Allied Rental Modaraba (PSX: ARM) was established under the Modaraba Companies Modaraba (Floatation and Control) Ordinance, 1980. It is engaged in rental/Ijarah and operation and maintenance of Caterpillar and other machinery such as generators, forklifts, compactors, etc.
Shareholding pattern
As at June 30, 2022, associated companies own 91 percent of the certificates in the modaraba. Within this category, Allied Engineering & Services (Private) Limited is major certificate holder. About 5 percent is with the general public, while the directors, CEO, their spouses and minor children collectively own 4 percent certificates. The remaining less than 1 percent certificates are with the rest of the categories.
Historical operational performance
The company has seen a decline in revenue only twice since FY13, in FY16 and FY20. Profit margins, in the last six years particularly, have followed a downward trajectory between FY17 and FY21, before improving in FY22.
In FY18, total income, which is a sum of ijarah rentals, operating and maintenance income, and profit on ijarah finance, grew by almost 19 percent. Ijarah rentals is the major source of income for the company. It grew by over 19 percent in FY18. The latter was attributed to diversification of the rental portfolio, as well as sales growth witnessed in all segments of the rental portfolio. There was lower demand from textile that received better grid availability. On the other hand, the power rental business achieved its revenue targets. In addition, infrastructure projects under CPEC led to growth in CAT machines and SANY cranes rental segment. While gross margin was marginally lower at over 25 percent, finance expense brought net margin down to 10.7 percent, from last year’s 14.7 percent. The increase in finance expense was due to higher mark-up rates and borrowing. The latter was because of capital investment.
Total income in FY19 was higher by 3.4 percent as ijarah rentals also grew by a similar extent. The marginal growth was due to general economic uncertainty after the general elections. This caused “stagnation of new contracts as well as price increments”. Demand from textile sector remained low, while cement and housing society sector encouraged diesel and gas units’ sales. Gross margin was again slightly lower at almost 24 percent, followed by net margin also more or less flat at 10 percent as the latter was supported by other income of abnormally high Rs 105 million.
Total income in FY20 was lower by over 10 percent as income from ijarah rentals reduced by almost 11 percent. Economic activity was already slow a year after the elections, when the Covid-19 pandemic broke out leading to strict lockdowns. Thus, production in many sectors was brought to a halt. Due to dampened economic activity, investments reduced to Rs 317 million. With some decrease in operating expenses as a share in revenue, gross margin increased marginally to over 25 percent. However, net margin was down to 6.6 percent as other income reduced substantially Rs 28 million.
Total income in FY21 recovered as it posted a growth of over 8 percent with majority of this growth brought about by an increase in ijarah rentals. Sales from the power rental business increased as all the segments achieved their targets for the year. The large MW units of diesel also saw higher usage due to gas shortages with the textile units. However, with the increase in operating expenses due to currency depreciation, gross margin reduced to 23.5 percent. Despite considerable support from other income, the company incurred a net loss of Rs 251 million as taxation expense stood at a considerably higher Rs 783 million. However, if one were to look at profit before tax, it stood at a six-year high of Rs 532 million.
Total income in FY22 grew by the highest seen since FY13, at over 20 percent to reach Rs over 4.5 billion in value terms. Ijarah rentals witnessed a growth of almost 21 percent. Requirement for power rentals existed throughout the year due to weak grid, and unavailability of gas to captive power units. Hence, overall, there was an increase in demand as deployment was seen across the sectors, from textiles to cement to all industrial and commercial segments. With operating expenses consuming a relatively smaller share in revenue year on year, gross margin increased to 27.7 percent. This also trickled to the net margin that improved to 8.6 percent as taxation expense reduced year on year.
Quarterly results and future outlook
Total income in the first quarter of FY23 was higher by 26.5 percent, with ijarah rentals higher by nearly 27 percent year on year. Particularly, revenue from the power segment increased by 35 percent while sales from outbound logistics increased by 42 percent. On the other hand, sales from machines and cranes segment were lower due to the floods that led to lower utilization of machines. With a very marginal increased in operating expenses as a share in revenue, gross margin remained flat at 28 percent. Net margin improved slightly to 12 percent as administrative expense and taxation consumed a lower share in revenue.
As the tax exemption for Modarabas was exempted, Allied Rental considered converting the modaraba to two private limited entities, for which it received NOCs from all creditors. It expects to hear approval from Sindh High Court before the end of 2022, after which it will conduct the transfer of assets and liabilities.
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