of Nationalist government.

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CASE STUDY

Being in the right place November 3 will be a big day for Chris Bartolo. It will be one of those moments that could so easily turn into a life-defining moment – and yet, the ways things have gone in the past four years, it seems certain that there will be many other such turning points.

He will be representing his company, Dazzle Panel, as a beta start-up at the Web Summit in Dublin – representing their designated top 15 per cent of start-ups from around the world.

Mr Bartolo has already paid back all the private investors that helped him turn his student dream into a reality. He has had a number of offers to sell the company and is already working on the next phase of products and projects. Not bad for someone who is only 22.

It all started with an assignment at the University of Malta, where he was reading for a BSc in IT and Artificial Intelligence. It was all about intelligent bus systems and he got to thinking.

Unlike so many of his peers, however, he did not stop there.

He started working on software for tracking devices and by October 2011, while he was still at university, he already had several clients who had a small fleet of vehicles – and a few months later, their numbers had grown exponentially.

“At the time I was doing freelance work on content management systems (CMS) for local and international clients. What I

DAZZLE PANEL’S EVER-INCREASING CLIENT RANGE INCLUDES TAXIS, DELIVERY VANS, COACHES AND SCHOOL TRANSPORT. PHOTO: MATTHEW MIRABELLI

“Some clients only need basic information – where the vehicles are and if they are on time. Others might want to make sure that the driver is not sleeping in the vehicle with the air conditioning on”

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CASE STUDY

thought would be a small side project turned into a fully-fledged business,” he said, adding that he kept the name of his CMS ‘dashboard’ as the company’s name: the Dazzle Panel.

What the company does seems quite straightforward on the face of it: it imports tracking devices, configures them and develops the software and servers to run it. As with most things, the devil is in the detail.

In Mr Bartolo’s case, success came from thinking outside the box.

“So much software is based on old technologies since developers prefer to stick to the tried and tested. For example, many live systems process forced updates every few seconds. Why not challenge that?

“Also we were catering to Maltese from every sector and every educational background. Even the wording of interfaces is often too technical for most people. We pride ourselves on offering something that everyone can use,” he said.

He recently presented the tracking system to a company in Israel which has its own tracking system and has sold over a million tracking devices over the years.

“They were blown away by it,” he smiled.

The business model is based on software-as-a-service, which means clients save considerably on the upfront cost – which in turn means regular monthly revenue for the company, but a steep capital investment by Dazzle Panel for the devices and set up. However, with clients already at the door, he never had to go to the bank to seek financing and is even now using profits to grow the company.

The devices range from basic ones which report where a vehicle is using GPS or GSM, to ones with functions like monitors for airconditioning usage, temperature sensors for refrigerated trucks, fuel sensors and even driver behaviour monitoring.

“Another thing is that normal tracking devices just update every few seconds and stop there. Our systems are more efficient and faster because we also do ‘events’.

We know if you have an accident, if the driver stops, accelerates or turns suddenly, if he overspeeds...” he explained.

“It is all about awareness of fuel use as well as about punctuality.

Some clients only need basic information – where the vehicles are and if they are on time. Others might want to make sure that the driver is not sleeping in the vehicle with the air conditioning on...

These are all extra costs.”

The companies choose what level of information is relevant – but tracking is not about checking up on your staff. It is also about reducing operational costs – and these can be reduced by as much as 25 per cent or more.

Dazzle Panel now provides tracking services to everything from taxis and delivery vans to coaches and school transport but you would never know it to pass by the main office, just round the corner from the Sliema police station. Mr Bartolo is the only person in there at the time of the interview, dramatic proof of how IT has changed office life.

“We are not a big team but we can all work just as easily from

AT 22, CHRIS BARTOLO HAS ALREADY PAID BACK ALL THE PRIVATE INVESTORS THAT HELPED HIM TURN HIS STUDENT DREAM INTO A REALITY.

“We were catering to Maltese from every sector and every educational background. Even the wording of interfaces is often too technical for most people.

We pride ourselves on offering something that everyone can use” home as from here! It is much easier than trying to find parking. And after all, everything they do is also tracked,” he laughed.

“My phone is always by my side.

And we have developed it in such a way that we can test and fix any problems on our phones, too.”

The problem with such a meteoric rise is knowing when to stop, when to sell out, when to expand.

