Independent auditor’s report
To the Shareholders of Malita Investments p.l.c.
Report on the audit of the financial statements
Our opinion
In our opinion:
· The financial statements give a true and fair view of the financial position of Malita Investments p.l.c. (the Company) as at 31 December 2021, and of the company’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU; and
· The financial statements have been prepared in accordance with the requirements of the Maltese Companies Act (Cap. 386).
Our opinion is consistent with our additional report to the Audit Committee.
What we have audited
Malita Investments p.l.c.’s financial statements comprise:
· the statement of financial position as at 31 December 2021;
· the statement of comprehensive income for the year then ended;
· the statement of changes in equity for the year then ended;
· the statement of cash flows for the year then ended; and
· the notes to the financial statements, which include significant accounting policies and other explanatory information.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion
Independence
We are independent of the company in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) together with the ethical requirements of the Accountancy Profession (Code of Ethics for Warrant Holders) Directive issued in terms of the Accountancy Profession Act (Cap. 281) that are relevant to our audit of the financial statements in Malta. We have fulfilled our other ethical responsibilities in accordance with these Codes.
To the best of our knowledge and belief, we declare that non-audit services that we have provided to the company are in accordance with the applicable law and regulations in Malta and that we have not provided non-audit services that are prohibited under Article 18A of the Accountancy Profession Act (Cap. 281).
The non-audit services that we have provided to the company, in the period from 1 January 2021 to 31 December 2021, are disclosed in note 19 to the financial statements.
Our audit approach
Overview
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· Overall materiality: €361,000, which represents 5% of adjusted profit before tax, after excluding fair value movements for the year. |
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· Valuation of investment properties · Accounting for service concession arrangements |
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the company, the accounting processes and controls, and the industry in which the company operates.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
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Overall materiality |
€361,000 |
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How we determined it |
5% of adjusted profit before tax, after excluding fair value movements for the year. |
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Rationale for the materiality benchmark applied |
We chose adjusted profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the company is most commonly measured by users and is a generally accepted benchmark. We chose 5% based on professional judgement, noting that it is also within the range of commonly accepted profit-related benchmarks. |
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above €36,100 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
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Key audit matter |
How our audit addressed the Key audit matter |
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Valuation of Investment Properties
The Company’s investment property measured at fair value comprises the Malta International Airport (“MIA”) and Valletta Cruise Port (“VCP”) properties as well as the Parliament Building and Open Air Theatre. The fair value of the investment property has been determined based on projected future cash flows, discounted by a risk adjusted discount rate.
The valuation of the MIA and VCP properties, which was carried out by management, is based on the present value of ground rents up to the expiry of the temporary emphyteutical grants and the estimated freehold value thereafter discounted to present value. The fair value of MIA and VCP properties is calculated with reference to the cash flows receivable by the Company in terms of its contractual agreements, discounted to present value as at 31 December 2021. The discount rate is based on the yield to maturity on the longest term available MGS (Malta Government Stock) in issue as at year end plus a premium reflecting the risk inherent in the underlying cash flows and a conditional premium given the unexpected and unprecedented low interest rate environment.
The valuation of the Parliament Building and Open Air Theatre, which was carried out by management, is based on the present value of the lease income that is projected to be generated from these properties up to the expiry of the emphyteutical grant. The fair value of the Parliament Building and Open Air Theatre is calculated with reference to the cash flows receivable by the Company in terms of its contractual agreements, discounted to present value as at 31 December 2021.
The discount rate is based on the yield to maturity on the longest term available MGS (Malta Government Stock) in issue as at year end plus a premium reflecting the risk inherent in the underlying cash flows and a conditional premium given the unexpected and unprecedented low interest rate environment.
The existence of significant estimates referred to previously could result in material misstatement, which is why we have given specific focus and attention to this area.
Relevant reference in the Annual Report and financial statements: - Critical accounting estimates and judgements; Note 3 - Investment property; Note 6
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We engaged our own in-house valuation experts to critique and challenge the model and assumptions used by management.
Our procedures in relation to management’s valuation of the properties included: - Assessing the methodologies used by management to estimate the fair value of the properties. We confirmed that the valuation approach for the properties was in accordance with professional valuation standards and suitable for use in determining their carrying values as at 31 December 2021; - Assessing key inputs in the calculations such as ground rent and other cash inflows, by reference to management’s forecasts and contractual arrangements in place; - Assessing inputs considered to be significantly judgemental in the valuation of investment properties workings including the growth rate, discount rate, and other variables in the valuation model by reference to data external to the Company and the expertise of in-house subject matter experts to challenge and assess the reasonableness of results of workings approved by Audit Committee and the Board; - Testing the mathematical accuracy of the calculations derived from each forecast model; - Assessing the appropriateness of the disclosures within the financial statements.
We discussed the valuations with the Audit Committee and concluded, based on our audit work that the company’s property valuation was within an acceptable range.
