Leasing Company: ASKARI LEASING LIMITED - Analysis of Financial Statements Financial Year 2004- 1H'09

Askari Leasing Limited was incorporated and domiciled in Pakistan as a public limited company on August 1, 1993 and was granted certificate of commencement of business on November 3, 1993 and went public in September in the same year with a capital base of Rs 100 million.
As of June 30th, 2008, its total equity was over Rs 1.2 billion while its balance sheet was nearly Rs 12.4 billion. The company is controlled by Army Welfare Trust (AWT) which owns 57.66% shares of the company. Its 1,192 individual shareholders own 5.886% shares.
The remaining shares are owned by other institutional investors and employees. It has a presence in the consumer, transport, communications, textile, power and healthcare sectors. The company also offers Certificates of Investments for various durations, both short-term and long-term. Some of its products are as follows: Askar, ALL's flagship product which has been synonymous with the concept of auto leasing in the country, Ask Life, Industrial Lease, Certificates of Investments, Ask Overseas and Ask Power.
Its other sister concerns are Askari Commercial Bank Ltd, Askari General Insurance Company Limited, Askari Cement Company Limited, Askari Aviation (Pvt) Ltd, Askari Associates (Pvt) Limited, Askari Information Systems Limited, Askari Guard Limited. Its registered and head offices are situated at 5th Floor, AWT Plaza, The Mall, Rawalpindi Cantt. It has a strong presence in important commercial centres across the country through its elaborate branch network. It has a total of 10 branches in various cities across Pakistan namely, Karachi, Lahore, Rawalpindi, Islamabad, Peshawar, Faisalabad, Multan, Sialkot, and Gujranwala. PACRA has maintained Askari Leasing's entity rating of "A Plus" for long-term and "A1" for short-term obligations based on results of June 30, 2007.
INDUSTRY BACKGROUND
There are a total of 27 companies operational in the leasing sector of Pakistan. These include 16 leasing companies, 4 investment banks, 2 investment companies and 5 Modarabas. In 1997, 32 leasing companies were operational in the country. This number has been decreasing since then, especially after the 2000, when the minimum paid-up capital requirement for leasing companies was raised to Rs 200 million which led to mergers and acquisitions. The recent performance of the leasing sector was affected due to strong competition from commercial banks, which are increasingly offering products and services similar to that of NBFCs, including the leasing companies.
This, along with the slowdown in private sector credit off-take, decreased new business volume of members by 14% to Rs 36 billion in 2007, compared to Rs 41 billion in 2006. The total assets of the leasing sector increased to Rs 128 billion in 2007, a 4% rise from Rs 123 billion in the year before that. During the same period, investments in lease finance decreased to Rs 73.6 billion in FY07 from Rs 75 billion in FY06, while the revenues increased marginally by 2% to Rs 15 billion from Rs 14.7 billion. Increasing interest rate environment resulted in sharp upsurge in borrowing costs which were higher by 14% at Rs 8.5 billion from Rs 7.4 billion. The average spread, which is described as the difference between the average rate of cost of funds and lending rates, decreased to below 2% jeopardizing the profitability of the sector which reached to Rs 635 million in 2007 from Rs 2.06 billion in 2006.
PERFORMANCE IN H1FY09
The first half of the financial year 2009 was clearly tough for Askari Leasing Limited. There was an increase in the total revenue by 8.8% to reach the level of Rs 621 million in H1FY09 from Rs 570 million in the same period last year. The company succeeded in disbursing a total of Rs 1.756 billion in H1FY09. Half of this amount was in the form of consumer leases, while about 48% was given to corporate customers.
Despite this growth in revenue, the increased expenses of the company combined with greater allowance for potential lease losses have led to a 10.9% less profit before tax for the period at Rs 82.1 million. The profit after tax for the period stood at Rs 63.1 million, which is 12.5% less than the net profit of H1FY08. This is keeping in mind the relaxation given by the SECP to companies, with respect to losses from valuation of available-for-sale securities. In ALL's case, net profit without this relaxation would have been substantially lower.
The profitability of the company was severely hit in FY09's first half, even more so than is evident by the income statement of the company. Gross Profit Margin of ALL was 16.2% in the half year of FY08, while it has lost 3 percentage points in FY09's half year to come down to 13.2%. Similarly, the profit margin of the company was 10.2% in the current period while it was at the level of 12.7% in the same period last year. A closer inspection would reveal that the reason for this trend was a greater growth in the company's expenditure than its revenues. The company's finance cost hiked by 10.5%, while its administrative expenses increased by 12.2%. In contrast, the growth rate of the company's revenues did not even touch a double figure mark, staying at 8.8%.
