Hafiz Limited

Hafiz Limited (PSX: HAFL) was set up in 1951 under the repealed Companies Ordinance, 1984. Initially the company dealt in spinning of textile fibers when it was known as Hafiz Textile Mills Limited, but now it primarily earns rentals on land and building.

Shareholding pattern

As at June 30, 2020, 33 percent of the company’s shares are held by the directors, CEO, their spouses and minor children. Within this, Mr. Fakhruddin Usmani and Mrs. Marium Usmani are major shareholders. Close to 57 percent shares are owned by the general public, while about 10 percent are owned by the associated companies, undertakings and related parties. This category solely includes Textile Trading Company Limited. The remaining about less than 1 percent shares are with the rest of the shareholder categories.

Historical operational performance

Hafiz Limited has mostly seen a growing topline since FY13, with the exception of FY14, FY16 and FY19. Operating margin, on the other hand, has been fairly stable, while net margin has fluctuated.

Rental income in FY17 grew very marginally by close to 1 percent, remaining in the Rs 12 million bracket. But it was the gain on change in fair value of investment property that that fell year on year that largely affected profitability for the year. Between FY14 till FY17, income from gain on investment has largely exceeded the rental income. Resultantly, any major movements, upwards or downwards, creates a major change in profitability. With the same declining from Rs 22.7 million in FY16 to Rs 15.6 million due to a rather bearish market in FY17, profits reduced considerably, by 30 percent year on year, with net margin at 162.6 percent, versus 233 percent in FY16.

In FY18, rental income increased by over 11 percent, crossing Rs 13 million. Gain on change in fair value of investment, however, continued to decline, reducing to Rs 11.5 million for the year. It was the first time that rental income exceeded the gain on change in fair value of investment. Some support to the bottomline was also made by other income that was recorded at Rs 98 million compared to nil in FY17. Before that, in FY16, other income stood at Rs 762 million. Other income was largely earned through gain on sale of fixed assets. Thus, net profit reduced for the second time in a row, at Rs 16.9 million in FY18. With the textile industry spiraling downwards and facing major challenges due to outdated machinery, shortage of raw materials, and high input costs, the company had decided to rely on warehouse business, but it continues to look for better opportunities.

In FY19, rental income slumped to Rs 11.2 million, registering a 17.5 percent decline. Gain on change in fair value of investment, on the other hand, picked up clocking in at Rs 19.5 million for the year. This was a result of revaluation gain on free hold land; building on free hold land, however, continued to experience a revaluation loss. Given the change in government, the uncertainty in the economy as a result, currency depreciation, coupled with increase in policy rates, it did not make a feasible environment to make investments. Despite witnessing one of the biggest declines in rental income, net margin and profit grew to over 200 percent, and Rs 24 million, respectively. This was because of significant support coming from other income that was recorded at Rs 493 million, sourced primarily from gain on sale of fixed assets.

Hafiz Limited witnessed one of the highest growths in rental income in FY20, at over 22 percent, taking rental income to Rs 13.8 million in value terms; majority of this was earned in the third quarter of FY20. This depends on terms and conditions on which the godown is rented out; it could range anywhere from three months or more. In a conversation last year, a company representative revealed that the company stopped its textile business in 1998, but it continues to look out for investments in the same sector. On the other hand, gain on change in fair value of investment reduced once again, to Rs 14 million. Other income supported the bottomline to a certain extent, as it was recorded at its all-time high of Rs 2.4 million coming mostly from non-financial assets. But it was not sufficient to keep the net profit from declining, that was recorded at Rs 20.7 million.

Quarterly results and future outlook

The first quarter of FY21 saw no gain on change in fair value of investment, while rental income was nearly 35 percent higher year on year, that was further supported by other income bringing in an additional Rs 1.6 million. the second and third quarter saw rental income increasing by almost 88 percent and 30 percent, respectively. Both quarters also saw administrative expense claiming around 20 to 30 percent of revenue, which is considerably lower than that seen in the previous years. Therefore, year on year profitability cumulatively is significant as noted by a net profit of nearly Rs 11 million in 9MFY21 compared to Rs 4.4 million in F9MFY20, excluding the revenue from gain in change in fair value of investment. Given that the nine months of FY21 have depicted improved financial performance, the company is likely to end the year at higher profitability.