Askari Leasing Limited (ALL) was incorporated as a public limited company on August 1, 1993 and granted the certificate of commencement of business on November 3, 1993 and went public in the same year with a capital base of Rs 100 million. As of June 30, 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% of its stock. 1,192 individual shareholders own 5.886% shares of the company. Remaining shares 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 of various durations, both short term and long term. Some of its products are as follows: Askar, ALLs 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 Leasings 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 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 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 by strong competition from commercial banks, which are increasingly offering products and services similar to that of NBFCs, including 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.
RECENT DEVELOPMENTSNet 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. Total revenue had increased by 3.6% to Rs 1.17 billion in FY08, but 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 the 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 companys leasing activities are not for corporate or the 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 third-fourths 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 this sector are grim. A drop in the real estate value and a surge in the cost of construction activities have hit the housing sector.
COMPANY PERFORMANCE (FY04-FY08)Considering the profitability of the company since FY04, the gross profit margin has remained between 16.2% and 16.7%, the only exception being a gross profit margin of 20.5% in 2006s financial year. A similar trend has been seen in profit margin, which remained 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 7 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 companys employees.
Furthermore, the revenue 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 companys 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 FY07s 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 companys 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 2008s 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 industrys current ratio has been actually increasing for the last few years from 0.92 in FY05 to 1.13 in FY07. Yet, ALLs 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 is 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 were 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 companys short term borrowing at the year end of 2008 compared to 2007, along with the halving of the accrued markup on the companys borrowings and certificates of investments (COIs).
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 the administrative and general expenses increased, 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 mark-up 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 Ltd 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 ALLs assets are 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, 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 ALLs competitors whose debt-to-equity ratio has been on a constant rise. ALLs 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 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 industrys TIE ratio has been on a constant decline, being 1.62 in 2005 while touching 1.05 in 2007. Thus, ALLs TIE ratio is better than that of the industry.
Upon analysing 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, 2006s 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 ALLs 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 ALLs shares near Rs 30. In the current 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 PROSPECTSPakistans 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 has risen due to increased steel prices (till a few months back), rising energy costs and a major depreciation in the rupee value. 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 companys leasing activities are in the form of consumer facilities, which will also be negatively affected by high interest rates, inflationary pressures 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 countrys 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 and gas exploration/production and energy generation and distribution in order to capitalise 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 ALLs 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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