Furthermore the company also had to incorporate a greater allowance for potential lease losses, an increase by a huge 64%, keeping in mind the turmoil in the economy, plagued with recessionary trend, high interest rates and high inflation rates. An important piece of information should be considered to truly understand the profitability of ALL. The SECP has relaxed the implementation of one of its laws, namely the IAS 39. Due to this relaxation, if a company has suffered impairment losses due to valuation of available for sale securities, this loss may not be shown in the profit and loss statement of the company's financial statements.
Instead, the company can directly deduct the amount of loss from the company's equity portion. The SECP has made this allowance keeping in view the turbulence seen in the last year in the economy in general, and the capital markets in particular. The good news for ALL, along with other companies is that it will be able to report a higher level of Net Profit for the period. In fact, if ALL's Rs 38.797 million impairment loss would have been included in the income statement, its profit after tax would have dropped to less than half than that of the same period last year.
The liquidity position of ALL was not commendable in the first half of the financial year 2009. There was a decline seen in both current assets and current liabilities, side by side with an increase in the company's expenses relative to its income. Consider the current ratio, which was 1.22 till the year-end of 2008, but currently has gone up to 1.30 from then till December 2008. The main reason for this trend was a huge decrease witnessed in the current liabilities, at 16.2%, than the decrease in the current assets, at 10.7%.
Although, there was 146% growth seen in ALL's investments due to a five-time increase in the held-to-maturity investments (specifically short-term placements), there was 15.2% decline in the current portion of net investment in lease finance, which makes over 80% of all current assets. The current liabilities saw double-digit decline in all top three of its four components, especially witnessing a decline of 14.6% in current maturity of long-term liabilities.
On the other hand, the Income-to-Expense Ratio of the company decreased to 1.20 in H1FY09 from 1.22 in H1FY08. This was an obvious result of greater growth rates of Finance and Administrative Expenses, at 10.9%, against the lesser growth in Total Revenue of 8.8%. The Debt Management picture of ALL has been on a path of deterioration. The company was hard hit by the increased finance costs arising out of the incidence of higher interest rates in the economy. For the foreseeable future, the monetary policy of the country will continue to be tight, unless inflation shown signs of abating.
However, ALL has done well to control the adverse effects of these factors. The level of increase in Debt in relation to Assets or Equity has not been radical. There was an understandable increase in the cost of funds to the company, with the finance cost rising by 10.5% since December 2007. Comparatively, the increase in EBIT of the company since that time has been only 6.2%. This translated to a marginally lower Times Interest Earned ratio of 1.20 in H1FY09 from 1.25 at December 2007.
As far as the Market Value of the company is concerned, there was an obvious decline seen due to a lack of good performance in the current period. The Net Profit for the period was down by 12.5%, which then translated to 12.2% lower Earnings per Share. In H1FY08, the EPS stood at Rs 1.39. In H1FY09, the EPS further plunged to a level of Rs 1.22.
RECENT DEVELOPMENTS
Net income for the year increased by 3% from Rs 149 million in FY07 to Rs 153 million. This amount is still less as compared to the net income of Rs 155 million in FY06, which was a particularly good year for the company performance wise. The total revenue had increased by 3.6% to Rs 1.17 billion in FY08, but the expenses of the company grew at a faster rate of 20.5%. This expense growth was mainly driven by administrative and general expenses, which increased by about 21% compared to last year. Combined with greater risk aversive policies of the companies seen in greater provisioning costs in response to the harsh economic conditions, the overall result was lesser net income growth.
Furthermore, the company saw its balance sheet grow by a very small margin of 1.4%. If the lease portfolio of the company is seen sector wise, the category of Consumer Facilities makes up over 68% of the total, with energy, oil and gas and transport and communication making 6% and 5.33% respectively. Thus it is quite clear that an overwhelming amount of the company's leasing activities are not for corporate or industrial use. If the leasing activities are categorized by assets, we see that mostly Vehicles have been leased by the company, nearly worth Rs 9 billion which is about three-fourth of the total, compared to machinery which ranks second at just over Rs 2 billion.
Intriguingly, ALL was granted licence to carry out housing finance services by the SECP on June 12, 2007. The company has not applied for the renewal of licence this year. This is understandable, as the current prospects of gaining profit from that sector are grim. The housing sector has been hit by a drop in the real estate value and a surge in the cost of construction activities.
COMPANY PERFORMANCE (FY04-FY08)
Considering the profitability of the company, since FY04, the Gross Profit Margin for Askari Leasing has remained between 16.2% and 16.7%, the only exception being a gross profit margin of 20.5% in 2006's financial year. A similar trend has been seen in Profit Margin, which remained a between a tight range of 13.1% and 13.2%, although soaring to 15.4% in FY06. This trend is due to better performance in 2006 by the company, which also yielded record earnings per share of Rs 3.63. In FY08, the profit margin and the gross profit margin are 13.1% and 16.6% respectively, having maintained their previous years' average levels despite the economic and political uncertainties in Pakistan.
