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Cathay Pacific Airways Profits multiply

Thu, 14 Aug 2008 09:49:20 EST

Cathay Pacific Airways Profits multiply - by xpertwriter

Cathay Pacific Airways today released combined Cathay Pacific and Dragonair traffic figures for July 2008 that show nearly a double digit growth in the number of passengers carried by the two airlines compared to the same month in 2007, along with a rise in cargo tonnage.

In July the two airlines carried a total of 2,308,738 passengers an increase of 9.7 percent over the same month last year. The month's load factor was down 0.5 percentage points to 84.1 percent, while capacity, measured in available seat kilometres (ASKs), increased by 16.3 percent on the previous year. For the year to date, the passenger total is up 13.1 percent compared to a capacity rise of 14.6 percent.

Cathay Pacific and Dragonair between them carried 142,770 tonnes of cargo and mail in July, up 5.0 percent on July 2007. Capacity for the month, measured in available cargo/mail tonne kilometres, grew by 2.4 percent while the cargo and mail load factor dipped by 0.1 percentage points to 66.0 percent. For the year to date, the 6.6 percent rise in cargo tonnage compares to a 6.2 percent capacity climb

Abbott Labortories Pakistan Limited

Wed, 13 Aug 2008 13:14:50 EST

Abbott Labortories Pakistan Limited - by xpertwriter

Abbott Laboratories is a highly diversified global healthcare company devoted to the discovery, development, manufacture and marketing of pharmaceutical, nutritional and medical products, including devices and diagnostics.

The company is principally engaged in manufacturing, import and marketing of research based pharmaceutical, nutritional, diagnostic, hospital and consumer products and providing the toll manufacturing services.

With over 70,000 employees worldwide and a global presence in more than 130 countries, Abbott is committed to improving people's lives by providing cost effective health care products and services that consistently meet the needs of its customers. Abbott Pakistan is part of the global healthcare corporation of Abbott Laboratories Chicago, USA.

Abbott started operations in Pakistan as a marketing affiliate in 1948. The company has steadily expanded to comprise a workforce of over 1500 employees. Its shares are quoted on all the three stock exchanges of Pakistan. It has the honour of being the first pharmaceutical company in Pakistan to achieve Class-A certification by a world-renowned organization M/s Oliver Wight. The company has also pioneered the concept of disease specific nutrition in Pakistan through introduction of specific products.

Abbott Pakistan has a leadership in the field of pain management, anesthesia, medical nutrition, anti-infectives and diagnostics. Its wide range of products is managed and marketed through four marketing arms. The diagnostic division operates from its office located at Korangi, Karachi. With leading products in several key areas of the diagnostic market, sales and support staff are available all the major cities of the country.

A continuous process of innovation, research and development at Abbott's worldwide facilities enables Abbott Pakistan to offer effective solutions for various healthcare challenges, with products and services that are well focused, within the customer's reach and contribute to improved health care of the people of Pakistan. Currently, the two manufacturing facilities located at Landhi and Korangi in Karachi continue to use innovative technology to produce top quality pharmaceutical products.

RECENT RESULTS 1H'08

For the half year ending May 31, 2008 the pharmaceutical segment, representing 78% of the companies business witnessed a growth rate of 11%, while nutrition and other segments registered a growth of 23%. Prices remained stagnant while the inflationary pressures and currency devaluation led to a decline in gross margins. Gross margins declined to 37% from 42% in the same period last year.

Sales revenue for the half year ending May 31, 2008 increased by 4.7% to Rs 3,254 million, with the domestic sales contributing to the increase while export sales witnessing a decline of 50.5%. Cost of goods sold increased by 7.8%, resulting a marginal decline in the gross profit. However, the administrative expenses and selling and distribution expenses increased by 23% and 11.9% respectively pulling down the PBT by 15.7% to Rs 626 million. PAT has shown a decline of 11.5% to stand at Rs 441 million with an EPS of Rs 4.51.

The market conditions generally remained favourable throughout the FY07 and consequently the company witnessed a double-digit sales growth in its all segments. Pharmaceutical sales increased due to improved field force productivity and an overall strong demand for company's products. Antibiotics and cough cold sales also registered an increase compared to last year. Vitamins and pain management product sales continued its double-digit sales growth as the company maintained its leadership position in these sections of the pharmaceutical market. The company, despite the competition from low-priced generic products, achieved a robust sales growth without a price hike.

Over the last few years, the company's profitability has been on a constant rise till 2007 (except in 2006), indicating that the costs are under control, as the net income has been increasing by a greater proportion than the sales.

However, net sales for FY06 increased by only 13% as compared to last year. The pharmaceutical segment (representing almost 85% of the company's business) is starting to get adversely affected by the lack of price increase for registered products by the government. With almost a double-digit inflation and the rupee depreciation particularly against the major European currencies, the cost pressures are beginning to hurt the company's profitability. Consequently its gross profit and net profit margins both declined in FY06, despite an improvement in both sales mix and plant efficiencies. The profit margin increased by 32% between 2003 and 2004, while the gross profit increased by around 40% in 2007, the largest increase witnessed in the 8 years under observation.

Despite all this, Abbott has been doing better than the average pharmaceutical company over the 8 years under review. In 2001, Abbott performed much better than the industry average, an 84% difference in profit margin in favour of Abbot. After 2001, the industry's rate of change of profit margin was greater than that of Abbott, bring the two to closer to each other. However in 2003, the difference began to increase again and still it operates above the average.

