United Group Financial Analysis: Revenue, Assets, and Capital Employment, Assignments of Financial Statement Analysis

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Issuer

United Finance p.l.c.

(C 26598)

Financial

Analysis

Summary

15 June 2018

United Finance p.l.c. GB Buildings 2nd^ Floor, 28, Watar Street, Ta’Xbiex XBX 1310 Malta

15 June 2018

Dear Sirs

United Finance p.l.c. Financial Analysis Summary

In accordance with your instructions, and in line with the requirements of the Listing Authority Policies, we have compiled the Financial Analysis Summary (“Analysis”) set out on the following pages and which is being forwarded to you together with this letter.

The purpose of the financial analysis is that of summarising key financial data appertaining to United Finance p.l.c. (the “Company”) and United Group Limited (the “Group”). The data is derived from various sources or is based on our own computations as follows:

(a) Historical financial data for the three years ended 31 December 2015 to 31 December 2017 has been extracted from audited financial statements of the Company and Group for the three years in question.

(b) The forecast data of the Group for the year ending 31 December 2018 has been provided by management of the Company.

(c) Our commentary on the results of the Group and on its financial position is based on the explanations provided by the Company.

(d) The ratios quoted in the Financial Analysis Summary have been computed by us applying the definitions set out in Part 4 of the Analysis.

(e) Relevant financial data in respect of the companies included in Part 3 has been extracted from public sources such as websites of the companies concerned, financial statements filed with the Registrar of Companies or websites providing financial data.

CONTENTS

• PART 1 – INFORMATION ABOUT THE ISSUER AND GROUP
  • 1. Key Activities of the Company
  • 2. Key Activities of the Group
  • 3. Directors
  • 4. Group Organisational Structure
  • 5. Group Operational Development
  • 5.1 Retail
  • 5.2 Automotive
  • 5.3 Property
  • 5.4 Catering
  • 6. Business Development Strategy
  • 7. Major Assets owned by the Group
• PART 2 – GROUP PERFORMANCE REVIEW
  • 8. Financial Information – The Issuer
  • 9. Financial Information – The Group
  • 10. Related Party Debt Securities
• PART 3 - COMPARABLES
• PART 4 - EXPLANATORY DEFINITIONS

PART 1 – INFORMATION ABOUT THE ISSUER AND

GROUP

1. KEY ACTIVITIES OF THE COMPANY

The principal activity of the Company is to carry on the business of a finance company within the United Group.

The Company does not itself carry on any trading activities apart from: (i) leasing to third parties and a Group company commercial space in a property located in Ta’Xbiex; and (ii) the raising of capital and advancing thereof to members of the United Group. Accordingly, the Company is economically dependent on the operations and performance of the United Group.

2. KEY ACTIVITIES OF THE GROUP

The origins of the Group go back to some 90 years ago when in 1926, Carmelo Gatt Baldacchino set up a small transportation company in Malta. During the last financial year (2017), the Group operated in three industry sectors - retail, automotive, property. In 2018, the Group commenced operations in the catering sector through the opening of a cafeteria at Pendergardens, St Julians.

Important events in the development of the Group’s business during FY2017 are included hereunder:

 Development works on the new commercial property in Qormi, which was acquired in 2017, were progressing as planned and is scheduled for completion in 2019. The said property will offer circa 3,500m^2 of office space and car park facilities for lease.

 A new subsidiary, United Catering Company Limited, was incorporated on 18 September 2017 to operate a number of catering outlets in Malta. The first outlet, U&Co (an urban social café) was opened in April 2018 at Pendergardens, St Julians.

3. DIRECTORS

United Finance p.l.c. is managed by a Board consisting of five directors entrusted with the overall direction and management of the Company.

Board of Directors

Carmen Gatt Baldacchino Chairperson Edmund Gatt Baldacchino Chief Executive Officer Simon Gatt Baldacchino Non-Executive Director James Bonello Independent Non-Executive Director Joseph F.X. Zahra Independent Non-Executive Director

5. GROUP OPERATIONAL DEVELOPMENT

The consolidated operations of the United Group comprise fashion retail, rental & leasing of vehicles, and income from third party rentals of office space at G.B. Buildings, Watar Street, Ta’ Xbiex. An analysis of revenue, extracted from the consolidated audited financial statements of United Group Limited, is provided below.

