OVERVIEW OF THE COMPANY
Askari Leasing Limited (ALL) is a public limited company incorporated in Pakistan on August 1, 1993. It obtained a certificate of commencement of business on November 3, 1993, with an initial capital base of Rs 100 million. By June 30, 2009, ALL’s total equity had surpassed Rs 1.4 billion and its balance sheet amounted to nearly Rs11.8 billion. The Army Welfare Trust (AWT) has majority control over the company and holds a stake of approximately 57.66%.
5.886% of the shares are owned by individual shareholders, while institutional investors and employees hold the remaining shares. The company operates in multiple sectors such as consumer, transport, communications, textiles, power, and healthcare. It also offers Certificates of Investments with varying durations, both short-term and long-term. Among its prominent products are Askar, which is renowned for auto leasing within the country, along with Ask Life, Industrial Lease, Certificates of Investments, Ask Overseas, and Ask Power.
Its sister concerns include 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, and Askari Guard Limited. Operating from its registered and head offices located on the 5th Floor, AWT Plaza, The Mall, and Rawalpindi Cantt., Askari Leasing Ltd also has a strong presence in various commercial centers throughout the country with its extensive branch network.
Askari Leasing, a company with a branch network in 10 cities across Pakistan including Karachi, Lahore, Rawalpindi, Islamabad, Peshawar, Faisalabad, Multan, Sialkot, and Gujranwala has been awarded an entity rating of A Plus for long-term obligations and A1 for short-term obligations by PACRA as of June 30th, 2007. Askari Leasing holds a significant presence in major commercial centers nationwide.
INDUSTRY BACKGROUND
In Pakistan’s leasing sector, there are currently 27 companies. This includes 16 leasing companies, 4 investment banks, 2 investment companies, and 5 Modarabas. The number of leasing companies in the country was higher in 1997 with a total of 32. However, this figure has been declining since then, especially after the year 2000. This decrease can be attributed to the increase in the minimum paid-up capital requirement for leasing companies to Rs 200 million. Consequently, mergers and acquisitions have become more prevalent.
The leasing sector has seen a decline in performance recently due to tough competition from commercial banks, which now offer similar products and services as non-banking financial companies (NBFCs) and leasing firms. Moreover, there has been a slowdown in credit uptake by the private sector, leading to a 14% decrease in new business volume for members. In 2007, this volume dropped to Rs 36 billion compared to Rs 41 billion in 2006. However, there is some positive news as the total assets of the leasing sector rose by 4% to Rs 128 billion in 2007 from Rs 123 billion the previous year.
Investments in lease finance decreased from Rs 75 billion to Rs 73 billion in FY06, while revenues increased slightly by 2% from Rs 14.7 billion to Rs 15 billion. However, borrowing costs rose significantly by 14% to Rs 8.5 billion due to the increasing interest rate environment. This caused the average spread, which measures the difference between the cost of funds and lending rates, to drop below 2% and impact the sector’s profitability. As a result, profitability declined from Rs 2.06 billion in 2006 to Rs 635 million in FY07.
CREDIT RATING
Pakistan Credit Rating Agency Limited (PACRA) has maintained Askari Leasing’s entity rating of A Plus for the long-term and A1 for the short-term obligations based on the results of June 30, 2008. However, there has been a decrease of Rs 3 million (1.17%) in lease income compared to the same period in 2008. This decline in lease income is attributed to a decrease in the loan portfolio caused by high interest rate levels and a slowdown in economic activity in Pakistan. Additionally, other income has also declined by Rs 11.3 million (57.75%). This decline can be attributed to a one-time record of capital gain from the disposal of investment property in Q2 2008.
The financial charges decreased by 6.2% due to replacing high interest liabilities with lower rate liabilities. However, general and administrative expenses increased by 6.5%, which is considered nominal considering the inflationary pressures. Lease income was recorded at Rs 262 million, a significant increase compared to the previous quarter. Profit before Tax declined by 12.7% and was recorded at Rs 41 million. Profit after Tax experienced a decline of 13.5% and was recorded at Rs 32 million. With the improvement of Pakistan’s economy in the future, it is hopeful that ALL will also improve.