He is clearly in no hurry, preferring to help his company reach its full potential. He will be graduating next month, having completed a masters at the University of Hertfordshire by correspondence.

And the company already has a number of innovative projects to launch next year.

And, of course, there is the Web Summit in Dublin – “the best technology conference on the planet” – and the chance to mingle with 22,000 attendees from more than 100 countries.

One things seems certain: he plans to dazzle them.

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e Business Observer is Malta’s leading business newspaper distributed with Times of Malta every fortnight.

Editorial Vanessa Macdonald, Head of Content (Business), Times of Malta.

EDITORIAL

Shadows falling across the ‘vision’ Finance Minister Edward Scicluna had much to smile about at the press conference called last week to present the pre-Budget document. The 86-page document, entitled Delivering Our Vision, was studded with charts showing positive trends, with unemployment, inflation and deficit sliding gleefully downwards and gross capital fixed formation, employment and gross value added, to name but a few, striding confidently upwards.

Fitch Ratings was just about to confirm credit rating, reflecting the gradual improvement of Malta’s public finances, helped by strong economic growth and lower nominal interest expenditure. Forget what the minister said; it is always nicer to hear it from someone independent: Fitch said the headline fiscal deficit should fall to 1.8 per cent of GDP this year, with total revenue/GDP reaching a record high of 42.8 per cent.

The document outlined more of what we heard last year: tweaks to successful and less successful programmes; projects to ensure that people are weaned off dependency and are helped to help themselves. The measures introduced in the past two years may not have been lavish or dramatic. But look at the unemployment register and the female participation rate to judge whether they worked or not...

The minister made one telling remark: you don’t always need to spend money to improve things. That does not necessarily mean, for example, that providing free child care does not cost the government. It means that it recoups what it spends on the service through direct revenue like tax and national insurance from the working mother (not to mention a host of other indirect benefits like more disposable income for the family). The same thinking works for training the unemployed, preventative medicine and public-private partnerships. The age-old cliché holds: you need to break an egg to make an omelette.

Unfortunately, the slow and steady improvement in macroeconomic

indicators is being completely eclipsed by the shenanigans of other ministers, and incredibly short-sighted lapses in governance of staggering cheek that will not easily be forgotten by the electorate. And there are far too many projects which are simply ‘missing in action’.

There was hope that this government would succeed where its predecessor had so dismally failed, but half way through the legislature, there is still no sign of progress at either White Rocks or Marsa Shipbuilding, no matter how many reassurances we are being given that all is in hand.

There was one other shadow cast across the press conference: the news that manufacturing gross value added in the electronics sector was down by 40 per cent. A little digging revealed that this was the result of a downturn in ST Microelectronics’ performance. Imagine. One of Malta’s leading exporters, which employs 1,600 people, and represents a staggering 47 per cent of the island’s exports, reports a loss of $26 million in 2014. And the only comment from the government was a trite comment that “ST was expected to weather this phase”.

Consider that this company reported a profit of $145 million in 2011 and an income of over $1.1 billion. Last year revenues dropped to just $707 million.

The financial report gives little clue as to what caused this massive drop. The global group reported fairly stable revenues and profits for 2014 – so the downturn does not seem to be due to structural changes in the market or prices of semi-conductors.

The General Workers’ Union is currently at advanced stages of negotiation of the collective agreement and this is undoubtedly a sensitive time for this company which has always had the power to wag the government’s tail, so important is it to the Maltese economy.

The company has failed to reply to questions from The Sunday Times.

The government’s assurances are woefully inadequate.

What is going on there?

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BUSINESS OPINION

Private writings and recent court judgments

Conrad Portanier Maltese civil law traditionally distinguishes between agreements or acts that need to be done (a) by means of a public deed before a notary public (e.g. transfers of immovable property), (b) by means of a ‘private writing’ (skrittura privata), (c) by means of a simple document ‘in writing’ (is-semplici kitba) and (d) verbally.

Recent laws have introduced some novel concepts, but the latter are beyond the scope of this article, which relates specifically to the ‘private writing’ (skrittura privata).

Some documents under Maltese law need to be expressed, on pain of nullity, in a public deed or a ‘private writing’, while in other cases it is sufficient if these documents are simply expressed ‘in writing’. For example, whereas an agreement to transfer shares needs to be ‘in writing’, a konvenju or a pledge over rights must be made either by public deed or by ‘private writing’.