Turnover generated by each of Motors Inc. Limited and Pender Ville Limited, of which the Group has a shareholding of 33.33% and 19.23% respectively, is not consolidated on a line by line basis and therefore has not been included in the above analysis. Results of companies that are not subsidiaries of the Group are accounted for in the income statement below the operating profit line as ‘share of results of associates and jointly controlled entities’.

5.1 RETAIL

5.1.1 History and Business

The United Group of Companies entered the retail industry in 2005 and through a number of outlets retails a number of international brands, including Debenhams, Oasis, MAC Cosmetics and Estee’ Lauder.

The Company operates two Debenhams stores under franchise in two locations, one at The Point Shopping Centre in Sliema, covering over 2,500m^2 of shop floor and another 930m^2 store at the Main Street Shopping Complex, in Paola. Debenhams’ key product categories include womenswear, menswear, kidswear, homeware and beauty.

In 2017, the Group extended its Jack & Jones offering and launched a number of new Bestsellers fashion brands including Only, Selected and Play. In addition, Dune footwear, one of the most influential global players in fashion footwear and accessories, was introduced in Malta and is available at the Debenhams stores. Another new offering at Debenhams Sliema is the Beauty Club, which offers a diverse range of beauty, cosmetic and fragrances from various market leading brands.

The key objective of the Group for its retail operations continues to be strengthening recognition of each of its brands within their respective target markets, enhance revenue growth and maintain efficiency at the operational level. At the same time, the Directors will continue to explore

United Group Revenue Analysis FY2015 FY2016 FY €’000 €’000 €’

Retail 7,256 7,431 6, Automotive 2,472 2,127 2, Property 360 370 382 Total revenue 10,088 9,928 9,

Source: Consolidated audited financial statements of the United Group for the years ended 31 December 2015 to 2017.

opportunities to invest in other retail concepts that offer features that are attractive to the Group in terms of benefits from possible synergies and revenue expansion.

5.1.2 Market Overview

Data in relation to the size of the apparel market in Malta is not published. Notwithstanding, an estimate of the retail store market has been derived from data obtained from the National Statistics Office of Malta (the latest available information relates to calendar year 2015). Data with respect to online sales generated in Malta is not available and therefore is excluded from the analysis below.

The table below sets out statistics in relation to sales of apparel (excluding textiles, footwear and leather goods) by retail outlets in Malta. The information has been analysed by size of outlet on the basis of the number of staff employed by a retail store.

Turnover of Apparel Retail Stores in Malta 2008 2009 2010 2011 2012 2013 2014 2015 2008- 0-9 employees Total turnover (€' million) 69 64 52 54 59 57 59 64 -1.1% No. of outlets (units) 703 704 667 675 681 662 675 530 Average turnover (€' million) 0.10 0.09 0.08 0.08 0.09 0.09 0.09 0. Year-on-year growth -7% -14% 3% 8% -1% 2% 38% 10-49 employees Total turnover (€' million) 40 33 50 51 45 48 42 37 -1.1% No. of outlets (units) 19 17 28 29 29 28 26 25 Average turnover (€' million) 2.11 1.94 1.79 1.76 1.55 1.71 1.62 1. Year-on-year growth -8% -8% -2% -12% 10% -6% -8% 50-249 employees Total turnover (€' million) 51 63 68 64 78 81 92 103 10.6% No. of outlets (units) 8 11 12 13 14 14 14 15 Average turnover (€' million) 6.38 5.73 5.67 4.92 5.57 5.79 6.57 6. Year-on-year growth -10% -1% -13% 13% 4% 14% 4% Total Turnover (€' million) 160 160 170 169 182 186 193 204 3.5% Year-on-year growth 0% 6% -1% 8% 2% 4% 6% Source: National Statistics Office Malta (NACE 47.71 data)

Chart II above provides an indication of the trend in performance of the overall retail sector in Malta as compared to the European Union (2010 being the base year = 100). According to the EU trend line above, retail trade increased at a steady pace till early 2008, which was followed by a decline that lasted until mid-2013. Thereafter, the EU retail sector experienced a constant rate of growth and has now reached a level of almost 8 percentage points above the pre-financial crisis high (Q1 2008).

