First Habib Modaraba

First Habib Modaraba (PSX: FHAM) is managed by Habib Metropolitan Modaraba Management Company (Private) Limited. It is engaged in the business of leasing, Musharaka, Murabaha financing and other related business.

Certificate holding pattern

As at June 30, 2021, over 57 percent certificates are held under the “others” category, followed by 27 percent by the local general public. The associated companies, undertakings and related parties hold 10 percent of the certificates. This category solely includes Habib Metropolitan Modaraba Management Company (Private) Limited. The directors, CEO, their spouses and minor children do not hold any certificates in the modaraba, while the remaining roughly 6 percent certificates are with the rest of the certificate holder categories.

Historical operational performance

Between FY16 and FY20, the modaraba saw a rising net income, while net margin declined gradually. On the contrary, in FY21, net income increased while net margin reduced.

During FY18, revenue witnessed an over 8 percent growth, with majority of the growth seen coming from profit on diminishing musharaka. The latter rose by 22.4 percent, while income from ijarah leasing reduced year on year. The modaraba overall saw a 29 percent rise in its disbursements which has been the highest thus far. Towards the end of FY18, the modaraba also launched a car financing product that received reasonable response, thus building the expectation of growth in this portfolio. Despite the growth in income, the modaraba was unable to uplift the net margin that was recorded at 49.5 percent, down from last year’s 54.6 percent. This was attributed to the escalation in finance expense, consuming 45 percent of total income. The increase in finance expense was due to profit on certificate of investment (musharaka).

The modaraba witnessed the biggest growth in revenue in FY19 at 54.4 percent, as net income rose from Rs 586 million in FY18 to Rs 905 million in FY19. While income from ijarah leasing decreased, it was more than offset by the rise in profit on diminishing musharaka that almost doubled year on year in value terms. The size of the balance sheet grew by 8 percent while total financing grew by 4 percent. Despite the highest growth seen in revenue, net margin continued to decline for the sixth consecutive period, recorded at 35 percent for the year. This was due to finance expense making a larger share in revenue at 60 percent. This was again due to profit on certificates of investment (musharaka).

In FY20, net income grew by over 22 percent to cross Rs 1 billion. Majority of the increase was associated with the increase in profit on diminishing musharaka that stood at Rs 1 million. The size of the balance sheet decreased by almost 11 percent whereas total financing reduced by 30 percent. This was attributed to “monthly repayment of financing book and reduced assets booking”. Additionally, the outbreak of the Covid-19 pandemic led to a slowdown in business and economic activities causing the lowest disbursements in the last quarter when strict lockdowns were in place. Accompanied by a continuous rise in finance expense, net margin fell to 28.6 percent for the year.

Revenue in FY21 shrunk by 20 percent as it fell to Rs 885 million. Profit on diminishing musharaka reduced by almost 22 percent.

However, there has been a rise in disbursement by 80 percent with the size of the balance sheet witnessing a 22 percent growth. But it was the fall in finance expenses, both in terms of value and as a share in revenue that made room for profitability as reflected in a net margin of 41 percent - a considerable increase from last year’s 28.6 percent. The decrease in finance expense was brought about by a decrease in profit on certificates of investment (musharaka).

Quarterly results and future outlook

Revenue in the first quarter of FY22 grew by over 33 percent year on year due to a significant improvement in disbursements for the period that more than doubled in value terms. This was attributed to better investment environment, and reasonable economic and business activity compared to the same period last year when business activities were only starting to resume after lockdowns began easing. Despite the increase in revenue, profitability was lower in 1QFY22 due to a higher finance expense as well as taxation. The latter was due to withdrawal of the modaraba sector from tax exemption. Thus, the company made provision for tax, unlike the same period last year.

Revenue in the second quarter of FY22 was significantly higher by almost 48 percent year on year. Cumulatively, disbursements for 1HFY22 witnessed a growth of 82 percent year on year resulting in financing assets growing by almost 42 percent. But net margin was again lower for 2QFY22 due to a notable finance expense that consumed more than 50 percent of the quarter’s revenue.

During 1HFY22, the economy has witnessed challenges such as twin deficits, currency devaluation and inflation. This can have an adverse impact on the business sentiments and thus the company.