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Arif Habib Limited (AHL), formed in 2004. It is a part of the Arif Habib Group, which is one of the largest financial groups in Pakistan. Arif Habib Securities Limited is the parent company of AHL. AHL deals with brokerage and corporate finance. In 2007, the company listed on all the three stock exchanges as well as on the National Commodity Exchange Limited (NCEL)
The list of financial services include securities brokerage, investment research, valuation, financial structuring, raising capital, advisory, initial public offers, private placements or commodities brokerage. Operating revenue is composed of income from these operations. AHL invests in providing an increasing capacity to serve its customers and complies with international standards of practices. These attributes have provided AHL a competitive advantage over its competitors.
RECENT FINANCIAL PERFORMANCE
During the current quarter, the company earned operating revenue of Rs 111.7 million but incurred a net after tax loss of Rs 42.5 million on a quarter-on-quarter basis. The operating revenues have shown a decline of 26.3%. This was primarily due to the poor performance of the market, lack of business and the risk of default in collections. Although the operating profit for the above period was higher than the corresponding period in FY08, a stupendous increase in the other charges drove the figure into red.



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Recent Results for Q1-09 2007 2008
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Operating revenue 151,491,256 111,678,269
Capital gain on investments - Net 1,485,524 73,055,906
Operating expenses -31,354,365 -33,776,164
Operating profit 121,622,415 150,958,011
Finance costs -17,606,545 -31,766,175
Profit before taxation 108,999,840 -37,189,807
Profit after taxation 101,071,922 -42,492,335
Earning per share-basic and diluted 4.59 -1.77
=======================================================================

KSE-100 Index, which is the benchmark, reported a decline in price by 24.7% and the index came down to 9179.68 points on 30th September 2008. The volumes on a Q-o-Q basis have declined drastically by 71.5% - 73.95 million shares in Q1'08 against 259.60 million shares in Q1'09. On 30th Sep 2008, the volume at KSE-100 Index was an all time low of 1 million shares.
OVERVIEWSince 2000 to April 2008, this sector has seen massive growth as the stock market in Pakistan witnessed a boom. This was propelled by the sound policies of the government in the form of deregulation and privatisation of the non-banking financial institutions (NBFIs).
A number of brokerage firms established and the scope of finance industry expanded. Apart from the stock market crash in 2005, the macroeconomic indicators were stable and the market maintained its momentum.
However, this year Karachi stock market was volatile as KSE-100 Index was at 13,772 points at the start of the year, increased to 15,676 points in April 2008 and then hurtled down to 11,162 points in June 2008.
There was initially an increase of 13.8% but there was a net decline of 19% from the start of the year. For FY08, the overall net decline in price was 10.8%. The average daily volumes (ADV) increased by 15.7% compared to FY07. This has been due to the worsening macroeconomic indicators and loss of both domestic and foreign investors' confidence due to political and financial turmoil. This is evident in the comparison chart, which compares AHL's stock KSE-100 Index.
PROFITABILITY
The profit margin has declined substantially from 200% to 60%, even though the operating revenue increased from Rs 555.3 million to Rs 731.4 million and gross profit margin has remained almost constant over the three-year period. However the increase in operating revenues was very low (32%) in FY08 compared to FY07 (97%).
Besides, the costs for the current fiscal year were much higher as compared to the last year, which has resulted in a decline of profitability. Hence the profit after tax declined by 48%.
Moreover brokerage and financial services have a derived demand. If stocks have a higher overall demand due to macroeconomic stability then the companies will be in greater need for IPO issues, underwriting requirements and general financial advisory services.
Otherwise companies will curtail financial advisory expenditure and focus over core operations. Moreover, equity has increased by 76.4%, which has reduced the return on equity ratio. Assets have also increased by 49% in FY08 compared to an increase of 28% in FY07 and that has also reduced the return on assets ratio.
LIQUIDITY
The liquidity has improved as the current assets have increased over the time first by 30% in FY07 and then by 51% in FY08 while the liabilities initially declined by 7% and then increased by 16%. Revenues have also increased substantially while expenses have shown little change. Hence the company is in a better position to finance its short-term obligations either through current assets or through earnings in the current period. The company thus also faces low credit risk.
DEBT MANAGEMENTThe debt management shows a declining trend of debt. This indicates low financial risk for the company. Increase in equity may be a reason for a lower debt to equity ratio. The company will have fewer interest payments to make and will thus insulate effects of adverse interest rate movements especially in an economy where tight monetary policy is being followed.
The long term to equity ratio has declined to zero as long-term liabilities have been zero since two years. Increase in equity and assets, has also resulted in this trend. This will enable the company to borrow funds in the future and be able to maintain the gearing ratio and other debt management ratios.
INVESTOR EXPECTATIONSThe stock gave an annual return of 27.1% for the fiscal year 2008. This is favourable compared to the return at the KSE-100 Index which is -7.7%. Hence for this time period, AHL outperformed its benchmark. The market price of the stock and the EPS increased.
The P/E ratio has shown a slight increase in value. The future expectations as reflected in price are good. In FY07, the company declared 100% dividend as it reported a huge profit, but in FY08, the dividend was declared only at 25% due to decline in profits.
However, in the first quarter of FY09 the returns on AHL stock value has declined owing to the market conditions. The share prices reached at a peak in January this year and have progressively declined. The share may be interpreted to be under-valued (due to market conditions) and the investors can purchase the shares now in hope that the price will rise in the future. In that e vent they will make capital gains.
FUTURE OUTLOOKAHL is a part of an important financial sector. To reform the NBFIs, SECP has given the sector some advantages and incentives to attract customers and for the growth of the industry. The regulations ensure that the risks at these stages are minimised.
The sector and the company have a lot of potential to grow as the growing worldwide trend is towards financial innovation. The company benefits from synergies as the Arif Habib Group have many financial institutions under its umbrella. After the stock exchange turmoil is over the company will regain its position.