The law requires additional formalities when it comes to ‘private writings’. For example, where the private writing is not signed by

“Signing documents in counter-parts is the norm in today’s financial world, and departing from this would be a step in the wrong direction” each of the parties, it must be attested in the manner prescribed

by Malta’s procedural laws. These additional formalities are not applicable to contracts which need to be simply ‘in writing’.

The cause célèbre in this regard is Gerald Vella et vs Joseph Cassar noe (Court of Commercial Appeal – 24.IV.1967). To paraphrase the main reasoning of the court: “The term ‘private writing’ needs to be used and understood in a restrictive manner. The law

certainly does not require that the two signatures are signed at the same time (Il-liġi ċertament ma teżiġix il-kontestwalità talfirem), but surely the law requires the unity of what is being signed (iżda indubbjament teżiġi l-unità tal-kontest).”

The court then establishes that an exchange of letters can constitute a private writing when it contains all elements which are essential to a contract and when the parties are ad idem (i.e. in agreement on the same thing).

This judgment establishes the important legal principle that even an exchange of letters may satisfy the requisites of a skrittura privata.

Fast forward to this day. Even a contract signed in counter-parts between a creditor in London and a debtor in Malta need not be signed on the same page, but it is sufficient if the same contract is signed remotely and then signatures are exchanged, sometimes even in PDF form. Recent court judgments have referred to Vella

vs Cassar and have indicated that a private writing must be made on the ‘same document’ (fuq l-istess dokument).

One such judgment was S.G. South Ltd vs Joseph Scicluna et (First Hall, Civil Court – 2.IV.2004), where the court quoted Vella vs Cassar as saying that both signatures need to be signed on the ‘same document’.

Recently this same exact wording was used by the Court of Appeal in Id-Direttur tal-Artijiet vs.

Mediterranean Film Studios Limited et (17.III.2015), which attributed to Vella vs Cassar the requirement that signatures must be “fuq l-istess dokument”.

The phrase l-istess dokument is ambiguous. It could mean: (a) that although parties can sign a ‘private writing’ in counter-parts or by exchange of letters, it is necessary that they sign a document which is identical in content; or alternatively (b) that they need to sign on the same physical document. It is submitted that the former interpretation is the correct one.

Vella vs Cassar never required that a private writing contain signatures on the same physical document, but simply established that the parties needed to be in agreement as to what they were signing. Signing documents in counter-parts is the norm in today’s financial world, and departing from this would be a step in the wrong direction.

Conrad Portanier is a partner at Ganado Advocates and a visiting lecturer at the Faculty of Laws, University of Malta.

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NEWS

Unit labour costs ‘not excessive’ A report by the Central Bank of Malta should dispel oft-expressed concerns that the unit labour costs in Malta are making the islands uncompetitive.

CBM senior research economist Brian Micallef has found that the developments in unit labour costs were not excessive.

“Since before the crisis, pronounced structural changes have occurred in the economy, with diversification of its economic base and a shift from traditional industries towards higher-value-added activities, mostly in the services sector.

“ULC growth in Malta is broadly comparable to Finland, which has registered a broadly comparable decline in the share of manufacturing industry.

“That said, Maltese industry has improved its competitiveness over the last 15 years, whereas there was a slight deterioration in Finland’s,” the report said.

Malta’s ULCs grew by an average of 2.2 per cent between 2010 and 2014, the highest increase in the EU – but productivity contracted by 0.3 per cent on average, compared with the eurozone increase of 0.9 per cent.

The report also quoted from the Wage Dynamics Network survey, which said – in stark contrast to official statistics – that increases in costs between 2010 and 2013 were matched by gains in labour productivity – with 25 per cent of firms reporting that they had exceeded it.

“This could be, to a certain extent, the result of the difficulty of accurately measuring output in an increasingly serviceoriented economy,” Mr Micallef wrote.

The key to understanding these results is to look at the shift from traditional industries to higher-value-added activities – mostly services.

By 2014 Malta’s share of services was one of the highest in the EU, in line with that in the UK and Ireland. This coincided with the largest drop in manufacturing gross value-added, matched only

by Finland’s.

