Allied Rental Modaraba (PSX: ARM) was set up under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. It is engaged in rental/Ijarah and operation and maintenance of Caterpillar and other equipment, for example, generators, forklifts, compactors, etc.
Shareholding pattern
As at June 30, 2020, 91 percent of the certificates are owned by the associated companies. Within this category, majority, that is nearly 70 percent, are owned by Allied Engineering and Services Limited, followed by 20 percent in Allied Engineering Management Company (Private) Limited. The general public owns around 5 percent, and 4 percent are with the directors, CEO, their spouses and minor children. The remaining few certificates are with the rest of the categories.
Historical operational performance
The company has mostly seen a rising revenue except for in FY16, and more recently in FY20, when it fell by over 10 percent. Profit margins, on the other hand, have observed a declining trend, with net margin recorded at above 30 percent during FY12, to single digits in FY20.
During FY17, revenue increased by 16 percent, crossing Rs 3 billion in value terms. Majority of the revenue came from Ijarah rentals. While continuous growth in units has been seen over the years, the demand for gas engine rentals increased on the back of “flow of LNG to the captive power units”, particularly in the north of the country. Moreover, although power rental business maintained its momentum, it saw lower demand from the textile segment. On the other hand, operating expenses reduced to 73 percent of the total income during the year, compared to nearly 78 percent seen in FY16. Combined with the growth in revenue, this allowed gross margins to improve to almost 27 percent. The increase was also reflected in the net margin that increased to 14.7 percent.
Revenue continued to increase during FY18 at 19 percent, with most of the increase seen in Ijarah rentals. This was attributed to diversification of the rental portfolio, and sales growth seen in all the segments of the rental portfolio. While demand from textile sector did not increase due to better grid availability, the power rental business was able to achieve its revenue targets. On the other hand, the large engine segment earned revenue mostly from cement and housing society sectors. Moreover, with launch of infrastructure projects under CPEC, CAT machines and SANY cranes rental segment also witnessed growth. With operating expenses increasing, gross margin declined to marginally to over 25 percent, but net margin fell further down to 10.7 percent, compared to 14.7 percent in FY17 due to the escalation in finance expense. This was a result of increase in markup rates, and higher borrowing due to capital investment.
Revenue growth, at 3 percent in FY19, was a little slower than the double-digit growth seen historically. This was attributed to the general economic pressure prevalent in the country after the change in government post the 2018 general elections. This led to “stagnation of new contracts as well as price increments”. While textile segment continued to lower its demand due to better grid availability, the diesel and gas units’ sales were driven by cement and housing society sector. In addition, due to a slowdown in economic activity, investments also reduced to Rs 537 million for the year, compared to typically over Rs 1 billion in the last three years. With an overall increase in expenses, net margin was somewhat maintained at 10 percent, due to other income bringing some support to the bottomline.
The company saw the highest contraction in revenue during FY20, at over 10 percent. Most of this drop was seen in Ijarah rentals. The previous year saw some uncertainty due to the change in government while FY20 saw the outbreak of the Covid-19 pandemic that shut down factories, production processes and trade were brought to an abrupt halt. With most of the trends remaining similar for the company, investment was further reduced to Rs 317 million. Operating expenses made a marginally lower share in total income that allowed gross margin to improve to over 25 percent. However, with other income returning to previous levels, net margin fell to 6.6 percent for the year.
Quarterly results and future outlook
Revenue during the first quarter of FY21 was lower by 11.5 percent year on year. This was attributed to the slowdown in business activity during Covid-19. Sales from inbound and outbound logistics fell by 11 percent; sales from machines and cranes segment dropped by 16 percent; another 11 percent drop in power generation segment. However, since its operating costs were lowest among the three quarters of FY21, the first quarter saw the highest profitability.
Net revenue in the second quarter was better quarter on quarter, as well as year on year. Sales from power generation segment, construction machines and cranes segment picked up. However, due to increase in expenses, net margin was slightly lower at 8.7 percent quarter on quarter but higher than that seen in the same period last year.
The nine months of FY21 cumulatively saw revenue only marginally higher than 9MFY20. Rental power segment primarily drove the sales and profitability for the company. With much lower finance costs due to the lowering of KIBOR base rate and a better other income, net margin was better year on year at over 10 percent.
Although some stability and recovery are expected by FY22, the ongoing third wave and future uncertainties will continue to pose a risk that will have to be considered for investments and strategies.
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