Financial Groups: ARIF HABIB LIMITED - Analysis of Financial Statements Financial Year 2006-H1 Financial Year 2009
Arif Habib Limited (AHL) was 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. It deals with brokerage and corporate finance. It is 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. Hence these off-the-balance sheet transactions are responsible for the operations of the company. 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.
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Recent Results for Q1-09 H108 H109
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Operating revenue 339,936,243 282,808,508
Capital gain on
investments - Net 29,395,013 (100,785,292)
Operating expenses (72,500,840) (46,949,788)
Operating profit 296,830,415 (164,017,573)
Finance costs (24,401,070) (126,159,102)
Profit before taxation 273,158,790 (51,639,060)
Profit after taxation 251,261,834 (59,059,220)
Earning per share-basic
and diluted 8.49 (1.97)
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Recent Results for Q2-09 Q208 Q209
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Operating revenue 188,444,988 171,130,239
Capital gain
on investments - Net 27,909,489 (173,841,198)
Operating expenses (41,148,475) (12,264,624)
Operating profit 175,208,001 (153,634,287)
Finance costs (6,794,525) (94,392,927)
Profit before taxation 160,299,274 (14,449,253)
Profit after taxation 146,330,236 (16,566,885)
Earning per share-basic
and diluted 5.01 (0.55)
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Recent Results for Q1-09 Q109 Q209
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Operating revenue 111,678,269 171,130,239
Capital gain on investments - Net 73,055,906 (173,841,198)
Operating expenses (33,776,164) (12,264,624)
Operating profit 150,958,011 (153,634,287)
Finance costs (31,766,175) (94,392,927)
Profit before taxation (37,189,807) (14,449,253)
Profit after taxation (42,492,335) (16,566,885)
Earning per share-basic and diluted (1.77) (0.55)
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RECENT FINANCIAL PERFORMANCE
The results for the first half of FY09 show a dismal picture. The PAT shows a loss of Rs 59 million as against PAT of Rs 251 million in the corresponding period of last fiscal year, a decline of 124%. The operating revenue in first half of FY09 stood at Rs 282.8 million as against Rs 339.9 million in the corresponding period of last year. This represents a loss of 17%. The major reason for this huge loss of net income is the capital loss on investments. Due to problems in the stock exchange and crunch in the financial sector, brokerage activities have come down to a halt.
Consequently the investments have devalued as compared to the previous fiscal year. The finance cost has also increased by 417%. This is the impact of the tight monetary policy. The operating expenses reduced by 35%, but could not bring a positive difference in the operating profit, which showed a decline of 155%. The results on a quarter-based comparison in the two years show a similar picture. The company incurred a net loss in Q2FY09, which represents a 111% decline in PAT. The capital loss on investments incurred in this period was Rs 174 million resulting in a 732% decline in the value of investments.
The operating expenses were 70% lower compared to the corresponding period in the last fiscal year, which resulted in a net operating loss of Rs 154 million (loss of 188%). The finance costs increased by a whopping 1289% and further substantiated the loss. The results on a quarter on quarter analysis of the same fiscal year show that the operating revenues increased by 53%. The capital gain on investments converted to a capital loss in second quarter, reflecting a change of minus 338%. The operating expenses declined by 64% but the operating profit declined by 202% due to significant capital loss on investments. The PAT has increased by 61%. This shows that performance has improved on a quarterly basis. The erosion in EPS has reduced as well by 69%.
OVERVIEW Since 2000 to April 2008 this sector has seen massive growth as the stock market in Pakistan witnessed a boom. This was propelled by sound government policies in the form of deregulation and privatization of the non-banking financial institution sector (NBFIs). A number of brokerage firms established and the scope of finance industry expanded. Apart from the stock market crash in 2005, the macro-economic indicators were stable and the market regained 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 19.0% from the start of the year. For FY08, the overall net decline in prices was 10.8%. The average daily volumes (ADV) increased by 15.7% compared to FY07. This has been contributed by the worsening macroeconomic indicators and loss of both domestic and foreign investor confidence due to political and financial turmoil. This is evident in the comparison chart, which compares AHLs stock with 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 also remained almost constant over the three years period. However the increase in operating revenues (32%) was lower compared to last year (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 macro-economic 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 the current fiscal year compared to an increase of 28% in the last fiscal year and that has also reduced the return on assets ratio.
LIQUIDITY
The liquidity of the company has improved as the current assets have increased over 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 MANAGEMENT The debt management shows a declining trend of debt. This indicates low financial risk for the company. 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. The earnings of the company have reduced by 48% which will affect the ability of the company to pay its current liabilities from earnings in the current period which will create a need to borrow if these funds are insufficient.
INVESTOR EXPECTATIONS
The 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 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 gave a 100% dividend as it reported a huge profit, but this year, the company declared a cash dividend of 25% due to decline in profits.
However in the first quarter of FY09, the returns on AHL stocks value has declined owing to the market conditions. The share prices reached a peak in the month of 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 event, they will make capital gains.
FUTURE OUTLOOK
AHL is part of an important financial sector. To reform the NBFIs, SECP has given the sector some advantages and incentives to attract customers and grow. 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. The floor on the market has been removed and the market has shown some revival on account of launch of NIT fund and IMF package. The daily volume has on many days crossed the 150 million shares mark. The companys performance now depends on the traded volumes and asset values on the exchange.
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Arif Habib Ltd. - Financials
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Jun 04 - Jun 08 (In Rupees)
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Balance sheet (In Rupees) 2006 2007 2008
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SHARE CAPITAL AND RESERVES
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
Reserves 125,868,733 397,459,366 813,901,008
Total Shareholders Equity 325,868,733 597,459,366 1,053,901,008
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NON CURRENT LIABILITIES
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Long term loan 250,000,000 0 0
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CURRENT LIABILITIES
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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
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NON CURRENT ASSETS
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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
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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 27,052,714 0 0
securities transactions
Receivables against 0 220,544,999 11,873,267
CFS transactions
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
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 240,693 963,307 -1,268,532
remeasurement 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].
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