However, while Malta increased its services sector, Finland did not, the report says.

“This may explain why Malta’s economic indicators, unlike Finland’s, still showed a positive macro-economic narrative in spite of the drop in the importance of manufacturing,” it said.

“At sectoral level, the gap between hourly costs in Malta and the European average varied”

Malta’s manufacturing ULC in 2014 was 17 per cent below its 2000 level, whereas in Finland’s it was three per cent above.

With the exception of Bulgaria and Romania, the lowest labour costs per hour were recorded in the Baltic countries – less than €9 per hour – and the highest in Scandinavian and core European economies – from €30 to slightly higher than €40. In 2014 average hourly labour costs stood at €24.60 in the EU and €29.20 in the eurozone.

Labour costs in Malta, at €12.30 per hour in 2014, rank at the lower end of the table, generally higher than in the Baltic and Eastern European countries but lower than in most other eurozone economies.

“This information suggests the Maltese economy is quite competitive in terms of labour costs compared with other eurozone countries, even maintaining its cost competitiveness despite the reduction in labour costs in stressed countries since the financial crisis.”

At sectoral level, the gap between hourly costs in Malta and the European average varied. In the accommodation and food service industry, costs stood at 53 per cent in 2012, reflecting the lowest gap in costs. Costs in the professional, scientific and technical services sectors were just 36 per cent of the European average.

A WORKER AT ACTAVIS’ PHARMACEUTICAL PLANT. PHOTO: JASON BORG

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STOCK MARKET REVIEW

RS2 RS2 Software Software p plc lc

Pre-tax Pr re-tax pr profits rofits ffor or th the e ffinancial inanciial years years e ended nded 31 31 December December 2 2010 010 - 2 2014 014 and and the the six siix m months onths ended ended 3 30 0 JJune une 2015 2015 7 6

P Pre-tax re-tax profit profit (! (! million) miillion)

This is very relevant in the case of RS2 Software. In fact, in recent years revenue and profits from one accounting period to the next fluctuated remarkably and were very much dependent on the timing of licensing contracts.

RS2’s directors again cautioned investors about this likelihood in the recent company announcement by stating that since the performance for a specific accounting period is influenced by revenue recognition criteria, the performance between accounting periods may not be linear.

This may start to smoothen out given the surge in service fee income as well as the growth in processing fees. However, RS2’s financial performance is still somewhat dependent on the timing of new licence agreements, and one cannot simply assume that the profits achieved in H1 2015 will double during the second half of the year.

As such, although the interim ROE is very strong indeed, it would not be prudent to assume that this ratio will be similar at year-end. Notwithstanding any fluctuations in the second half of the year, the 2014 ROE of RS2 at 12.5 per cent was still relatively attractive but somewhat lower than the top achievers, namely Malta International Airport plc and Medserv plc which are both above 20 per cent. It would be interesting to see whether RS2 can achieve this ratio once the 2015 full-year financial statements are published.

So what could one expect from RS2 during the second half of its financial year? It is worth recalling that in the interim directors’ statement published on November 19, 2014, the directors stated that the group is in the process of negotiating a new licence deal with a client in Europe and this was expected to be concluded during the first quarter of 2015. No news of this has so far emerged.

Last November RS2 confirmed that in the area of transaction processing (i) negotiations on a second letter of intent were ongoing and were at an advanced stage,

5 4 3 2 1 0 -1 -2

2010

2011

2012

Pre-Tax Pr e-Tax Profit Profit ((H1) H1)

2013

Pre-Tax Pr e-Tax Profit Profit ((H2) H2)

2014

2015

Pre-Tax Pr e-Tax Profit Profit ((FY) FY)

“Although the interim ROE is very strong indeed, it would not be prudent to assume a similar ratio at year-end”

while in the interim directors’ statement published on May 13, 2015, the directors indicated that contract negotiations are taking place with a UK company; (ii) negotiations on new letters of intent were ongoing with potential clients across Europe and North America.

In both instances, no further updates were provided in the recent announcement.

Presumably, RS2 will be updating on the progress achieved in each of these cases as they occur.

In addition to all the foregoing, during the AGM held on June 9, 2015, Mr El Haj confirmed that the licence agreement with the Vietnamese bank was an important step to achieve further penetration across the Asian market, and RS2 was also targeting other potential clients in Asia.

