20000228

Brief

recordings

- BY SCANNER -

Modarabas

First Fidelity Leasing Modaraba

Year Ended June 30, 1999

Overview.........

The management company of this Modaraba is wholly owned subsidiary of Fidelity Investment Bank Ltd. The Modaraba has been able to post income from lease operations at Rs 46.96 million, profit on Morabaha finances at Rs 7.4 million, dividend income at Rs 1.07 million and profit on bank deposits at Rs 10.15 million. Except for profit on Morabaha finances which declined by 23.8%, profit from lease operations increased by 120%, dividend income by 134.9% but profit on bank deposit was almost identical to last year's. The Modaraba posted net profit at Rs 25.25 million which works out to EPC at Rs 1.22 (1997-98: Rs 0.73). Despite higher EPC during the period under review, the Modaraba's cash dividend payout was lower at Re one per certificate compared to the payout of Rs 1.15 for the previous financial year. The Modaraba's balance sheet is awash with cash which might have been reviewed in the light of long term debt costing 18% per annum.

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First Fidelity Leasing Modaraba (FFLM) is managed by Fidelity Capital Management (Private) Ltd. which was incorporated in the province of Punjab. FFLM is the wholly owned subsidiary of Fidelity Investment Bank Ltd. The Modaraba has its offices in its home city as well as in Karachi and Islamabad.

FFLM was formed under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 and the Rules framed thereunder. Modarabas are classified Non-Banking Financial Institutions (NBFIs) and regulated by Security and Exchange Commission of Pakistan (SECP).

The Modaraba commenced its operation on 5th December 1991 certificates in the Modaraba are quoted on all stock exchanges of Pakistan i.e. Karachi, Lahore and Islamabad.

The Modaraba is a perpetual, multi-purpose and multi-dimensional Modaraba by virtue of which it can undertake all modes of Sharia'a based activities of funding and even trading as mentioned in the Modaraba Rules.

However, FFLM is primarily engaged in the business of leasing together with Musharaka, Morabaha financing and investment in marketable securities which are non interest based.

FFLM was listed at the Karachi Stock Exchange in 1992. At present its certificate is trading at Rs 4.40 at substantial discount of 56% to its par value of Rs 10 per certificate. But most of the Modarabas' certificates are quoted below even half of the par value as the market capitalisation of the Modaraba sector has severely eroded. One glaring business style has been that large number of Modarabas made substantial investments in the capital market because this mode of investment is considered Sharia'a based by the Modaraba managers. During rising stock index this investment had provided attractive yield. But when the stock market index met with free fall and most of the Modaraba's asset base weakened. The investment portfolio not only became to a large extent unremunerative but also the cause of large provisions for diminution in the value of investment.

The last 6 years' highest price of the FFLM certificate was recorded at Rs 15.50 per certificate in 1994 while the lowest price was quoted at Rs 1.25 in 1998. The present market value of the Modaraba's certificate signifies 72% diminution in the value of investment.

Since 1994, the Modaraba could make announcement of the profit distribution to the shareholders only three times i.e. in 1994 at 20%, in 1998 at 11.5% and in the year under review (FY 1998-99) at 10% which works out to 6.92% per annum on the average during last 6 years. Obviously the certificate holders in general and individual investors in particular, have greatly suffered due to lower yield and at the same time gross depreciation in the value of their investment.

The investors had also chosen certificates of Modarabas because of their strong leaning towards Sharia'a based investment as well as their need for lower denomination as investment in Modaraba certificates was affordable. Now, after all these years, they are disillusioned. Obviously government should identify, and regulate Sharia'a based investment opportunities as the need for Sharia'a based investment and regular source of income for the old and unemployed people will always remain even increase.

In the categories of the certificate holders of FFLM, there were 5540 individual investors out of total 5604 certificate holders. They constituted 98.86% of total certificate holders. Even their aggregate holding of the Modaraba stock is overwhelming at 53.12% of the Modaraba's stock.

Among the institutional investors 9 joint stock companies held 15.58% of the Modaraba's stock. The sponsors held only 13.23% stock so their stake is much lower than individual investors'.

The Modaraba's paid-up capital at Rs 206.33 million has remained unchanged for several years. Paid-up capital in 1994 had amounted to Rs 108.8 million but next year the Modaraba raised its paid-up capital after capitalising right issue. Its shareholder's equity increased to Rs 234.50 million in 1999 which was nearly 113.7% of the paid-up capital. At the same time the size of balance sheet improved to Rs 292.82 million.

Apart from internal source of finance, which are equity and allowance for depreciation, the Modaraba's external source of finance was from the finance availed under Morabaha arrangement at Rs 20 million at the effective cost of 18% p.a.