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ARIF HABIB LTD. - FINANCIALS
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Jun '04 - Jun '08
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Balance sheet (In Rupees) 2006 2007 2008
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SHARE CAPITAL AND RESERVES
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Authorised capital (50,000,000 500,000,000 500,000,000 500,000,000
ordinary share of Rs 10 each)
Issued, subscribed and paid up capital
24,000,000 shares, 200,000,000 200,000,000 240,000,000
shares of Rs 10/- each
Reserve 125,868,733 397,459,366 813,901,008
Total Shareholder's Equity 325,868,733 597,459,366 1,053,901,008
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NON CURRENT LIABILITIES
---------------------------------------------------------------------------------------
Long term loan 250,000,000 0 0
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CURRENT LIABILITIES
---------------------------------------------------------------------------------------
Trade and other payables 192,051,363 443,509,955 327,873,795
Mark up accrued 5,621,869 4,102,412 21,718,668
Short term borrowing 58,874,379 0 168,894,551
Taxation 18,043,931 41,357,424 48,528,447
Total Liabilities 524,591,542 488,969,791 567,015,461
Total equity and liabilities 850,460,275 638,816,790 1,620,916,469
---------------------------------------------------------------------------------------
NON CURRENT ASSETS
---------------------------------------------------------------------------------------
Property, plant & equipment 8,170,488 10,098,090 11,761,526
Memberships & licenses 41,600,000 41,600,000 57,150,000
Long term deposits 12,870,000 13,971,500 13,975,385
Total non-current assets 62,640,488 65,669,590 82,886,911
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CURRENT ASSETS
---------------------------------------------------------------------------------------
Investments - at fair value 130,404,600 31,204,000 169,127,651
through profits & loss
Trade debts 393,729,041 278,093,975 437,370,800
Receivable against securities transaction 27,052,714 0 0
Receivables against CFS transactions 0 220,544,999 11,873,267
Loans and advances 5,149,932 24,041,405 41,109,912
Deposits and prepayments 2,131,711 88,270,642 133,324,620
Advance Tax 21,479,632 43,719,964 55,859,788
Other receivables 5,188,929 8,367,311 18,483,829
Cash & bank balances 202,683,228 326,517,271 670,879,690
Total current assets 787,819,787 1,020,759,567 1,538,029,557
Total assets 850,460,275 1,086,429,157 1,620,916,468
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PROFIT AND LOSS ACCOUNT 2006 2007 2008
---------------------------------------------------------------------------------------
Operating revenue 282,232,040 555,372,993 731,375,817
Capital gain on investments - Net 53,202,205 3,853,149 34,302,014
Gross Profit 335,434,245 559,226,142 765,677,831
Operating expenses -61,424,251 -126,793,028 -153,995,551
Operating profit 609,444,239 991,659,256 611,682,280
Finance cost -28,814,323 -71,216,979 -136,593,804
Other income 0 1,108,936 29,379,681
Other charges 0 -136,121 -33,765
Net gain on re-measurement 240,693 963,307 -1,268,532
of investments
at fair value through profit and loss
Profit before taxation 580,870,609 922,378,399 503,165,860
Provision for taxation -18,077,931 -41,561,624 -46,724,218
Profit after taxation 562,792,678 880,816,775 456,441,642
EPS - basic & diluted 11.37 16.08 19.14
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FINANCIAL RATIOS 2006 2007 2008
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PROFITABILITY RATIOS
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Profit Margin 1.99 1.59 0.62
Gross Profit Margin 1.19 1.01 1.05
Return on Assets 0.66 0.81 0.28
Return on Equity 1.73 1.47 0.43
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LIQUIDITY RATIOS
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Current Ratio 1.50 2.09 2.71
Revenue/Expense Ratio 4.59 4.38 4.75
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.62 0.45 0.35
Debt to Equity Ratio 1.61 0.82 0.54
Long Term Debt to Equity 0.77 0.00 0.00
Times Interest Earned 21.15 13.92 4.48
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MARKET RATIOS
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Earning per share 11.37 16.08 19.14
Price/Earnings Ratio 12.68 12.90
Dividend per share (Rs) 10 2.5
Book value per share 16.29 29.87 43.91
No of Shares issued 20,000,000 20,000,000 24,000,000
Market prices(Year End) 203.9 246.99
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Copyright Business Recorder, 2008

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