RS2’s immediate strategy also involves penetrating the market in the US, and during 2014 it increased its equity stake in the US company Transworks from 25 per cent to 64 per cent. This vehicle is being used to expand the group’s business in the US. At the AGM, the CEO hinted that some positive developments could materialise in the months ahead. Furthermore, last week’s announcement revealing the appointment of John Elkins to the board of directors of RS2 could also be linked to the company’s expansion strategy in the US. Mr Elkins has extensive experience in the industry, having served as executive vice president and chief marketing officer for Visa International and more recently as president and executive manage-

ment committee member (International Regions) of First Data, a global electronic payment processing enterprise, with operations in 35 countries. Additionally, the news release published by RS2 on this new appointment reveals that the company has worked with Mr Elkins at First Data since 2011 and believes that Mr Elkins’s tremendous knowledge of the payments industry should enable RS2 to continue its global expansion strategy.

RS2’s share price has by far been the strongest performer in recent years. After the 2-for-1 share split in mid-June the equity traded up to a new record and touched €2.26 on July 20 before easing to €2.05 last week.

Following the publication of the interim financial statements, the share price rebounded sharply and

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report. © 2015 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

traded up to a new record high of €2.30. The strong rally over the past three years increased the market capitalisation of RS2 from €20 million to over €200 million.

RS2 is now the seventh largest company on the Malta Stock Exchange and its market capitalisation exceeds many of the longer-established companies’.

RS2 now needs to conclude a number of the international contracts referred to in recent months and communicate these to the market accordingly to justify the significant increase in its market capitalisation.

Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd. www.rizzofarrugia.com

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STOCK MARKET REVIEW

Profitability at RS2 Software more than doubles in the first half of 2015 CHAIRMAN MARIO SCHEMBRI (LEFT) AND CHIEF EXECUTIVE OFFICER RADI ABD EL HAJ DISCUSSING A REFURBISHMENT PROJECT AT RS2’S HEADQUARTERS IN MOSTA. PHOTO: CHRIS SANT FOURNIER

Edward Rizzo The interim financial statements published by RS2 Software plc on August 14 may have caught investors and financial analysts by surprise. Few would have possibly expected such a strong increase in revenue and profitability during the first half of 2015, given the lack of any major contracts announced by the company.

RS2 reported a 48.5 per cent increase in revenue to €11.5 million, and pre-tax profits surged by 121 per cent to €6.6 million (June 2014: €2.9 million).

The only new contract announced by the company in the first half of the year was the licence agreement with Viet Capital Bank, a bank in Vietnam, for an undisclosed amount.

Shareholders and market participants who attended the annual general meeting on June 9, 2015 ought to have been less surprised at the revenue and profitability growth in the first half of the year.

In his speech during the AGM, CEO Radi El Haj indicated that the results for H1 2015 are positive and exceeding expectations. The CEO also commented that the second half of 2015 should be very successful for the company.

Unfortunately, the interim financial statements do not provide a breakdown of the various revenue sources split up into licence fees, service fees, income from maintenance agreements and processing services. This makes it difficult

to analyse the exact changes that took place in the first half-year.

RS2 indicated that the growth in revenue was mainly attributable to the recognition of new licence fees and an increase in service fees. Moreover, the company reported that maintenance fees for new and existing clients also contributed to the increased revenue figure while processing fees grew by 16 per cent.

During the 2014 financial year RS2 registered a surge in service fee income to almost €8 million (+84 per cent), largely due to the implementation and consultancy services provided to the two new major clients, namely Barclays Bank plc

“e growth in revenue was attributable mainly to the recognition of new licence fees and an increase in service fees”

and the unnamed global processing company signed up in 2014.

At the time of the publication of the 2014 annual financial statements, Mr El Haj had confirmed that service fee income should continue to grow in 2015 and future years. As such, this strong trend ought to have continued during the first half of the year, largely contributing to the 48.5 per cent overall revenue growth.

The 2015 interim financial statements provide further confirmation of the profitable business model of RS2. The gross profit margin improved to 59 per cent (June 2014: 50 per cent) and likewise, the Ebitda margin surged to 62.7 per

cent from 49.3 per cent in the first half of 2014. Additionally, the net profit margin increased to 41 per cent compared to 29 per cent in the first half of last year.