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Accounting for Service Concession Arrangements
During 2017, the Company entered into an agreement with the Housing Authority to develop sixteen residential blocks, including car spaces for affordable housing purposes.
IFRIC 12 covers public-to-private service concession arrangements and as disclosed in Note 8, the Company will be responsible for the construction, operation and maintenance of this project until 2050.
In line with IFRIC 12, the Company has the right to receive cashflows from the rental of such units and records the development as a financial asset once finalised and as a contract asset during the construction phase.
During the construction phase, management determines the stage of completion and actual costs incurred and capitalised based on experts’ reports. The Company recognises income for project management in the Statement of Comprehensive Income and once the units are completed and handed to tenants, will recognise revenue from rental streams, also in the Statement of Comprehensive Income. A master agreement has been entered into with the Housing Authority and specific agreements will follow once tenants are assigned. Management intends to optimise revenues based on variations to original designs and to also cover the construction of additional units. The IFRIC 12 model prepared by management continues to be updated with the latest actual and projected costs and expected revenues to provide management and the Board with updated profitability projections, compared with the original estimates.
As disclosed in Note 8, a number of sites are nearing completion and therefore resulting in the crystallisation of a number of the major costs and in the better determination of the financing required to complete the respective sites. The Company has secured financing for the project based on initial estimates. Variations for various sites, including additional number of units, has necessitated an increased spend which has been approved by the Board. Management is currently pursuing options for the additional required financing. Note 15 explains the current financing arrangements and plans to obtain additional financing in the coming months.
As the directors have described in the accounting policies, estimating future cash flows requires the application of significant judgement, especially during the current phase during which the Company is exploring ways to optimise revenue streams in view of the respective changes to the sites, including the increased number of units.
The key judgements made by the directors include estimating future returns, discount rates and the bridging of financing needs. The estimation of future cash flows and the level to which they are discounted is inherently uncertain and requires judgement. The extent of judgement around future revenue streams, discounting rates, liquidity needs and the size of the related asset, resulted in this matter being identified as an area of audit focus.
Relevant reference in the Annual Report and financial statements: - Critical accounting estimates and judgements; Note 3 - Contract asset and service concession arrangements; Note 8 - Borrowings; Note 15 |
We carried out the following procedures in relation to service concession arrangements:
- We selected a sample of costs incurred, and capitalised, which we agreed to supporting documentation and to approvals by the Company’s Project Board and to correspondence from the Company’s appointed specialists.
- We also reviewed inputs to the IFRIC 12 model prepared by management and we challenged management in relation to updated inputs for cost overruns and increased costs (including further projected costs) relating to more units developed compared to original plans. We also reviewed the discount rate applied by reference to the overall cost of capital for the company.
- We reviewed agreements in relation to the determination of revenue streams from the Housing Authority in combination with revenues from tenants. We also tested other variables used in the accounting for IFRIC 12 including estimated project management fees during the construction phase.
- The viability of the project and the assessment of the internal rate of return percentage were discussed with management and the Board. We also enquired with management on its conclusion for additional financing that is required based on committed costs.
- We tested the arithmetic accuracy and computation of the model and reviewed the accounting treatment and related disclosures.
- Management also provided appropriate evidence supporting the profitability of the project, subject to curtailment of further cost overruns. We also had discussions with management on how they intend to address liquidity requirements and actions taken so far in this regard.
Based on the work performed, we found the accounting for the IFRIC 12 model to be consistent with the explanations and the evidence obtained. |
Other information
The directors are responsible for the other information. The other information comprises the Directors’ report, the Corporate governance statement and the Remuneration statement (but does not include the financial statements and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report, and the Chairman’s Statement, which is expected to be made available to us after that date.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon except as explicitly stated within the Report on other legal and regulatory requirements.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
When we read the Chairman’s Statement, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance in accordance with International Standards on Auditing.
Responsibilities of the directors and those charged with governance for the financial statements
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with IFRSs as adopted by the EU and the requirements of the Maltese Companies Act (Cap. 386), and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the company’s financial reporting process.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
· Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
· Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the company’s ability to continue as a going concern. In particular, it is difficult to evaluate all of the potential implications that COVID-19 will have on the company’s trade, customers and suppliers, and the disruption to its business and the overall economy.
· Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements
Report on compliance with the requirements of the European Single Electronic Format Regulatory Technical Standard (the “ESEF RTS”), by reference to Capital Markets Rule 5.55.6
We have undertaken a reasonable assurance engagement in accordance with the requirements of Directive 6 issued by the Accountancy Board in terms of the Accountancy Profession Act (Cap. 281) - the Accountancy Profession (European Single Electronic Format) Assurance Directive (“the ESEF Directive 6”) on the Annual Financial Report of Malita Investments p.l.c. for the year ended 31 December 2021, entirely prepared in a single electronic reporting format.
Responsibilities of the directors
The directors are responsible for the preparation of the Annual Financial Report, including the financial statements, by reference to Capital Markets Rule 5.56A, in accordance with the requirements of the ESEF RTS.
