Orient Rental Mod (PSX: ORM) was formed under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. It is engaged in the business of ijarah, operation and maintenance services.
Certificate holding pattern
As at June 30, 2021, roughly 16 percent certificates are held in each of the following categories: directors, CEO, their spouses and minor children, and associated companies, undertakings and related parties. The latter includes Eman Management (Private) Limited and ASJN Holdings (Private) Limited. The local general public owns close to 54 percent certificates followed by almost 9 percent in banks, DFIs, NBFCs, insurance companies, etc. The remaining about 4 percent certificates is with the rest of the categories of certificate holders.
Historical operational performance
In FY18, the modaraba had functioned for almost nine months. In FY19, it saw a full year of operations.
In FY19, the modaraba’s income from ijarah rentals improved from Rs 418 million seen in the nine months of operations of FY18, to Rs 841 million, while income from operation and maintenance doubled year on year. During the period, the modarabas also managed to attract a healthy customer base that is reflected in its growth in total revenue that stood at almost Rs 1.3 billion. Gross margin for the year was recorded at 19.2 percent and a net profit of Rs 103 million versus Rs 71.5 million in FY18. The improvement in profitability was also reflected in the increase in earnings per certificate at Rs 1.37. The modaraba intends to distribute 90 percent of its profit to the certificate holders.
Revenue in FY20 shrunk by almost 9 percent to Rs 1,161 million. The decline in revenue and profitability was attributed to the trying economic times in the first half of the year such as currency devaluation, high interest rates and inflation that were exacerbated by the outbreak of the Covid-19 pandemic in the second half of the year. This resulted in strict restrictions and lockdowns, shutting down businesses and halting production processes abruptly, also affecting the modaraba company. However, the decline in profitability exceeded the decline in revenue due to the rising cost of business, the burden of which could not entirely be passed on to the market. As a result, net margin fell to 2.6 percent, a significant decrease from last year’s 8 percent.
Revenue in FY21 grew by over 16 percent year on year with ijarah rentals growing by 19.5 percent and operation and maintenance income growing by 11.4 percent. Profitability also picked up as gross margin was recorded at a three-year high of 25 percent that also trickled down to the bottomline with a net margin also at a three-year of 11.5 percent. The growth in profitability is linked to the growth in industrial sector that saw a turnaround in FY21. As the industrial sector grows, the business of the modaraba is also expected to move in the same direction. Additionally, higher profitability during the year is also attributed to the “early terminations of Ijarah contracts which resulted in saving of Ijarah payments by Rs 116.02 million”. During the period, the modaraba company also made provision for taxation as the modaraba sector was withdrawn from tax exemption by Finance Act, 2021-22.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was almost 28 percent year on year with ijarah rentals posting a growth of over 34 percent accompanied by a 16 percent rise in operation and maintenance income. However, owing to higher operating expenses, gross profit at 20.7 percent was lower year on year, compared to 23.5 percent seen in the same period last year. But net margin, on the other hand, was supported by the absence of impairment loss that stood at Rs 17 million in 1QFY21, in addition to Rs 2 million earned in income on deposit with banks. Thus, at a net margin of 9.2 percent in 1QFY22, profitability for the period was better compared to 7 percent in 1QFY21.
Revenue in the second quarter of FY22 was higher by almost 22 percent year on year with both ijarah rentals and operation and maintenance income registering growths. With operating costs reducing to 69.5 percent of revenue, compared to almost 75 percent in 2QFY21, gross margin was better at 30.2 percent for the period. However, net margin for the quarter was lower at 10.4 percent due to modaraba management company’ fee more than doubled year on year in addition to Rs 44.6 million accounted for tax as the modaraba sector was withdrawn from the tax exempted status.
The economy is facing challenges as inflation is rising and so is the trade deficit. Moreover, the policy rate has also been increased. Simultaneously, the economy is also witnessing growth in industry particularly construction and small-scale manufacturing. These are also expected to improve in FY22. While the company does benefit from the growth in the industrial sector, it also needs to consider the gas shortage that creates an adverse impact for the modaraba company.