ROA trend (how effectively assets are being utilized in generating the net income, after interest and taxes) shows a constant increase right until 2005, with the sharpest increase between 2003 and 2004. This was due to the 42% increase in the net income. The increase in total assets was a much smaller proportion of 14%.

However, FY06 has witnessed a major decline because of the greater proportionate increase in assets compared to an increase in net income. The net income increase was lower because of higher selling, administrative and distribution expenses driven mainly by increased promotional expenses relating to consumerization of selective nutritional products and higher pension charge. Slight increase in financial costs combined with inflation and Rupee depreciation caused the net income to increase only slightly compared to total assets increase. However, the situation improved in FY07 showing an increase in ROA.

Furthermore, Abbott's ROA has been greater than the average pharmaceutical company in all the 8 years under review. This has been mainly due to the greater net income the Abbott has been able to generate, due to its greater basic earning power and lower reliance on debt financing, resulting in lesser interest charges.

The ROE follows a similar trend to that of ROA with the exception of 2003, where the ratio fell from 23.19% to 22.63%. This was because of the greater proportionate change in common equity (23%), attributable to 31% increase in revenue reserves, as compared to 20% increase in net income. FY06 has seen a major drop in this ratio, due to less proportionate increase in net income than total equity, on account of aforementioned reasons. However, like ROA, the ROE ratio improved again in FY07 due to higher net income.

ROE has been relatively volatile compared to the industry, on the other hand, the average pharmaceutical company has enjoyed an increasing tendency. The company's rate of increase was quite high in the first 2 years, compared to the industry but declined in the following 2 years. It again rose in 2004 and continues to be above industry average to date.

All the liquidity ratios indicate that the company has expanded over the 8 years. The current ratio has increased from 1.83 in 2000 to 4.76 in 2006. However, it declined in FY07 again due to combined effects of lower CA and higher CL. Abbott's current ratio trend has been in line with the increasing industry trend, with the exception of the year 2005, where the current ratio fell from 4.26 to 4.18, a result of the higher proportionate increase in current liabilities, including creditors, accrued and other liabilities (25% compared to 23%). But this decline is quite meager.

The current assets have been increasing constantly till 2006, however the rate of increase has been very variable, ranging from 68% between 2000 and 2001, from 0.4% between 2001 and 2002 and ultimately declining in FY07.

On the other hand, current liabilities have experienced a very fluctuating trend, ranging from a 45% increase between 2000 and 2001, to a 15% decrease over the next year. The current ratio rose sharply between 2002 and 2004 because the current assets increased by 37%, mainly due to an increase in cash balances and recoverable taxation, while the current liabilities decreased by 20%, because a decline in the short-term finances and proposed dividends.

In fact, current liabilities fell from 2001 to 2003. While in 2000, the ratio of 0.61:1 showed that the company might become insolvent, it further implied that its stock-in-trade was above the industry average. In subsequent periods it improved its liquidity position with respect to this particular ratio. The company's movement is similar to that of the industry, with the exception of 2005. The drop can be attributed to the 33% increase in inventory that year.

Although, the increased current ratio over the six years reflects an increase in Abbott's ability to pay off its short-term obligations, it also indicates an excess of nonproductive assets such as cash and inventory.

Quick ratio followed a similar trend to that of current ratios, being on a constant rise till 2004, while suffering a fall in the consequent periods. The rise for the first four periods can be attributed to the proportionate increase in current assets, excluding inventory, being higher than the proportionate increase liabilities. Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. For Abbott, this has always been greater than that of the industry's average as its undergoing a capital expansion program over past few years.

ITO has been declining until 2004, after which it started rising. The decline is to be explained by the proportionate increase in net sales being higher than the increase in average inventory kept by the company. For instance during 2002, net sales rose by 15% while average inventory rose by a lower 13%. This is a good sign because a decline in inventory turnover indicates that the company efficiently selling off its inventory and hence is not facing a risk of obsolescence of inventory further showing that demand is high. However the increase in ratio from 2004 onwards is because the net sales are not increasing by a high percentage while inventory increases. This can be attributed to company's plant expansion and up-gradation project that has been commissioned in phases till 2007. Now, in FY07 the ITO ratio has improved considerably and has been at a level even below that of 2003 (around 52 days).

Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be high enough for the company to avoid risks of bad debts. The trend line indicates a decline in this ratio for the first two years due to the proportionate increase in net sales being higher than that in trade debts indicating that the company is facing higher risk of debt evasion and it needs to reformulate its credit policy. In 2001, trade debts actually fell by 1%. Then there were some fluctuations after which this ratio experienced a rapid rise in 2005 and 2006 due to 67% and 43% rise in trade debts (credit sales) with only modest increase of 13% and 14% in net sales respectively. The operating cycle of Abbot hence showed an increase in FY05 and 06 due to a rise in ITO and DSO in the respective years. However, DSO declined again in FY07 like ITO thus lowering the overall operating cycle, which is a good sign.

Moreover, it must be noted that Abbott's DSO is far below the industry average, depicting its healthy status. It can use this advantage over the average pharmaceutical company, as it receives cash much earlier than the others. This cash can be used for further investment in more assets, such as inventory, as well as for further expansion. TATO, a reflector of the company's assets' revenue generation capability, decreased in 2001 only to increase in 2002 but after that the ratio shows a negative trend, though by a low proportion. The reason for this decline can be the percentage increases in net sales of 7%, 8%, 13% and 14% being lower than the percentage increases in total assets of 13.67%, 13.88%, 23% and 22% in 2003, 2004, 2005 and 2006 respectively.