Our responsibilities
Our responsibility is to obtain reasonable assurance about whether the Annual Financial Report, including the financial statements, complies in all material respects with the ESEF RTS based on the evidence we have obtained. We conducted our reasonable assurance engagement in accordance with the requirements of ESEF Directive 6.
Our procedures included:
· Obtaining an understanding of the entity's financial reporting process, including the preparation of the Annual Financial Report in XHTML format.
· Examining whether the Annual Financial Report has been prepared in XHTML format.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the Annual Financial Report for the year ended 31 December 2021 has been prepared in XHTML format in all material respects.
Other reporting requirements
The Annual Report and Financial Statements 2021 contains other areas required by legislation or regulation on which we are required to report. The Directors are responsible for these other areas.
The table below sets out these areas presented within the Annual Financial Report, our related responsibilities and reporting, in addition to our responsibilities and reporting reflected in the Other information section of our report. Except as outlined in the table, we have not provided an audit opinion or any form of assurance.
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Area of the Annual Report and Financial Statements 2021 and the related Directors’ responsibilities |
Our responsibilities |
Our reporting |
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Directors’ report The Maltese Companies Act (Cap. 386) requires the directors to prepare a Directors’ report, which includes the contents required by Article 177 of the Act and the Sixth Schedule to the Act. |
We are required to consider whether the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements.
We are also required to express an opinion as to whether the Directors’ report has been prepared in accordance with the applicable legal requirements.
In addition, we are required to state whether, in the light of the knowledge and understanding of the Company and its environment obtained in the course of our audit, we have identified any material misstatements in the Directors’ report, and if so to give an indication of the nature of any such misstatements.
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In our opinion: · the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and · the Directors’ report has been prepared in accordance with the Maltese Companies Act (Cap. 386).
We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section.
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Corporate Governance Statement The Capital Markets Rules issued by the Malta Financial Services Authority require the directors to prepare and include in the Annual Financial Report a Statement of Compliance with the Code of Principles of Good Corporate Governance within Appendix 5.1 to Chapter 5 of the Capital Markets Rules. The Statement’s required minimum contents are determined by reference to Capital Markets Rule 5.97. The Statement provides explanations as to how the Company has complied with the provisions of the Code, presenting the extent to which the Company has adopted the Code and the effective measures that the Board has taken to ensure compliance throughout the accounting period with those Principles.
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We are required to report on the Statement of Compliance by expressing an opinion as to whether, in light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have identified any material misstatements with respect to the information referred to in Capital Markets Rules 5.97.4 and 5.97.5, giving an indication of the nature of any such misstatements.
We are also required to assess whether the Statement of Compliance includes all the other information required to be presented as per Capital Markets Rule 5.97.
We are not required to, and we do not, consider whether the Board’s statements on internal control included in the Statement of Compliance cover all risks and controls, or form an opinion on the effectiveness of the Company’s corporate governance procedures or its risk and control procedures. |
In our opinion, the Statement of Compliance has been properly prepared in accordance with the requirements of the Capital Markets Rules issued by the Malta Financial Services Authority.
We have nothing to report to you in respect of the other responsibilities, as explicitly stated within the Other information section. |
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Remuneration statement The Capital Markets Rules issued by the Malta Financial Services Authority require the directors to prepare a Remuneration report, including the contents listed in Appendix 12.1 to Chapter 12 of the Capital Markets Rules. |
We are required to consider whether the information that should be provided within the Remuneration report, as required in terms of Appendix 12.1 to Chapter 12 of the Capital Markets Rules, has been included. |
In our opinion, the Remuneration report has been properly prepared in accordance with the requirements of the Capital Markets Rules issued by the Malta Financial Services Authority. |
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Other matters on which we are required to report by exception We also have responsibilities under the Maltese Companies Act (Cap. 386) to report to you if, in our opinion: · adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us. · the financial statements are not in agreement with the accounting records and returns. · we have not received all the information and explanations which, to the best of our knowledge and belief, we require for our audit.
We also have responsibilities under the Capital Markets Rules to review the statement made by the directors that the business is a going concern together with supporting assumptions or qualifications as necessary. |
We have nothing to report to you in respect of these responsibilities. |
Our report, including the opinions, has been prepared for and only for the Company’s shareholders as a body in accordance with Article 179 of the Maltese Companies Act (Cap. 386) and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior written consent.
Appointment
We were first appointed as auditors of the Company on 20 October 2011. Our appointment has been renewed annually by shareholder resolution representing a total period of uninterrupted engagement appointment of 11 years. The Company became listed on a regulated market on 7 August 2012, thereby we were engaged in an interrupted manner to serve as the Company’s auditor, in its listed status, for the last 10 years.
PricewaterhouseCoopers
78, Mill Street
Zone 5, Central Business District
Qormi
Malta
Stephen Mamo
Partner
18 March 2022