During the 17 years under review, retail activity in Malta increased by almost 18 percentage points and since Q4 2016 has performed better than the EU average. Further analysis shows that between the years 2004 and 2009, the Maltese retail sector lagged behind the EU average. Post 2009, retail sales generated in Malta recovered to some extent while the EU average reflected lower activity levels. From 2010 to 2016, the Maltese retail sector maintained a similar trajectory when compared to the EU average.

5.1.3 Trend Analysis

Stiff competition continues to be prevalent in the local market, both from local retailers as well as from online sales (through the internet). Given that the Group’s brands, particularly Debenhams, are top international brands in the fashion retail sector, the Directors are confident that the Group’s outlets can compete well for market share in Malta.

5.2 AUTOMOTIVE

5.2.1 History and Business

The companies forming part of this segment are primarily engaged in: (i) the importation and servicing of motor vehicles and the sale of parts and accessories and (ii) car rental and leasing service.

The Group has been active in the car dealership business since 1982 representing Opel and Saab brands locally, and in 2011 the Group, through Cars International Limited (“CIL”), merged its car dealership with the operations of Easysell Kia (Malta) Limited. In September 2016, CIL merged its operations with that of Pater Group via the creation of a new entity, Motors Inc. Ltd (“MIL”). As a result of this merger, United Group today owns 33.33% of MIL, which operates a multi-brand dealership for KIA, Opel, DFM, Alfa, Jeep, Fiat, Iveco and Hyundai. Through the aforesaid merging of business interests, MIL is set to benefit from a cost-effective and efficient operational structure, through economies of scale, which will enhance customer service.

The United Group also operates the car rental business through United Garage Limited. This company has been the franchisee of Hertz since 1961, making it the oldest European franchisee of this international car-hire brand since its inception. The United Group of Companies offers a variety of services and products relating to rental and leasing of vehicles and owns one of the largest modern fleets in Malta. The company has also over the years expanded its offering is now the multi-brand franchise operator of the whole Hertz brand portfolio consisting of Hertz, Firefly, Thrifty and Dollar.

5.2.2 Market Overview – Vehicle Rental

Competition among car rental industry participants is intense and continues to be primarily based on price, vehicle availability and quality, service, reliability, rental locations and product innovation. Price has also continued to be more important in recent years since tourists visiting Malta are increasingly more independent in decision-making and are price sensitive.

The Directors believe that the reputation of the Hertz brand and the recent introduction to the local market of the Firefly and Dollar/Thrifty brands will enable the Group to better compete across multiple market segments and thereby improve its market share.

5.2.3 Market Overview – Importation of Vehicles

Local market

Over the years the automotive sector in Malta has become highly competitive with a wider range of new motor vehicle franchises and models imported at competitive prices. In addition, the used car import market has grown substantially as evidenced by statistics published by the National Statistics Office Malta and which are included in the table below. During the past decade, registered passenger cars in Malta increased by 68,889 vehicles, from 222,775 in 2008 to 291,664 in 2017, which is equivalent to a compound annual growth rate of 3.04%.

As shown in the above chart, the market has been inundated with substantial imports, particularly in terms of used cars from the United Kingdom, at the expense of imports of new cars. In 2017, the registration of used cars amounted to 10,953, an increase of 16.4% when compared to 2016 (9, used passenger car registrations). In comparison, 7,776 new vehicles were registered in 2017, an increase of 6.0% from a year earlier (2016: 7,333 new passenger car registrations).

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

New vs Used Passenger Car Registrations

Used Passenger Car Registrations New Passenger Car Registrations

The United Group has an interest in Pendergardens located in St Julians, Malta through the ownership of 19.23% of the equity capital of Pender Ville Limited. With reference to the annual audited financial statements of Pendergardens Developments p.l.c. for the financial year ended 31 December 2017, development works relating to the final phase of the project (being Towers I & II, Block 17 and the underlying car park) are progressing well and the tempo of sales are in line with management’s expectations.