The Net Income grew marginally as growth in the expenses outpaced that in revenues by nearly seven times for the current year. The reason for a rapid growth in the expenses was the 30% growth in the Administrative and General Expenses in FY08, which were almost wholly accounted for by Salaries, Allowances and Benefits to the company's employees. Furthermore, the revenues growth was slowed down by Income on Investments which saw a decline of nearly 11%. This was due to the lesser profits earned in the form of dividends from shares, TFC profits and less capital gains on sale of securities. Thus, the financial crisis in the country had very noticeable effects on the company's operations in FY08.
The Return on Assets for ALL has remained very stable in the last five years, hovering between 1.2% and 1.4%. In FY08, the ROA was 1.2%, same as the year before. This was mainly due to the negligible increase in the Total Assets by 1.4% as compared to FY07's figures. Along with a 3% rise in net income, the resulting ROA changed by a very nominal percentage. The Return on Equity had been ranging from 13% to 13.2% until 2007, only jumping in 2006 to the level of 16.2% mainly due to the phenomenal 51% growth in after-tax profit for that year. If compared to the industry, ALL has been successful in having a steady ROE. The ROE of the industry has been on a decline since 2005 and had reached less than 2% by 2007.
In that respect, ALL has performed better than average for its shareholders. However, competitors like Orix Leasing have managed to give better returns to its shareholders compared to the company. In FY08, the ROE declined slightly by half a percentage to 12.7%. This was primarily because the company's equity grew by 7% on the back of issuance of bonus shares and increase in funds of capital and general reserves. This growth was greater than that in the net income, culminating in a decline in this 2008's ROE. The liquidity position of the company has been constantly declining since FY04 when the Current Ratio was 1.53 and down to 1.25 in FY07.
In contrast, the industry's Current Ratio has been actually increasing for the last few years from 0.92 in FY05 to 1.13 in FY07. Yet, ALL's current ratio is still above the industrial average. Moreover, the trend of a declining current ratio is also seen in competitors of ALL. In FY08, the current ratio of the company declined further to 1.22. This happened despite the fact that Current Liabilities of the company declined by 4.4%. The down surge in Current Assets was greater, at 6.1% mainly due to huge decreases in two components. One, the balances with other banks of which both current and deposit accounts decreased by 52%.
The other component was that of Investments which slumped by 86% in FY08. The main reason for this slump was that an overwhelming portion of investments was in the form of Pakistan Investment Bonds. From April 1, 2008, the company had reclassified PIBs from available-for-sale investment to held-to-maturity investment, thus including them in long term assets. This is clear indication that the company is feeling the heat of the economic crisis in the country and wants to bank on safer investment options. On the other hand, current liabilities saw a decrease mainly due to nearly 18% reduction in the company's short term borrowing at the year end of 2008 compared to 2007, along with the halving of the accrued markup on the company's borrowings and certificates of investments (COIs).
It is interesting to note that ALL has a tough time ahead in the short run as in the next three months after the year end, ie September 2008, the company does not have enough assets to meet the maturing liabilities. Maturities ranging from 3 months to a year show that the assets will adequately cover the maturing liabilities of that time. Between maturity period of one year to five years, there are less net assets, a situation, which is reversed after 5 years' maturity period. But, on the downside, more assets and less liabilities that maturing after five years, mean that ALL does not have long-term funding resources as of now.
The Income-to-Expense Ratio of ALL has been relatively constant since FY04. It jumped to 1.30 in FY06 from the average level of 1.26, but then tumbled down to 1.21 in FY07. This ratio is marginally better than one of its competitor in the industry, Orix Leasing, which shows that ALL can generate a greater income while incurring a lower level of expenditure compared to other companies. The Income-to-Expense Ratio improved to 1.26 in FY08, as there was no visible growth in expenses in that year. Although Administrative and General Expenses did increase, but finance and bank charges, which form a greater portion of total expenses, decreased by 5%.
The reason for that was lesser profits given on COIs and markup on bank borrowings. The net effect was that total expenses for FY08 were almost the same as that of the previous year. So, since income was the only component that changed and increased, the income-to-expense ratio improved. As far as Debt Management is concerned, Askari Leasing Ltd can be considered as a company which relies relatively more on debt for financing of its assets rather than equity. Since the financial year 2004, the Debt-to-Assets Ratio of Askari Leasing has been ranging from 0.90 or 0.91. Compared to the same ratio of 0.64 of Orix Leasing, it can be noted that a much greater portion of ALL's assets is financed by debt.