This decline is due to the fact that the company has been investing in its fixed assets, mainly in plant, machinery and infrastructure up gradation. Capital expenditure of Rs 365 million was made to improve compliance with the latest GMP and EHS requirements. The sales/equity ratio also follows the exactly same pattern as that of TATO. This is showing a declining trend from 2002 onwards because of increasing equity base of the company both due to increasing reserves and paid-up capital over the years. However, the situation reversed and both TATO and sales/equity ratios improved in FY07 on account of a much higher increase in sales.

As far as debt management is concerned, Abbot followed a very similar trend to that of the industry. The trend line of D/A ratio shows that the ratio has gone through a major decline over the years (except in FY07) owing to proportionate increase in liabilities being less than the proportionate increase in the assets. This shows that the company's reliance on debt financing is falling over the years and being replaced by equity financing. For instance, the 44% increase in liabilities in 2002 is less than the 57% increase in total assets. Besides, it has always been below 50% throughout the period, showing that equity financing has always been the primary source of financing.

Debt to equity ratio, which simply compares the two modes of financing, has also been falling over the years as shown by the trend. This is due to the proportionate changes in shareholders' equity being higher than the proportionate changes in total liabilities and further confirms that there's a change in financing policies, shifting from debt financing to equity financing. This ratio has increased in FY07 on account of lower equity base compared to a higher deferred taxation.

The long term debt to equity ratio has been volatile over the 8-year period, however, showing that long term debts still remains very insignificant portion of equity (maximum being 0.02 in 2000 only). In 2006, the doubling of long term debts, was offset by a considerable increase in equity base (increase in paid-up capital and reserves), hence the long term debt to equity ratio remained around 1.04% which is very meager. However, a sharp increase in the ratio in FY07 can be witnesses due to higher deferred taxation.

Looking at Abbot's TIE ratio we see it rose from 2000 to 2003 and then fell in 2004 and again rose sharply in 2004 which was due to the fact that interest charges fell by 81%. This increase continued till 2005 due to a higher EBIT and lower finance costs compared to previous years. This shows that the company's ability to pay interest improved till 2005. However TIE again declined slightly in 2006 due to a 21% increase in interest expense compared to a very small 5% increase in EBIT. But it recovered immensely in FY07 on account of higher other income compared to interest expense.

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the earnings per share (EPS). Abbot's EPS has been on a constant rise from 2000 right until 2006. This drastic increase can be attributed to a higher increase in net sales, while the number of shares remained either constant or increased slightly. In FY06, the EPS declined to a greater number of shares issued. Consequently, the P/E ratio also followed a rising trend due to a higher increase (or smaller decline in case of FY06) in market price than the proportionate increase (or decline in FY06) in EPS.

Till 2005 the shares of Abbot have outperformed the 100 index but later the trend has been volatile as evident from the price chart. Initially investors were willing to pay relatively little for a dollar of Abbot's book value however 2001 onwards, the company has turned into a financially strong setup. A major factor of the increase in this book value per share is the continuous increase in its equity base. The ratio declines in FY06 and FY07 due to greater number of issued shares than increase in overall equity base (which declined on the account of lower revenue capital).

The dividend per share was the highest in 2001 but showed a negative trend then onwards. This shows that currently the company is expanding and is reinvesting its profits in the business rather than giving return to its shareholders in the form of dividends. It is hoped that with continued focus on improving cost effectiveness via expansion; the company would enhance its overall efficiency and productivity in the near future, hence promising a good return to its investors.

FUTURE OUTLOOK

The FY08 is likely to be demanding, in particular for the pharmaceutical industry of Pakistan. The industry has immense growth potential, however it can only be tapped if the provided regulatory environment balances the interests of the research-based industry, with the need for affordable healthcare. Almost 85% of Abbot's business depends on the sale of pharmaceutical products, price of which have been static since December, 2001 and there has been no offset made by the government to account for an adverse impact of rising inflation (particularly in the energy and the fuel costs), raw and packaging material costs, construction costs and rupee devaluation, particularly against the major European currencies.

The business improvement initiatives mainly on upgrading and expanding manufacturing facilities, undertaken in past few years by Abbot, have contributed towards its the enhanced operational efficiencies and cost savings. However, this beneficial impact is eroding and will continue to do so unless the Government implements an appropriate and consistent mechanism for determining prices of new products. Furthermore, an increase in price of registered products is also demanded so as to offset inflation and devaluation. This is essential to encourage quality manufacturers to invest in the industry, which can then sustain itself for future.

Abbot furthermore, urges the government to take stringent action against the menace of counterfeit and spurious drugs that have infiltrated the local market. In the past few years, Pakistan has made some progress in updating its Intellectual Property Rights (IPR) laws to the levels required by global conventions. Practically, much more needs to be done to discourage both piracy and counterfeiting. Its effective implementation will not only protect the consumers, but also the industry and result in quality and research oriented culture. It is hoped that the government would effectively implement the recent directive of the Supreme Court to stop the unlicensed sale of drugs.

Pakistan state Oil Profts Multiply

Wed, 13 Aug 2008 13:09:21 EST

Pakistan state Oil Profts Multiply - by xpertwriter

Pakistan State Oil Company Limited (PSO), the leading oil marketing company in the country, has earned a record Rs 14.053 billion profit after tax in the fiscal year ended June 30, 2008 as compared to Rs 4.689 billion earned in the corresponding period in FY07.