This fund was disbursed by MCBL and secured against hypothecation of specified leased assets of FFLM. This debt is repayable over a period of five years in equal quarterly instalments.

The other source of external finance is the security deposit which amounted to Rs 12.11 million received against lease contracts and are interest free. These are repayable/adjustable at the expiry/termination of the respective leases.

The Modaraba's leased out asset portfolio at book value increased by 27% to Rs 133.4 million over previous year's Rs 105.2 million. Leased asset formed 45.6% of total assets, while income from lease rentals amounted to Rs 46.96 million and reflected 120% rise over the previous year's figure at Rs 21.34 million, the lease income constituted 71.22% of the gross revenue.

Gross revenue also substantially improved by 54.6% to Rs 65.94 million over the preceding year's Rs 42.64 million.

On the other hand the Modaraba's lease rental receivables increased by 10.95% to Rs 44.6 million from Rs 40.2 million in the preceding year. Last year the Modaraba had booked Rs 19.6 million provision for doubtful receivables. So the net receivables were booked at Rs 20.5 million which is reduced to 51% of the gross receivables.

The annexed note clarified that provision for doubtful receivables is made/adjusted after a review of the outstanding portfolio at year end on the basis of Prudential Regulations for Non-Banking Financial Institutions (NBFIs) as applicable to the Modaraba and management's own judgement.

During the period under review the provision in this account increased from previous year merely by Rs 0.21 million.

Sector wise the Modaraba's highest exposure in the lease business remained with textile sector which was 42.4% of the total lease exposure although the exposure reduced from 47.13% from the preceding year's.

The company's balance sheet is awash with cash & bank balances at Rs 58.5 million and for the year profit on bank deposits was posted at Rs 10.15 million. But one would really feel baffled at the first glance as to what is the necessity of paying 18% cost on debt of Rs 20 million and why not adjust the liability against available cash resources which are of substantial amount. Even if it was absolutely necessary than one should renegotiate for lesser cost, because FFLM is a fairly lower risk client for bank.

The Modaraba carried large investment portfolio at Rs 49.21 million (FY 1997-98: Rs 49.21 million) at cost, but the market value of the portfolio was Rs 15.98 million (FY 1997-98: Rs 15.13 million). The Modaraba has booked only 13.29 million as provision for diminution in value of investment. One would see at a glance that there is further shortfall in provision by Rs 20.8 million. But the directors are confident, "the provision is more than enough to absorb any effects of permanent diminution in the value of investments."

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Performance Statistics (Million Rupees)

June 30 1999 1998

Capital & Liabilities.........

Paid-up Capital: 206.33 206.33

Reserves & Surplus: 28.17 23.56

Equity: 234.50 229.89

L.T. Debts: 17.06 -

L.T. Deposits: 12.11 12.00

Deferred Taxation: - 1.00

Current Liabilities: 29.15 30.86

Assets.........

Fixed Assets - Tangible - Own use: 0.49 0.15

Assets Leased Out: 133.54 105.23

L.T. Investments - Equity: 35.93 35.92

Current Assets: 122.86 132.45

Total Assets: 292.82 273.75

Revenue, Profit & Payout.........

Lease Rentals: 46.96 21.34

Profit on Morabaha Finances: 7.44 9.77

Other Income: 11.54 11.53

Gross Revenue: 65.94 42.64

Operating Cost & Management Fee: 41.59 29.43

Profit Before Taxation: 24.35 13.21

Net Profit After Taxation: 25.25 15.01

Dividend Cash 10% (1998: 11.5%): 20.63 23.73

Financial Ratios.........

Share Price (Rs) 16/2/2000: 4.40 -

Book Value Per Share (Rs): 11.37 11.14

Price/Book Value Ratio: 0.39 -

Debt/Equity Ratio: 7:93 0:100

Current Ratio: 4.21 4.29

Net Profit to Gross Sales (%): 38.29 35.20

EPC (Rs): 1.22 0.73

Price/Earning Ratio: 3.61 -

R.O.E. (%): 10.77 6.52

R.O.A. (%): 8.62 5.48

R.O.C.E. (%): 9.58 6.18

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Company information: Modaraba Company: Fidelity Capital Management (Private) Limited (wholly owned subsidiary of Fidelity Investment Bank Limited). Chairman: Javaid B. Sheikh. Chief Executive: Wasim-ul-Haq Osmani. Directors: Arshad I. Khan/Masood Akbar. Company Secretary: Imran Hameed. Principal Place of Business: 97-A, Aziz Avenue, Canal Bank, Lahore-54660. Branches: a) Aziz Avenue, Lahore. b) Chapal Plaza, Hasrat Mohani Road, Karachi. c) Tahir Plaza, Blue Area, Islamabad.