Another very important ratio for financial analysts is the return on equity, measuring the profit achieved by a company from the amount of money invested by shareholders. Since this ratio is calculated by dividing profits by the amount of average shareholders’ funds, it is not always a good measure to use at the interim reporting stage because one cannot annualise the interim profit due to fluctuations in profits from one accounting period to the next.

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BUSINESS UPDATES

Heritage Malta’s Great Siege 1565-2015 exhibition Heritage Malta has for the past two years been working on creating a grand exhibition to commemorate the Great Siege of 1565, a heroic defence in the face of adversity.

At the time of the Great Siege, the old continent was not just under the threat of an Ottoman invasion but was also divided and at war within itself, between countries supporting and upholding Papal supremacy and the various Protestant states. These ‘internal’ religious matters were in the limelight and many European states slacked in defensive strategies against Ottoman expansion in Eastern Europe.

The Ottoman strategy now shifted to attack Europe from the south, using Malta as a platform, with the ultimate goal being Rome. Thus, the lifting of the Great Siege of Malta was the first good news for Europe, both Roman Catholic and Protestant, after practically a century – so much so that even Queen Elizabeth of England rejoiced upon hearing the news and ordered prayers and church bell ringing in

thanksgiving to God for halting the Ottoman expansion into Europe.

Heritage Malta has thus seen it fit to include a contextual background to the siege – the inception of the Order of St John, the events occurring in Europe and in Turkey and North Africa, rulers and powers, and not least what was happening in Malta and the Maltese.

Over 150 historic items or groups of items have been selected for display in the exhibition, including Grand Master Jean de Valette’s four armour components and the Ottoman Spahi armour, both from the Palace Armoury.

The Maltese archives, be they the

Order’s, Notary and other historic institutions, provided primary sources of information and informative display material. Other Maltese Church and private museums, including the Cathedral Museum, have also provided historic and interesting artefacts.

The exhibition will also feature a number of artefacts from international sources. The Kremlin Museum will be lending Grand Master L’Isle Adam’s eightpointed cross. From Leeds Royal Armouries, several components of decorated armour pieces are to be amalgamated for the first time after well over 200 years

with their counterpart components from the Palace Armoury.

Palazzo Venezia and the Order of St John – both in Rome – will be lending historic items. Greenwich Maritime Museum will be lending two important paintings, one after Perez d’Aleccio documenting a now-partly-lost fresco painting at the Palace in Valletta.

From the Kunsthistorische Museum of Vienna, among other items, the armour of Ascanio della Ciornia, leader of the Gran Soccorso, will be displayed.

Moreover, de Valette Rock Crystal Cross, a gift from the Pope after the siege, will be brought

over from the Order’s museum at Clerkenwell, London, together with other items.

The exhibition, under the Patronage of the President of Malta, will be displayed in several rooms in the Palace. The Throne Room will set the scene of the siege itself and the Perez d’Aleccio frescoes, which form part of the display, will take the form of an immersive display.

The exhibition opens on September 4 and runs till December 6.

For more information follow the event on Heritage Malta’s official Facebook page or the Great Siege blog www.heritagemalta.org/1565.

HSBC provides tools for doing business in Malta Moving or starting a business in a new market – while exciting – can be a challenging prospect no matter one’s experience in world markets. HSBC Bank Malta understands this and has dedicated significant commitment to create tools for businesses on the verge of setting up business in Malta or Maltese businesses wishing to trade internationally.

First is a Why Malta? film which highlights the attractions of living, working and running a business in Malta. Owing to its popularity, the 12-minute Why Malta? has now been translated into five international languages – Arabic, French, German, Spanish and Mandarin – in addition to the original English version.

Another tool for businesses is a Doing Business in Malta guide, prepared by HSBC Bank Malta in conjunction with Grand Thornton. The guide provides invaluable insight into the key aspects of undertaking business and investing in Malta.

It aims to answer the key questions overseas businesses and entrepreneurs will have when making their first venture into the Maltese market. This is another tool which businesses can use to introduce Malta to their business counterparts around the globe.