The company's earning per share surged to Rs 81.94 in the period under review against Rs 27.34 in the same period a year back. The board of management of PSO in its meeting held here on Tuesday reviewed the performance of the company for the financial year ended June 30, 2008 and approved the audited financial statements for the year. Sardar Muhammad Yasin Malik, Chairman, BoM, presided over the meeting.

The board recommended a final cash dividend for the financial year at the rate of Rs 12.5 per share, equivalent to 125 percent. This is in addition to already paid first interim dividend at Rs 5 per share ie 50 percent and second interim dividend at Rs 6 per share ie 60 percent.

In a statement issued by PSO, it said the board observed that during financial year 2008 the company achieved impressive performance with a turnover touching Rs 583 billion (8.5 billion dollars) compared with Rs 411 billion a year ago, an increase of 42 percent. Profit before tax recorded at Rs 21.4 billion against Rs 7.1 billion last year and profit after tax at Rs 14.1 billion against Rs 4.7 billion registered in previous financial year.

PSO made record earnings during 2008 mainly due to one time inventory gain. Last year the company had an inventory loss. Subsequent to the year-end 2008, the international oil prices have shown a downward trend which, if it maintains a similar trend may cause corresponding inventory loss for the period.

Excluding the one time large inventory gain, the 2008 operating profit increased by about 40 percent in line with the massive growth in both regulated and non-regulated business delivered by the company during the year.

The company's income tax payments during 2008 at Rs 7.3 billion in this period against Rs 2.4 billion last year showed an increase of 200 percent mainly due to 35 percent tax on inventory gain recorded in 2008 accounts. During FY08, PSO sales volume recorded healthy growth of 11 percent against overall industry growth of 8 percent.

The company outperformed its competitors by recording 18 percent increase in White Oil sales volume against industry growth of 13 percent, whereas Black Oil sales increased by 4 percent against industry growth of 1 percent. In furnace oil, the company maintained its leadership with 83 percent market share and registered impressive growth of 4 percent against industry growth of 2 percent.

PSO diesel sales during FY08 were 19.6 percent higher than last year and substantially higher than the industry growth of 13.2 percent. During FY 08, PSO achieved sales volume of 5.3 million MTs for diesel and 0.72 million MTs for mogas against previous year's figures of 4.4 million MTs for diesel and 0.54 million MTs for mogas respectively. These figures depict company's impressive growth of approximately 20 percent in diesel and 33 percent in Mogas sales during FY 08.

During the twelve months ending June 2008, the diesel sales in Pakistan showed an overall volume growth of 0.97 million MTs out of which 0.87 million MTs (89 percent of the total industry growth) was contributed by PSO. It is worth mentioning here that during the crunch month of June 08 when some market players restricted their supplies of diesel due to heavy build-up of subsidy, PSO supplied 30,000 MTs additional diesel to meet the market demand.

During FY 08, PSO continued to play a vital role in importing deficit products in the country and fulfilled 80 percent of country's total import requirements. Besides 3.4 million tons of diesel, 3.5 million tons of furnace oil and 0.44 million tons of LSFO was also imported to ensure uninterrupted supply to the power generation sector.

PSO continued its leadership in providing CNG fuel facilities and added 30 more stations to its network, bringing the total to 240 which is more than any other OMC in the country. In this fuel category the company registered an impressive growth of 30 percent against the industry growth of 24 percent. PSO's CNG earnings during FY08 showed a corresponding increase.

FY2008 witnessed an unprecedented rise in oil prices. US brent crude oil price hit 143 dollars a barrel on 30th June 2008. A major reason underlying soaring oil prices has been weakening of US dollar due to which it is believed that certain investors may have used oil as a hedge against US dollar devaluation due to rising international prices. Throughout the review period the government of Pakistan continued to provide huge subsidy on diesel, which touched highest ever level at Rs 37.07 per litre in June 2008. Throughout FY08 the company continued to face liquidity problems due to ever-increasing receivables from the government on account of Price Differential Claim (PDC) resulting in galloping financial cost.

The board of directors of the company were highly concerned that Pepco, Hubco and PIA substantially delayed payments to PSO specially in the second half of the year thereby seriously aggravating company's liquidity position. As of June 30, 2008, receivables from these entities stood at Rs 27 billion adding to company's cash flow problems.

Being fully aware of the global trend in development of alternative and renewable energy resources, the company is in an advance stage of research and development work on bio-diesel and tests are being carried out to blend it with conventional diesel

Shell Pakistan At a Glance

Wed, 13 Aug 2008 13:06:13 EST

Shell Pakistan At a Glance - by xpertwriter

The profit after tax of Shell Pakistan Limited has significantly increased to Rs 5,137.094 million in the FY08 as compared to Rs 706.659 million earned in the same period in FY07. The company's earning per share increased to Rs 93.76 in the period under review against Rs 12.90 in the same period a year back.

The board of directors of the company, in its meeting held here recommended a final cash dividend for the year at the rate of Rs 40 per share, ie. 400 percent. This is in addition to the interim dividend already paid at the rate of Rs 10 per share ie. 100 percent

The board also recommended to issue bonus shares in the proportion of one share for every four shares held ie. 25 percent. The said bonus share shall not be eligible for the dividend declared for the year ended June 30, 2008. According to the financial results, the company's sales increased to Rs 157.626 billion in the fiscal year FY08 as compared to Rs 130.129 billion in the same period in FY07.

On the other hand, the cost of products sold increased to Rs 124.694 billion in the period under review against Rs 108.664 billion in the same period a year back. The company's profit before tax was recorded at Rs 7,723.340 million in FY08 against Rs 378.736 million in FY07.

