Awwal Modaraba

Awwal Modaraba (PSX: AWWAL) was set up under the Modaraba Companies and Modaraba Ordinance, 1980. It is managed by the Awwal Modaraba Management Limited, engaged in providing working capital, term finance, ijarah, musharika, morabaha, and advisory services.

Shareholding pattern

As at June 30, 2020, nearly all the certificates are held under the category of associated companies. Within the category, Pak Brunei Investment Company Limited holds nearly 90 percent of the total certificates while the remaining 10 percent certificates are owned by Awwal Modaraba Management Limited. The individuals own about 0.2 percent of the certificates while the directors, CEO, their spouses and minor children also own less than 1 percent certificates.

Historical operational performance

In the last almost four years, total income has mostly seen a decline owing to a contracting contribution by advisory fee and income from deposits from banks. Net margin has also followed a similar trend, with the latter declining particularly after FY17.

FY17 was the first year for Awwal Modaraba when it operated for a full year. it grew its total income from Rs 62 million in 2HFY16 to Rs 208 million in FY17. Majority of the income came from advisory fee that stood at Rs 129 million for the year, followed by Rs 29 million in musharika finance and another Rs 27 million brought in through deposits from banks. Since the company operated for a full year, operating expenses were also higher year on year. The preliminary expenses, however, were eliminated from the accounts in FY17 once the company was up and running. Given the significantly higher revenue for the year, net margin grew to 74 percent.

In FY18, the company saw the highest total income at Rs 264 million, registering an almost 27 percent growth. Again, majority of the income was contributed by advisory fees, though other categories also picked up year on year; income from musharika finance and diminishing musharika finance together made-up 26.5 percent of total revenue. In line with growing revenue, operating expenses also inclined. Most of the increase in operating expense was associated with salaries and staff benefits; it grew from Rs 19.9 million in FY17 to Rs 33.9 million in FY18. Along with this, management company’s remuneration shares in expenses also grew gradually. Thus, despite the highest net profit in value terms, net margin to 69.7 percent for the year.

The company witnessed a nearly 30 percent contraction in revenue in FY19 as a result of a significant drop in revenue coming from a major source- advisory fee; it reduced from Rs 164 million in FY18 to Rs 63 million in FY19. This was attributed to the general economic slow down in the country after the general elections. Income from other sources, however, picked up, such as musharika finance and diminishing musharika finance. With operating expenses remaining intact, it made a larger share in total revenue, at almost 31 percent, compared to almost 20 percent in the previous year. Thus, net margin also shrunk to 60 percent for the year.

Revenue continued to contract in FY20 as well, albeit at a slower rate of 4.3 percent. This was in line with the company’s expectations that the major source of income, advisory fees, would continue to be adversely impacted by the general slowdown in the economy and later on the lock down that ensued as a result of the Covid-19 pandemic. Advisory fee shrunk from Rs 63 million in the prior year to Rs 24 million in FY20. On the other hand, the largest contribution to revenue was made by musharika finance and diminishing musharika finance; together they made up nearly 65 percent of revenue.

Quarterly results and future outlook

As business activity remained slow, advisory fee continued to remain minimal, while musharika finance and diminishing musharika finance contributed a larger share to the total revenue pie during the first quarter of FY21; rather, advisory was nil during 1QFY21, compared to Rs 17 million seen in the first quarter of FY20 when the economy was gradually moving towards recovery. This led to total income halving year on year, and also due to lower mark-up rates. Therefore, net margin was also lower at 44 percent in 1QFY21 compared to 72 percent in 1QFY20.

The effect of lower mark up rate continued to reflect in the second quarter of FY21, as total income was 33 percent lower year on year, while net margin stood at 50 percent for the quarter compared to nearly 69 percent seen in the same period last year. The third quarter of FY21 saw some recovery in advisory fee, yet revenue was lower year on year for the period due to lesser income earned from other avenues; income from diminishing musharika was recorded at a negative. Thus, profit for 3QFY21 stood at Rs 7 million. Cumulatively too, the nine months ended of FY21 saw nearly 46 percent reduction in revenue, while net profit in value terms was less than half. Given that the company has maintained a conservative approach in obtaining exposure, it has had excess liquidity that shall be utilized in the future. Moreover, a change in tax regime will also have its effect going forward.