5.3.2 Market Overview

Residential property prices continued to rise during the fourth quarter of 2017 (see Chart I below) and said prices are being supported by a number of factors. The scheme for first-time buyers and a low interest rate environment make property more attractive to purchase. Demand for property is also being supported by growth in disposable income, which continues to benefit from favourable labour market conditions. These factors in turn are contributing to robust growth in lending for house purchases. The rise in foreign workers in Malta and the Individual Investor Programme, have also been supporting residential property prices.

The Central Bank of Malta’s advertised property price index shows that house prices rose at an annual rate of 8.8% in the last quarter of 2017. Prices of apartments – the major component – continued to grow strongly in Q4 2017 at 7.6% over the previous quarter (such data mainly provides trend information as advertised property prices may not accurately reflect the prices at which sales actually take place).

Eurostat’s House Price Index for Malta – which is based on transactions covering terraced houses, apartments and maisonettes – also indicates that residential property prices increased. The latest data available refers to Q4 2017 and shows that said prices increased by 4.1% compared with the same quarter of 2016 (vide Charts II below).

With regard to the number of permits, the Malta Environment and Planning Authority issued 7, permits during 2016, just over 90% more than in 2015 (statistics for 2017 have yet to be published). This followed growth of 34.4% in 2014, marking three consecutive years of growth following a period of decline. The increase in permits issued in 2016 was mostly driven by the largest residential category, namely apartments, which accounted for 84.1% of total permits granted.

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115

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CHART II: Malta House Price Index

Source: Eurostat

With respect to operations at Pendergardens, there is active demand for the various units on offer. To date, sales tempo for the available apartments in the final phase of the project is in line with budgeted figures and expectations, and management is confident that sales will progress in accordance with projected targets.

5.4 CATERING

5.4.1 Business

A new subsidiary of the United Group, United Catering Company Limited, was set up in September 2017 to operate a cafeteria establishment at Pendergardens. The outlet – U&Co - commenced operations in April 2018 and is an urban social inspired concept, offering clientele the opportunity to meet and relax in a fresh and trendy environment. The new outlet can cater for up to 120 customers and is expected to appeal to a broad spectrum of customers. The cafeteria is open from early morning till midnight. Depending on the level of success of U&Co, the Directors plan to further expand the Group’s catering operations in the near to medium term by opening a number of cafeterias with same concept in other key areas in Malta.

6. BUSINESS DEVELOPMENT STRATEGY

The United Group continues to believe in diversification not only by way of a business strategy but also as a risk management policy for the benefit of all its stakeholders. The Group has evolved at a relatively rapid pace over the last years and has diversified its operations from its core automotive business to investments in fashion retail, property and lately, in catering. Such investments were executed through the development of new operations as well as through strategic joint ventures with well-established business partners that share and complement the Group’s core business values. The Group’s strategy is to consolidate and grow market share of its current business portfolio, and shall maintain its on- going pursuit for new, prudent and sustainable investment and business opportunities.

To sustain business growth and competitiveness, the Group is continuously streamlining its organisational structure to improve efficiency and enhance through the recruitment of professional management and strict cooperate governance, its strategic focus at operational level.

7. MAJOR ASSETS OWNED BY THE GROUP

The United Group is the owner of a number of properties and financial assets which are included in the consolidated balance sheet under the headings: ‘investment property’ and ‘available-for-sale financial assets’ as follows:

United Group Major Assets FY2015 FY2016 FY €’000 €’000 €’

GB Buildings (note 1 ) (^) 4,685 4,685 4, Other immovable properties (note 2) (^582) 1,329 1, Available-for-sale financial assets 645 417 447

5,912 6,431 6,

Note 1: Property i s held directly by Uni ted Finance p.l .c.

Source: Consolidated audited financial statements of the United Group for the years ended 31 December 2015 to 2017.

Note 2: A property for devel opment i nto a bus ines s centre by the Group was a cquired in 2017. Book value is of €1.6 mi lli on. Property target completion is mid 2019.