Sui Southern Gas Company Limited Review

Sat, 09 Aug 2008 21:53:36 EST

Sui Southern Gas Company Limited Review - by xpertwriter

Pakistan's gas distribution sub-sector is comprised of two regional state regulated monopolies, SSGC and SNGPL. SSGC is responsible for transmission and distribution of natural gas in the south of the country, with exclusive distribution and sale licence in the province of Sindh and Balochistan.

The core business of the company involves the purchase of natural gas from E&P companies and its distribution and selling. Besides this, it is also engaged in the manufacture and sale of gas meters, sale of gas condensate and import of LPG.

The company's transmission system is comprised over 3,000 kms of high-pressure pipelines. The network stretches from Sui in Balochistan to Karachi in Sindh. The network of 27,540 kms covers over 1,126 towns in the two provinces hence catering up to 28% of the country's gas requirements.

During FY07, the power sector was the largest customer segment with Karachi Electric Supply Corporation (KESC), being the single largest customer, accounted for 22 percent of sales by volume and 25 percent by value.

Besides this, SSGC operates the only gas meter manufacturing plant in Pakistan with a capacity of over 510,000 meters. SSGC's meter manufacturing plant produced a record 550,150 meters, during FY07, while operating at 177 percent of its capacity. SSGC has embarked upon an ambitious five-year expansion programme to extend its network and hence also enhance capacity.

The company also focuses to add 600 new towns and villages to its network to increase its customer base. SSGC is working on a new pipeline in Balochistan that would help it to supply 130mcf gas to Quetta while the strategically located gas filed in Zarghun would help the gas company to inject gas to load centres of Quetta, Ziarat and other adjoining areas. An agreement had already been signed for the supply of 150mcf from the Zamzama field.

SSGC has signed an accord with Shell for the LNG Mashaal Project. Pakistan's gas demand and supply projections indicate a widening gap of approximately 500 million cubic feet per day (mmfcd) by the year 2010. The gap started to emerge in 2007-08 and builds up to 2,100mmfcd by 2015, as the current gas fields gradually go off plateau.

Any commitments of additional gas supplies to industries, power or fertiliser plants on a long-term basis are therefore not possible, without confirmation of additional sources of gas supply.

This may be possible through an import gas pipeline which at the earliest could come on-stream by 2015 as per the Gap Coverage Strategy or alternately a major on-shore/off-shore gas field discovery in the current year (the gas to market period being five years). A third alternate is the LNG import option, which by current assessment will be able to provide gas by the year 2010/11.

To this end GOP has nominated SSGC as the project facilitator for the establishment of 3.5 million tonnes per annum (mtpa) (equivalent to 500mmfcd of gas) LNG import project with a re-gasification facility to be located in the vicinity of Karachi. It is estimated that gas would be available through LNG import in 2010/11.

RECENT RESULTS (3Q'08) Gas sales volume in nine months to 31 March 2008 increased to 277 bcf versus 269 bcf in the corresponding period of FY 2006-07. However, by value it declined by 4% to Rs 55.1 billion as average sales price decreased by 5% to Rs 208.28 per mmbtu compared to Rs 219.50 of last year.

The increase or decrease in sales price has no impact on company's profits due to its unique tariff regime. The meter manufacturing plant produced 403,050 meters versus 381,450 in the corresponding period, an increase of 5.7%. Sales increased by 3% to 265,000 meters. The profit of the plant, however, decreased to Rs 53 million compared to Rs 86 million of the corresponding period due to an increase in material cost.

Financial charges have increased by 71% due to borrowings done in order to bridge the payments to be made to gas suppliers. Secondly, the interest on delayed payments to the gas suppliers also increased the financial charges. Delay in payments from KESC and WAPDA caused this circular debt situation to arise.

SSGCL posted a pre tax profit of Rs 938 million compared to Rs 722 million for the corresponding period, an increase of Rs 216 million (30%). The benefit of a higher regulated return on the back of an increase in asset base and increase in other income was offset by a higher tax impact. Due mainly to heavy capitalization, the company has to provide for a higher deferred tax liability.

The net profit after tax for the nine months period therefore, stands at Rs 319 million compared with Rs 469 million for the same period last year (EPS Rs 0.48 vs Rs 0.70). Going ahead, the capital expenditure incurred is Rs 4.2 billion in the nine months to 31 March 2008 compared to Rs 6.3 billion for the previous corresponding period.

However, transfer to completed assets was higher at Rs 2.7 billion versus Rs 2.2 billion last year. The capex is proceeding as per plan and higher level of capitalization of up to Rs 6 billion is likely to be achieved by the year end which should also favourably impact PAT.

In tandem with this industry wide trend, the profits of SSGC also declined 67.4% in FY07 with profit after tax dropping to Rs 0.290 billion as compared to Rs 0.892 billion in FY06. This effect was seen despite an 11% increase in sales revenue during the year.

The company also incurred higher financial costs in FY07, owing to the additional long-term sources of financing taken up by the company. During the year, SSGC subscribed to Sukuk Bonds, and also took up additional long-term loans. Consequently, the financial charges have gone up by 30%. This resulted in a further pull on profits.

Moreover, the company also suffered losses as a result of sabotage on gas pipeline installations, mounting to Rs 250 million. This figure would have been much higher, had it not been for the remote control operation of pipeline block valves that had particularly improved the efficiency and safety of the high-pressure pipelines. Consequently, the profit margins have dropped to dangerous levels, much below the profit margins of its counterpart in the north.