For further information, visit www.business.hsbc. com.mt and download the Doing Business in Malta guide. One can call 2380 8000 to obtain the Why Malta? USBs.

e Business OBSERVER

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| August 27, 2015

BUSIENSS UPDATES

Trading risk for returns

Affordable financing for the environmentally conscious Green has become a lifestyle for many. As more clients actively seek green financial products, Bank of Valletta entered into a collaborative agreement with GRTU to offer the BOV Eco Personal Loan – GRTU scheme.

This package is specifically designed for those wishing to invest in renewable resources, thereby making a positive contribution towards the environment while saving on their energy bills.

Clients wishing to purchase photovoltaic equipment and solar water heaters from a number of retailers who are authorised by the GRTU under the Photo Voltaic Purchase Facilitation Scheme (PVPFS) can benefit from greater benefits when applying for the BOV ECO loan – GRTU scheme.

Full details about scheme can be obtained from bov.com, any BOV branch or

Free sleep trial with your mattress purchase Mattress Collection is pleased to be the first company in Malta to offer a free 30-day sleep trial to anyone purchasing its mattresses. We understand and appreciate the fact that the few minutes spent in a shop to choose a mattress are not necessarily enough to choose the right one. We take pride in the knowledge we have gained over the years and we try our very best to guide our customers to the right mattress during their first visit; however, we cannot always be right, especially in cases of people who suffer from some debilitating pain, such as slip disk, sciatica, fybromyalgia, arthritis and other painful ailments.

We feel that this provides our clients with the peace of mind that they will end up with the right mattress for them, which is our ultimate goal.

Our mattresses have been tested by spinal doctors in Italy and are certified by the health authorities in European countries for the prevention, treatment and alleviation of pain (green cross). They are made from a blend of memory foam, latex and support foams, and also come with a ten-year guarantee.

For more information, visit the mattress Collection, in Mdina Road, Żebbuġ or www.mattresscollection.com.mt.

by contacting the BOV Customer Service Centre on 2131 2020.

Bank of Valletta plc is a public limited company licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap. 370 of the Laws of Malta).

Registered office: 58, Zachary Street, Valletta VLT 1130. Malta Registration Number: C 2833

As participants in the investing world, we are constantly in pursuit of higher returns. However, when placing our hard-earned money into financial assets, we must be comfortable with the chosen risk profile and objective of the investment.

There are two distinct investor types: those who are financially and emotionally able to handle higher levels of risk and others who are intolerant to risk.

Our attitude towards risk is referred to ‘risk aversion’ and it varies from one investor to another. The level of risk aversion depends on a variety of factors, most importantly, on goals, level of income, life-stage and financial knowledge. A trusted financial adviser helps investors to identify assets that meet their risk profile and investment objective.

Risk is defined as the probability that an investment’s actual return will differ from what was originally expected. The risk-return relationship is simple: low levels of risk are generally associated with low potential returns and high levels of risk are associated with high potential risk.

The keyword here is potential. The risk-return trade-off does not guarantee that higher risks translate into higher returns. There is only a possibility. Investors require higher returns from riskier investments simply because they must be induced with a good enough risk premium for them to trust their money within these assets. If the return on Malta government paper was the same as the return on local corporate bonds, investors would simply flock into Malta government bonds which are usually positioned on the low side of the risk spectrum.

Diversification is a technique which aims to reduce risk through a wide variety of investments within the same portfolio, thereby protecting capital. To ensure the best diversification, a portfolio must include exposure to multiple investment vehicles and varying investment exposures to economies, industries and asset classes. Investments in collective investment schemes are an economical way for retail investors with relatively small amounts of money to obtain the same level of professional management and diversification of investments, as wealthy individuals and financial institutions.

The opinions expressed herein should not be interpreted as investment advice. Investments in the Vilhena Funds SICAV plc should be based on the full details of the prospectus, offering supplement and the KIID which may be obtained from Valletta Fund Management Ltd (VFM), Bank of Valletta plc Branches/Investment Centres and other Licensed Financial Intermediaries. VFM is licensed to provide Investment Services in Malta by the MFSA. The Vilhena Funds SICAV plc is licensed by the MFSA and qualifies as a UCITS. Issued

by VFM, TG Complex, Suite 2, Level 3, Brewery Street, Mrieħel BKR 3000, Malta. Tel: 212 27311, Fax: 22755661, Email: infovfm@bov.com, website: www.vfm.com.mt. Source: Valletta Fund Management Ltd.