FINANCIAL PERFORMANCE FY09
Despite a challenging first half of FY09, ALL experienced a turnaround in the second half of the year. The company’s total revenue grew by 9.8% to reach Rs 1.29 billion in FY09, compared to Rs 1.17 billion in FY08. Despite facing increased expenses and allowance for potential lease losses, this revenue growth led to an 8.1% increase in before tax profit, amounting to Rs 210 million. The profit after tax for the period was Rs 160 million, which is a 4.5% improvement over the net profit of FY08.
Furthermore, ALL’s liquidity position also improved during FY09.
The company’s income grew due to higher current assets and lower current liabilities. Additionally, the current ratio increased from 1.22 to 1.46 by the end of 2008. This was primarily driven by a 10% decrease in current liabilities and a 7% rise in current assets.
Although ALL’s investments have increased by 146%, the majority of this increase is attributed to a five-fold rise in held-to-maturity investments, specifically short-term placements. Despite this growth, the current portion of net investment in lease finance, which makes up over 80% of all current assets, has only risen by 10%. On the other hand, there has been a decrease of 10% in total current liabilities mainly due to a significant decline of 69.4% in short-term borrowings. In contrast, there has been a 12.5% increase in the current maturity of long-term liabilities.
Although the Income-to-Expense Ratio only saw a slight increase from 1.26 to 1.27 in FY09, the company managed to achieve higher growth in Total Revenue at 9.8% compared to expenses growing at 8%. However, ALL’s debt management situation worsened due to increased financial costs resulting from higher interest rates in the economy. The period’s net profit increased by 4.5%, leading to a 4.4% rise in EPS, which went up from Rs 2.96 in FY08 to Rs 3.09 in FY09.
RECENT DEVELOPMENTS
Net income for the year increased by 4.5% from Rs 153 million in FY08 to Rs 160 million in FY09. The Total Revenue had increased by 39.8% to Rs 1.9 billion in FY09, and the expenses of the company grew at a rate of 8.5%. Combined with greater risk aversion policies of the companies seen in greater provisioning costs in response to the harsh economic conditions, the overall result was not as high a net income growth as should have been. Furthermore, the company saw its balance sheet grow by a relatively high 13%.
In terms of profitability analysis, since FY04, the Gross Profit Margin has remained steady within a range of 16.2% and 16.7%, except for an exceptional gross profit margin of 20.5% recorded in FY06.
The company has maintained a consistent profit margin, ranging from 13.1% to 13.2%, with a peak of 15.4% in FY06 and a decrease to 12.4% in FY09. In 2006, the company had strong performance, resulting in record earnings per share of Rs 3.63.
Over the past five years, ALL’s Return on Assets (ROA) has remained stable between 1.2% and 1.4%. In FY08, the ROA stayed at 1.24%, unchanged from the previous year. However, it significantly increased to 1.35% due to a reduction of 4.5% in Total Assets and a rise of 4% in Net Income compared to FY08.
The Return on Equity (ROE) of ALL remained steady at 13% to 13.2% until 2007, but it increased to 16.2% in 2006 thanks to a significant after-tax profit growth of 51%. Despite this notable increase, ALL has consistently maintained a stable ROE that exceeds the industry average and showcases exceptional shareholder returns. Nonetheless, competitors like Orix Leasing have managed to provide even higher returns for their shareholders when compared to ALL.
In FY08, the ROE decreased by 0.5% to 12.5% and further declined to 11.8%. This was mainly due to the company’s equity increasing by 13% through bonus shares issuance and an increase in capital and general reserves funds. This growth surpassed the growth in net income, resulting in a decline in this year’s ROE.
LIQUIDITY ANALYSIS
The company’s liquidity position has been consistently deteriorating since FY04, with the Current Ratio dropping from 1.53 to 1.22 in FY08. In contrast, the industry’s Current Ratio has been steadily improving, increasing from 0.92 in FY05 to 1.15 in FY08.