The FY06 witnessed a sales volume growth of 6% and corresponding sales value increase of 26%. The profitability of the company, however, declined despite the sales growth. This trend of declining profitability is common for both companies in this industry.

The fading profitability is largely a result of the rising cost of gas. In FY06, the cost of gas increased by 27%. This inflating cost of gas pulled down the profit margins for the industry. Sizeable penalties paid to OGRA for high distribution losses also greatly eroded the profitability. An increase in salaries/wages and benefits further added to expenses.

Most of the loans acquired by the company are based on KIBOR and the tight monetary policy pushed the rates even higher. Financial cost increased by 147% in FY06 due to an increase in loans and because of rising interest rates.

The other operating income, however, increased in the same period. These factors added to lower the profitability of SSGC, causing it to drop below the profit margin of the other industry player.

The company's liquidity position has been declining over the five years studied. In FY06, SSGC lost its superior liquidity position to SNGPL and the difference between the current ratios of the companies has been increasing since then. FY07 followed the same trend, with the current ratio declining to a marginal level. A further drop in the ratio will bring the company in the red zone, and would reflect negatively on its financial strength.

The inventory turnover (days) improved slightly in FY07 but its effect on the operating cycle was marred by a substantial increase in the collection period of receivables. This contrasts with a decrease in inventory turnover and increase in DSO for SNGPL. As a result, SSGC ended the year with a longer operating cycle. It would be advisable for the company to focus on speeding up its collection process in order to increase its efficiency and lower costs. Hence, in terms of generating cash from gas purchases, SSGC lags behind its counterpart in the north.

SSGC has a superior position in the industry in terms of total asset turnover and sales to equity, although total asset turnover has been declining since FY04. In FY06, the sales to equity reached its peak over the five-year period. The debt ratios of SSGC reflect its standing as a largely debt financed company.

The debt to equity and long-term debt-to-equity has been on an increasing trend for the last few years and the trend continued in FY06 and FY07. Shrinking equity due to declining profitability and consequently lower un-appropriated profit account influenced this trend.

In FY06, SSGC also acquired more long term loans to finance its capital expenditure. Increases in creditors and short term borrowings also boosted the ratios. During the year 2007, SSGC subscribed to Sukuk Bonds, and also took up additional financing in the form of long term loans. Consequently, the financial charges have gone up by 30%. This has resulted in a decline in the interest coverage ratio, TIE.

Despite this, SSGC has been able to maintain lower levels of debt to equity, long term debt to equity and debt to assets than the other regional monopoly. This suggests lower levels of leverage for SSGC. The EPS of SSGC declined to Rs 0.43, compared to Rs 1.33 in FY06. Consequently, the dividend per share also declined to Rs 0.5 for the period. The dividend per share for FY06 was steady at FY05 level.

The graph indicates that DPS has the tendency to move, on an average, in step with EPS. This reflects positively on the company's dividend policy from the standpoint of investors. Both the EPS and DPS stayed much below those of the other player in the industry. The book value has been on a receding trend since the FY06, all the while remaining below those of the industry average.

In July 2007, the Pakistan Credit Rating Agency (Pacra) assigned the long-term entity rating of 'AA-' (Double A minus) and short-term rating of "Al+" (A One Plus) to Sui Southern Gas Company Limited (SSGCL). The ratings denote a very low expectation of credit risk and a very strong capacity for timely payment of financial commitments.

This reflects on the low financial and business risks of SSGC, derived from the Government of Pakistan-guaranteed return of 17 percent on its net average operating assets, which continue to grow in pursuance of the company's aggressive network expansion plan.

The ratings also take into account the company's strong cash flows, sound financial coverage and adequate liquidity. Due to capital-intensive nature of the industry and government regulations, SSGC is likely to maintain its monopoly position in its area of franchise (Sindh and Balochistan).

FUTURE OUTLOOK The capital expenditure of SSGC which was 35% lower for HY08, compared to HY07, stood at Rs 2.6bn against the targeted expenditure of Rs 4.0 billion. At the same time, addition to assets rose to Rs 1.7bn this year, compared to Rs 1.5bn in the corresponding period of previous year.

Despite these efforts, the company has not been able to contain its UFG losses within limits specified by OGRA. The expansions have, however, enhanced the distribution capacity of the company and improved the distribution network of the company.

The laying of mains and service lines during the year has increased the gas distribution network by 996km compared to 751km in the corresponding period of last year. This includes 400km supply and distribution mains laid in new towns and villages in Sindh and Balochistan versus 295km.

Also 190km old mains and service lines were rehabilitated/replaced as compared to 114km in the period July-December 06. The company has also made efforts to address the problem of rising financial charges. For this purpose, the company borrowed Rs 4.3bn through Sukuk issuance and another Rs 5.8bn from commercial banks during 1HFY08 at financing cost of 3 month KIBOR+20bps.

These new loans were used to repay the more expensive loans, which were borrowed at higher rate ranging from 3 months KIBOR +1.25% to 3 months KIBOR + 1.4%. Lastly, the LNG import project is also moving forward and the selection of the project development is expected to complete in the 2nd quarter of 2008.

The gas distribution utilities in Pakistan had been following a formula based on the provisions agreed upon with the Asian Development Bank. This formula allowed SSGC a rate of return on the EBIT level of 17% on net assets.

Now, however, The OGRA has proposed a new gas tariff regime which allows for a variable rate of return based on 8% KIBOR for six months. Besides this, OGRA has also specified lower and upper targets for UFG whereby savings due to higher than targeted performance are retained by the companies.