The insignificant changes in total assets and total liabilities in FY08 result in maintenance of the ratio at its historical levels. In contrast, the Debt-to Equity Ratio is anything but stable. Till FY06, it saw an increasing trend reaching a figure of 10.36, after which it has been declining, down to 9.30 in FY08. This s rather opposed to the trend by some of ALL's competitors whose debt-to-equity ratio has been on a constant rise. ALL's rising and then falling trend was due to the fact that the company had not increased its equity substantially until FY06 had passed. Due the rise in the common stock and the reserves of the company ever since, the debt-to-equity has been on a decline.
FY08 serves as a good example to illustrate that as during that time, total debt did not even increase by a percentage point while the equity jumped by over 7%. A trend very similar to the above mentioned ratio is seen in the Long Term Debt-to-Equity Ratio, not just historically since FY04, but also in FY08. The Times Interest Earned by ALL has been constant reaching a high of 1.30 in FY06 and a low of 1.25 the next year. In FY08, the ratio improved to 1.27. This is in spite of a decrease in EBIT of 3.4% for FY08 as compared to that of FY07. The reason behind the increase in this ratio is that the decrease in EBIT was not as great as the decline seen in the Finance and Bank Charges, ie 5%. Interestingly, the industry's TIE ratio has been on a constant decline, being 1.62 in 2005 while touching 1.05 in 2007.
Thus, ALL's TIE ratio is better than that of the industry. Upon analyzing the Market Value of Askari Leasing Ltd, we see that it has been relatively steady in its Earnings per Share. Being a top performing year, 2006's EPS was a record Rs 3.63. The EPS in FY08 was Rs 3.41 as compared to Rs 3.30 of the previous year. It should be noted that the EPS average for the industry is well below that of ALL, being at Rs 0.24 in FY07 when ALL's EPS stood at Rs 3.30. However, there are firms in the industry that have consistently generated a higher EPS than ALL.
The Price-to-Earnings Ratio has been between 8.5 and 10 for the past three years on account of relatively similar market price of ALL's shares near Rs 30. For the latest financial year of 2008, the P/E ratio tumbled down to 8.71 from 9.92 in FY07 due to a hike in the EPS simultaneously with lower priced shares of ALL in the market. The company has mostly paid dividends in the form of bonus shares at the rate of 15% to investors. Cash dividend was given in FY07, but even then it was combined with bonus shares (10% cash; 5% bonus).
FUTURE OUTLOOK
Pakistan's economy has been going through very testing times. This is true for the financial sector as well of which leasing companies are an integral part. The constantly rising interest rates in the economy and breakneck inflation have proven as deterrents for potential lease customers. Even industrial customers would be less willing to lease machinery or equipment from leasing companies as the cost of doing so would be too high keeping in mind how poorly the industrial sector is expected to perform in the future.
Another challenge that ALL and other leasing companies will have to continue to face is competition from commercial banks. They are increasingly offering products similar to that of leasing companies and also have greater penetration in the market. Looking at the distribution of assets financed by lease, Askari Leasing Ltd, like many other leasing companies, has been heavily engaged in leasing vehicles, while plant and machinery have been leased too. Unfortunately, with the high cost of financing due to increased interest rates and inflation premiums, the demand for vehicles and their leasing has been dropping. Plus, the cost of automobiles themselves has risen due to increased steel prices (till a few months back), rising energy costs and a major depreciation in the Rupee.
All these factors combine to discourage demand for leasing vehicles. Therefore, it can be expected that leasing companies like ALL will be hit hard in the future. Nearly 70% of the company's leasing activities are in the form of Consumer Facilities, which will also be negatively affected by high interest rates, the soaring inflation and the resulting lack of purchasing power of the potential customers. Although the leasing sector has historically aimed to provide its services to the SME sector, there still is unmet demand from the SMEs. According to an estimate, financial services are only accessible to 20% of the country's population.
The penetration of leasing services would be understandably lower. Due to this reason, leasing companies have geared towards expanding into smaller cities to cater to the untapped market of SMEs over there. ALL has most of its operations in the bigger cites as of now, despite its presence in smaller cities like Gujranwala and Sialkot. ALL should also seek to expand its operations in the unconventional small cities of Pakistan.
It is also important to remember that ALL already has a presence in the Energy, Oil & Gas sector. This sector is being facilitated to grow by the government and prove a lucrative venture for foreign investments. Thus, ALL should provide products fit for the sectors of Oil & Gas Exploration/Production and Energy Generation and Distribution in order to capitalize on this opportunity.
The future of the company will be very testing with political and economic uncertainties creating hurdles in operations and may even hurt the interests of the company. But ALL has been a very resilient company throughout the years, most of its performance ratios stable at their previous levels. This is better than ALL's competitors and the leasing sector whose performance has been generally deteriorating. If ALL can deal with the competition from within the leasing sector and from outside it, harness the potential that exists in the opportunities present in the market, and continue its steady performance, then it will be able to withstand the turmoil that it will face in the future.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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