Despite this, ALL maintains a current ratio that is still higher than the industry average. Furthermore, the decline in the current ratio can also be observed in competitors of ALL. However, in FY09, the company’s current ratio increased to 1.46 due to a 7% increase in Current Assets and a 10% decrease in Current Liabilities. This ratio is slightly better than Orix Leasing’s, another competitor in the industry, suggesting that ALL can generate more income while incurring lower expenses compared to other companies. The Income-to-Expense Ratio also improved slightly to 1.27 in FY09.
Despite an increase in Administrative and General Expenses, the majority of the total expenses, including financial and bank charges, saw a rise of 8.9%. Consequently, there was a overall expense growth of around 8.5%. However, the income component only surpassed the expense growth by 1.3%, leading to a slight enhancement in the income-to-expense ratio.
DEBT MANAGEMENT
Askari Leasing heavily relies on debt rather than equity for financing its assets. Since the financial year 2004, the Debt-to-Assets Ratio of Askari Leasing Ltd has consistently been between 0.0 and 0.91. This is significantly higher than the ratio of 0.64 for Orix Leasing, indicating that a larger proportion of Askari Leasing’s assets are financed through debt. The ratio has remained relatively stable due to minimal changes in total assets and liabilities during FY09.
In contrast, the Debt-to-Equity Ratio has remained stable. It experienced a growing trend until FY06, reaching 10.36. However, since then it has consistently decreased to 7.71 in FY09. This contrasts with the trend observed in some of ALL’s competitors, whose debt-to-equity ratio has continuously increased.
The rise and subsequent fall of ALL’s trend can be attributed to the company’s lack of significant increase in equity until after FY06. However, with the subsequent rise in common stock and reserves, the debt-to-equity ratio has been steadily decreasing.
MARKET VALUE
After analyzing the Market Value of Askari Leasing Ltd, it is evident that its Earnings per Share (EPS) have remained relatively stable. In 2006, the company achieved a record EPS of Rs 3.63, making it a top performing year. In FY09, the EPS decreased slightly to Rs 3.09 from the previous year’s Rs 2.96. It’s worth mentioning that the industry’s average EPS is considerably lower than that of Askari Leasing Ltd, reaching Rs 0.4 in FY07 while ALL’s EPS was Rs 3.30. However, there are other firms in the industry that consistently generate higher EPS than ALL.
The Board of Directors of ALL has tentatively approved starting discussions for a potential merger with AKBL. The SBP has also tentatively approved both companies to examine each other’s procedures. However, management disagrees with the BoD’s choice to merge with AKBL and instead wants to focus on improving ALL’s financial position and performance.
Pakistan’s economy and financial sector, including leasing companies, are facing significant challenges. High interest rates and inflation have discouraged potential lease customers. Even industrial customers are hesitant to lease machinery or equipment from leasing companies due to the expected poor performance of the industrial sector in the future.
The financial performance of 2009-10 will be influenced by how the mentioned challenges are addressed in a practical manner. Ongoing measures that are candid and focused on meeting targets will enhance and support the recovery process, leading to the stability of both micro and macroeconomic foundations. Additionally, ALL and other leasing companies will continue to face competition from commercial banks, as they are expanding their range of products to match those offered by leasing companies and have a stronger presence in the market.
Askari Leasing Ltd, like many other leasing companies, has seen a decline in the demand for leasing vehicles as a result of higher financing costs caused by increased interest rates and inflation premiums. Additionally, the cost of automobiles has risen due to higher steel prices, energy costs, and depreciation in the value of the rupee. Therefore, the demand for leasing vehicles has been discouraged. However, the company has also engaged in leasing plant and machinery.
Consequently, leasing companies such as ALL are likely to face significant challenges in the future. The majority of the company’s leasing activities, about 70%, are in the form of Consumer Facilities. Unfortunately, these activities will also be adversely impacted by increasing interest rates, rising inflation, and consequent decrease in purchasing power among potential customers. Despite historical efforts to serve the SME sector, there remains a significant underserved demand from SMEs. In fact, it is estimated that only 20% of the country’s population has access to financial services.
