First Habib Modaraba

First Habib Modaraba (PSX: FHAM) is managed by Habib Metropolitan Modaraba Management Company (Private) Limited. It is in the business of leasing, Musharaka, Murabaha financing, and other related business.

Shareholding pattern

As at June 30, 2020, over 57 percent certificates were held under the “others” category, while Habib Management (Private) Limited held 54 percent certificates in the company. About 27 percent certificates were with the local general public, followed by 10 percent under associated companies, undertakings and related parties. This category solely includes Habib Metropolitan Modaraba Management Company (Pvt.) Limited. The remaining 6 percent certificates are with the rest of the categories.

Historical operational performance

The company has mostly seen rising revenue, albeit at varying rates, with majority of the revenue coming from Ijarah (leasing) but gradually skewed towards profit on diminishing musharaka. Profit margin, however, has seen a declining trend over the years.

During FY17, income expanded by over 13 percent, crossing Rs 500 million, with profit from diminishing musharaka exceeding the income from ijarah (leasing) unlike the previous years. During the year, “portfolio of Certificate of Investment (Musharaka) was increased to Rs 3.900 billion from Rs 3.150 billion”. The COM portfolio itself expanded by 28 percent. On the other hand, the rising finance expense and shrinking margins caused profitability to reduce for the second time in a row, at 54.6 percent, compared to 62.6 percent in FY16. Although in value terms, net profit declined only marginally, from Rs 298 million in FY16 to Rs 295 million in FY17.

In FY18, the compnay saw an 8.5 percent growth in revenue, whereas the overall balance sheet size registered a 23 percent growth; disbursements were higher by 29 percent; the asset size grew to the Rs 10 billion mark. The company’s annual report claims that out of the total financing, some 66 percent disbursement was made in diminshing musharaka, while vehicle financing portfolio made up 84 percent of total disbursements. During the year, it also launched a car financing product. But with mounting finance and administrative expenses, profit margins dropped to 49 percent for the year.

After the general elections at the start of FY19, there was a slowdown in the economy, with high lending rates, currency depreciation, and double-digit inflation. In this backdrop, several businesses witnessed shrinking profitability. Similar was the case with First Habib Modaraba. Although the balace sheet grew by 8 percent and income by 54 percent, the modaraba did not achieve its targets for the year. Particularly in the second half of the year, it saw a slow down in new business engagement while cautious financing was done for the existing customers. On the other hand, finance expense continued to expand, further trimming profits, despite the support from other income. However, the latter was not sufficient to offset the rise in expenses. Thus, net margin fell to 35 percent.

When some economic recovery was in sight with controlled twin deficits and progress on FATF front, the Covid-19 panndemic hit the country in FY20, resulting in a strict lockdown. While income increased by over 22 percent, booking of financing assets were reduced; disbursements in the last quarter of FY20 were at their lowest in the whole year. The overall size of the balace sheet decreased by nearly 11 percent. Due to the suppressed business activities, it “diluted timely repayment of borrowed facilities by the businesses”. This was further aggravated by the escalating finance expense that eventually reduced net margin to 28.6 percent. Although the interest rates were reduced in order to support businesses, however, this was done towards the end of the year FY20; therefore the full impact of it is not visible in this year.

Quarterly results and future outlook

Revenue was over 31 percent lower year on year in the first quarter of FY21, though disbursements were higher at Rs 1,099 million compared to Rs 902 million seen in the same period last year. Although net profit in value terms was lower in 1QFY21, net margin was at nearly 41 percent compared to 30 percent seen in 1QFY20.

The second quarter saw revenue marginally higher quarter on quarter, but significantly lower than the same period last year. However, disbursements for the first half of FY21 were 35 percent higher than that in the first half of FY20. The company was able to improve net margin for the quarter to 40.98 percent, which was notably higher than 29 percent seen in 2QFY20.

The third quarter saw another rise in income quarter on quarter, but still lower than 3QFY20. Cumulatively, nine months ended of FY21 saw 30 percent lower revenue year on year. In value terms, profits are nearly flat, but as a percentage of revenue the current period saw better margins, despite the lower lending rates.

While uncertainty is back in the equation given the ongoing third wave of the Covid-19 pandemic, the company also faces a risk due to the withdrawal of tax exemption status that could impact profitability and dividends.