It is hoped that the new tariff regime proposed by OGRA will improve efficiency and enable better utilization of resources. Hence the company's performance is likely to improve as a result of the new regime. Moreover, as the expansion plans are implemented and the enhanced capacity comes online, the company will be able to enjoy higher net sales and the company's efforts to reduce UFG will help reduce costs, thereby accentuating profitability.

Pakistan Tobacco Company Limited at Review

Sat, 09 Aug 2008 21:49:33 EST

Pakistan Tobacco Company Limited at Review - by xpertwriter

Pakistan Tobacco Company Limited is part of British American Tobacco, the world's most renowned tobacco group, with brands sold in 180 markets around the globe. The company produces high quality of tobacco products to meet the diverse preferences of millions of consumers, and it works in all areas of the business - from seed to smoke.

Pakistan Tobacco's operations in the country began in 1947, making it one of Pakistan's first foreign investments. It provides a number of reputed brands of cigarettes to its consumers in Pakistan, including Benson and Hedges, Embassy, Gold Flake, Capstan and Gold Leaf.

PTC sold 10.5 billion sticks in the first quarter 2008, 10% higher than the last year. Gold Flake remained the main volume growth driver, while Gold Leaf maintained its position as the value driver. The gross sales increased by 17.1% to Rs 11.8 billion in Jan-Mar'08 vis-a-vis Jan-Mar'07. In relation to the increase in sales, the cost of goods sold also increased by 17.3%. The gross profit increased by 16.2%, while PAT witnessed an increase of 17.4% to Rs 829 billion resulting in an EPS of Rs 3.24.

Administrative expenses showed an increase of 36%, due to inflationary pressures as well as refurbishment of the head office. For the year, the pressure is expected to be on cost of production, due to depreciation of the rupee and the inflationary pressures. Over the years, Pakistan Tobacco has shown a rising trend as evident from the impressive growth in gross, net and operating profits. The operating profits growing by 28% and net profit growing by 44% in 2006 compared to the previous year.

The strong financial performance is attributable to significantly higher sales volume, improved margins in all brands, and continued control on the cost with focus on operational efficiencies and other initiatives. The company maintained double digit volume growth in 2006 with a record sales volume of 34.5 billion sticks - 13% higher than the same period last year (SPLY). This is a remarkable performance keeping in view the overall industry growth, which is estimated at 3%. Gold Flake remained the volume leader in the portfolio and grew at a phenomenal rate of 27% compared to the SPLY, while Gold Leaf maintained its volume base.

In 2007, the company posted a record level of sales and profitability. Operating profit grew by 29% to Rs 3,973 million and profit after tax grew by 27% to Rs 2,413 million. Contribution to the government's revenue amounted to Rs 26 billion, an increase of approximately 15% over the last year. Underpinning this exceptional financial performance were the factors such as strong organic volume growth, efficient cost management, continued investment in brands and people, and most of all the consumers, who continually supported these brands.

Sales volume, at 37.2 billion sticks, grew by 8% during the year ahead of the industry growth that was estimated at 2%. Market share also grew by 1.7 percentage points, further strengthening our position as the market leader in the domestic tobacco industry. PTC further strengthened its brand portfolio with the launch of new variants, limited edition products and packaging, consumer promotions, and effective presence across key market segments.

Cost of sales increased by 14% in 2007 over last year and this was mainly due to higher production volumes and inflation. However, the Company was able to derive benefit from economies of scale (highest ever production) and various cost control initiatives in its supply chain. As a result, increase in cost per unit was contained at 6% over last year, which is well below inflation. Improved financial performance of the company translated into a significant increase in its operating cash flows. Though they were partially offset by higher dividend payments and investment in plant and equipment during the same period, yet it resulted in a net increase in cash amounting to Rs 358 million in comparison to a net decrease of Rs 887 million in 2006.

In line with its drive to invest in latest machinery and facilitate up-gradation in its technology footprint to meet the industry's increased demand, the company invested Rs 1.2 billion in tangible fixed assets in 2007. Moreover, various process optimization initiatives were undertaken at both the factories to further strengthen supply chain's competitive advantage. Dunhill: A high point of the year's activities was the Dunhill Centenary Celebration, which took place with a distinctive display of style and substance. In future, the brand will continue to leverage its international expertise to bring the best tobacco experience to premium segment smokers.

Benson & Hedges (B&H): B&H continued to be the largest brand in the premium segment and the company capitalized greatly on the packaging change done in 2006. The brand will continue to leverage its equity and will endeavor to consistently deliver the superior quality it promises to its consumers. John Player Gold Leaf (JPGL): 2007 has been a successful year for JPGL with the sales increasing by 8% and the brand growing both in terms of value and volume share. In this brand, which is part of the company's brand heritage, the company continues to bring innovation and improvement.

Capstan by Pall Mall: 2007 brought dramatic changes to Capstan - a year in which saw a major shift in the brand's essence and identity. True to its innovative and invigorating appeal, Capstan by Pall Mall was launched in a new modern pack, which offers smokers a unique opportunity to experience the same great taste with a fresh and exciting look. Capstan by Pall Mall is the leading offer in the medium segment. Gold Flake: Gold Flake further strengthened its position by achieving high levels of growth. It is the main volume driver in the company's portfolio. Brand building, targeted consumer promotion activities, and aggressive distribution drives have greatly contributed to Gold Flake's success.