Revenue principally comprises income from rental of commercial space in GB Buildings, which is currently fully occupied, and interest receivable from Group companies on amounts due to the Issuer. In FY2017, total revenue amounted to €797,000 (FY2016: €812,000). After deducting interest payable of €469,000 (FY2016: €469,000), the Issuer generated a gross profit of €328,000 (FY2016: €343,000). Overall, total comprehensive income in FY2017 amounted to €135,000 (FY2016: €171,000).

In line with previous year’s results, revenue in FY2018 is projected to amount to €803,000 (FY2017: €797,000), while gross profit is expected to amount to €333,000 (FY2017: €328,000). In the forecasted year, a planned valuation exercise of the G.B. Buildings will be performed in accordance with the Group’s accounting policy, and it is anticipated that an increase of €177,000 in fair value will be accounted for in other comprehensive income. As such, total comprehensive income for FY2018 is expected to amount to €284,000 as compared to €135,000 in FY2017.

United Finance p.l.c. Cash Flow Statement FY2015 FY2016 FY2017 FY €’000 Actual Actual Actual Forecast

Net cash from operating activities 27 (11) (106) 39 Net cash from investing activities 22 282 (46) 16 Net cash from financing activities (133) 332 (87) (277) Net movement in cash and cash equivalents (84) 603 (239) (222)

Cash and cash equivalents at beginning of year (^551 467) 1,070 831 Cash and cash equivalents at end of year 467 1,070 831 609

United Finance p.l.c. Statement of Financial Position 31 Dec'15 31 Dec'16 31 Dec'17 31 Dec' €’000 Actual Actual Actual Forecast

Assets Non-current 11,135 10,867 10,612 11, Current 2,433 2,779 3,090 2, Total assets 13,568 13,646 13,702 13,

Equity and liabilities Equity 4,464 4,485 4,500 4,

Liabilities Non-current 8,801 8,819 8,837 8, Current 303 342 365 217 Total liabilities 9,103 9,161 9,202 9,

Total equity and liabilities 13,568 13,646 13,702 13,

As at 31 December 2017, apart from the property (GB Buildings), total assets of the Issuer primarily included loans and receivables due from Group companies of €5.5 million (FY2016: €5.8 million), available-for-sale financial assets of €0.4 million (FY2016: €0.6 million), trade and other receivables totalling €2.3 million (FY2016: €1.7 million) and bank balances.

Trade and other receivables include circa €38,000 (FY2016: circa €61,000) in bills of exchange. Further to the transfer of the automotive business to Cars International Limited in June 2011, the United Group did not factor any bills of exchange, and therefore interest earned on bills of exchange has gradually decreased over the period under review. The remaining bills of exchange will be settled by 2018. Liabilities of the Issuer as at the end of FY2017 and FY2016 principally include €8.5 million in bonds.

9. FINANCIAL INFORMATION – THE GROUP

The following financial information is extracted from the audited consolidated financial statements of United Group Limited (the “Group”) for the three years ended 31 December 2015 to 31 December

2017. The financial information for the year ending 31 December 2018 has been provided by Group management.

United Group Income Statement FY2015 FY2016 FY2017 FY (€’000) Actual Actual Actual Forecast

Fashion retail 7,256 7,431 6,687 8, Automotive 2,472 2,127 2,312 2, Catering - - - 550 Property 360 370 382 360 Revenue 10,088 9,928 9,381 11, Other income 14 (3) 276 194 Direct costs and administrative expenses (9,053) (8,694) (8,781) (10,463) EBITDA 1,049 1,231 876 1, Depreciation and amortisation (774) (785) (812) (996) Share of results of associate companies 643 539 378 950 Dividends receivable - 1,244 1,210 60 Profit on disposal of properties 269 42 - - Profit on disposal on other assets - 43 82 150 EBIT 1,187 2,314 1,734 1, Net finance costs (601) (692) (734) (929) Profit before tax 586 1,622 1,000 696 Taxation 64 164 (5) (53) Profit for the year 650 1,786 995 643 Other comprehensive income Movement in value of Associate Company (369) (51) (11) - Revaluation gain on Investment Property - - - 177 Movement in fair value of financial assets 28 22 (29) - Total comprehensive income for the year (^309) 1,757 955 820