Hafiz Limited (PSX: HAFL) was incorporate in Pakistan as a public limited company in 1951. Initially the company was engaged in the spinning of textile fibers, however, the company changed its principal line of business and is now engaged in earning rentals on land and buildings.
Pattern of Shareholding
As of June 30, 2023, HAFL has a total of 1.2 million shares outstanding which are held by 947 shareholders. General public has the highest stake of 67.07 percent in the company, followed by directors, CEO, their spouse and minor children holding about 22.69 percent shares. Textile Trading Company Limited, which is an associated company of HAFL accounts for 9.84 percent of the outstanding shares of HAFL. The remaining ownership is divided among other categories of shareholders.
Financial Performance (2018-23)
Except for a dip in 2019, HAFL’s topline has been increasing during the years under consideration. Conversely, its bottomline plunged twice during the period i.e. in 2020 and 2022. The margins portray a cyclical pattern whereby they posted a staggering rebound in 2019 followed by a sharp decline in 2020. In 2021, the operating margin slightly recovered while net margin continued to slide down. The margins drastically eroded in 2022 followed by a recovery in 2023, however, couldn’t attain the level seen before 2022 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.
In 2019, HAFL’s topline slid by 17 percent year-on-year on account of lesser rental income owing to uncertain economic and political backdrop of the country making investors hesitant in making investments, resulting in thinner demand for land and buildings for warehousing. Administrative expense also slumped by 10 percent in 2019 as the company incurred lesser repair and maintenance expense. The company also booked considerable unrealized gain on change in the fair value of investment property in 2019. This resulted in a 35 percent year-on-year rise in its operating profit with OP margin moving up from 140 percent in 2018 to 228 percent in 2019. Finance cost slipped by 50 percent year-on-year in 2019. Finance cost comprised of only bank charges as the company didn’t have any external borrowings on its books as of 2019. The bottomline registered a 43 percent year-on-year uptick in 2019 to clock in at Rs.24.18 million with an NP margin of 215 percent versus 124 percent in 2018. EPS also improved from Rs.14.13 in 2018 to Rs.20.15 in 2019.
2020 saw a decent 24 percent year-on-year rise in the rental income of HAFL. The company provided warehousing services to its clients, which boosted during the COVID-19 period when sales of the businesses slumped and inventory needed to be held with the companies. Other income also posted a staggering 389 percent rise in 2020 as the company disposed off its operating fixed assets at a gain and also because of the write-off of the liabilities no longer payable. Conversely, unrealized gain on change in the fair value of investment property tumbled by 28 percent year-on-year in 2020.Administrative expense escalated by 10 percent year-on-year in 2020 mainly on account of utilities and depreciation expense. This squeezed the operating profit by 8 percent year-on-year in 2020 with OP margin marching down to 172 percent. Finance cost (or bank charges) grew by 17 percent year-on-year in 2020 due to frequent transactions on account of higher volume of warehousing clients during the year. HAFL’s bottomline eroded by 14 percent year-on-year in 2020 to clock in at Rs.20.74 million with an EPS of Rs.17.28 and NP margin of 150 percent.
Among all the years under consideration, HAFL posted the highest year-on-year growth of 67 percent in its rental income in 2021. However, the growth of rental income was largely offset by a 31 percent year-on-year plunge in unrealized gain on change in the fair value of investment property. Administrative expense also spiraled by 7 percent year-on-year mainly on the back of higher depreciation expense and auditors’ remuneration expense. Other income proved to be the life saver for HAFL in 2021 as it posted a robust 482 percent year-on-year rise on account of gain on sale and revaluation of its financial assets. As a consequence, operating profit picked up by 70 percent year-on-year in 2021. Finance cost eroded by 14 percent year-on-year in 2021. Net profit plumped up by 61 percent year-on-year in 2021 to clock in at Rs.33.30 million with an EPS of Rs.27.75 and NP margin of 145 percent.
HAFL’s rental income improved by 11 percent year-on-year in 2022. Unrealized gain also rose by 22 percent year-on-year in 2022. However, it was offset by 89 percent decline in other income as there was no gain booked on the revaluation of investment. Gain on sale of investment also considerably dropped in 2022. To make things even worse, administrative expense magnified by 78 percent year-on-year which was mainly the consequence of radical increase in directors’ remuneration, utilities and fee and subscription charges incurred during the year. Loss on revaluation of investment further deteriorated the financial performance of HAFL in 2022. Operating profit weakened by 64 percent year-on-year in 2022 with OP margin falling down to 57 percent. Finance cost almost stayed the same. Net profit plummeted by 64 percent year-on-year in 2022 to clock in at Rs.12.11 million with an EPS of Rs.10.09 and NP margin of 48 percent.
Recent Performance (2023)
In 2023, HAFL’s rental income grew by another 29 percent year-on-year. Unrealized gain on investment property also registered 24 percent uptick in 2023. Other income improved by 68 percent year-on-year as the company wrote off the liabilities no longer payable and made gain on disposal of its operating fixed assets in 2023. On the expense front, HAFL incurred lower loss on revaluation of its investments in 2023 which drove other expense down by 70 percent year-on-year. Conversely, administrative expense escalated by 24 percent year-on-year in 2023 on account of higher payroll expense, utilities, vehicle running expense as well as repair & maintenance. Nevertheless, operating profit jumped up by 108 percent year-on-year in 2023 with OP margin climbing up to 92 percent. Finance cost grew by 8 percent year-on-year culminating into a 93 percent year-on-year rebound in net profit in 2023. Net profit clocked in at Rs.23.39 million in 2023 with an EPS of Rs.19.49 and NP margin of 71.5 percent.
Future Outlook
HAFL’s performance is contingent on the business activity in the country as well as performance of stock market. Given the shattered investor confidence due to deteriorating macroeconomic indicators, both the variables are highly vulnerable. The company needs to diversify its sources of income in order to stay afloat in the current shaky economic and political backdrop.