The liquidity of Pakistan Tobacco has remained barely above 1 for the past couple of years, and actually fell in 2006 compared to 2005. This is because despite improved profitability on account of strong financial performance the company's cash outflow remained higher than inflow mainly due to higher income tax, dividend payment and capital expenditure. Consequently, there was not a significant increase in the current assets as opposed to the current liabilities.

Pakistan Tobacco's asset management ratios depict a healthy trend of improving inventory management and improved credit policies. Both the inventory turnover (days) and the days sales outstanding have decreased, indicating that the company has been able to utilize its inventory at an optimally better level each year, and has been able to receive cash from its debtors over shorter periods of time subsequently over the lapse of time. Even though the inventory turnover has increased in 2007 the overall operating cycle has improved tremendously, falling from around 57 days in 2003 to around 36 days in 2007. As far as the fixed assets are concerned, recently the Company spent Rs 1.2 billion (Rs 0.5 billion more than the previous year) for acquiring latest machinery to cater for increased demand and to facilitate up gradation in the technology footprint. With the phenomenal growth in sales over the past couple of years and efficient utilization of property plant and assets, the overall total asset turnover ratio has also shown a rising trend over the years.

The total asset turnover ratio exceeded 3 in all the five years, hence bearing substance to the efficient asset management practices of the company. The interest coverage ratio has improved phenomenally over the past couple of years. It has increased from 7.68 in 2003 to 74.8 in 2007, showing that over the years, the company, with improved operating margins, has improved on its ability to pay its financial costs pertaining to interest payments. However, the long term debt to equity ratio of the company increased over the years as well, primarily due to an increase in the deferred taxation of the company. However, the reliance of the company on long term debt is negligible, the only long term debt arising through taxation. Total dependency on debt financing is on average 50%, the main component of debt being the short term loans and payables.

The book value has improved over the years owing primarily to an increase in equity due to a rise in the revenues and reserves of the company. The dividends paid per share have also improved tremendously as the excellent performance of the company over the past couple of years allowed it to disburse dividends to its shareholders. Similarly, the earnings per share of the company also increased significantly, marinating a steeply rising trend since 2003.

This is due to an impressive growth in the net margin of the company over the course of the four years under consideration. The market price of the company has also improved significantly over the years. It was only Rs 29 in 2003, but soared up to Rs 68.35 in 2006, an increase of over 135% over a period of four years.

Considering the past performance of the company, the financial outlook for the future is quite positive for Pakistan Tobacco Company, and a healthy growth is expected over the years. However, the directors speculate that the profitability of the company for the coming time period may remain under pressure due to the cyclical nature of the business and the rising inflationary trend.

Saudi Pak Bank Limited

Sat, 09 Aug 2008 21:47:07 EST

Saudi Pak Bank Limited - by xpertwriter

Saudi Pak Bank is a subsidiary of SaudiPak Industrial & Agriculture Investment Company (SAPICO) and a joint venture between the governments of Saudi Arabia and Pakistan. The Saudi Pak Group comprises of Saudi Pak Insurance, Saudi Pak Leasing and Saudi Pak Bank. The Saudi Pak Group has holdings in diverse sectors of Pakistan's economy.

At present, the bank is providing services to its customers with a network of 50 online branches spanning in 21 cities of the country. In 2008, the majority shareholding of the bank was acquired by a consortium comprising of Bank Muscat S.A.O.G., International Finance Corporation (IFC), Nomura European Investment Limited and Sinthos Capital. A change in management has taken place with Shaukat Tarin as President and CEO of the organization

Saudi Pak Bank continued to show losses in 1Q'08 as well. Although operating profits of Rs 80 million were witnessed before accounting for provisions, overall the bank showed loss after tax of Rs 245.6 million.

Mark-up earned for the first quarter ending March 2008 was Rs 1,118 million, a decline of 3% compared to the same period last year. The interest expend on the other hand declined by 11.7%, resulting in a net interest income of Rs 145 million without taking into account the provisions. The non-interest income has nearly halved in the first quarter of FY08, on account of decline in all categories of income.

Deposits have shown a slight decline, while the advances and the investments, all experienced a decline as well. However, with the new management coming in, better results may be expected.

The loss amount has eroded the equity of the bank much below the MCR requirement. Saudi Pak Bank had issued 80% rights shares, the whole amount of which has been underwritten. The rights issue has enabled the bank to maintain MCR at the prescribed SBP level.

ANALYSIS OF FINANCIAL PERFORMANCE (FY03-FY07 )

The earning profile of the bank has shown a negative trend for most of the years, with a decline in profitability stampeding in 2007. Saudi Pak Bank posted a loss, which is considerably higher, around 850% increase, than its loss incurred for the corresponding period of FY06.

The main reason behind this decline is that the increasing NPLs of the bank have resulted in a massive provisioning that considerably lowered the profits and turned the net markup and interest income negative. As a consequent of this, all the profitability ratios have declined quite steeply. Though the non-interest income increased over the last year, this increase was not sufficient to counteract the decrease in net interest income. Moreover, the non-interest expenses increased more than the non-interest income.

The yield on earning assets has shown an increasing trend however with an increase in the cost of funding them. This pattern parallels the trend in the industry. The bank has maintained an increasing trend in the proportion of total assets it maintains as earning assets, despite the fact that the composition of these earning assets varied significantly over this period. On the other hand, the cost of earning assets has also increased. However, factors like consistent inflows, relatively less interest rate sensitivity of the depositor, not to mention the liquidity preference of the depositors for maintaining checking and transactional accounts, both saving and current, caused a relatively small increase in the cost of funds of the bank.

The liquidity profile of the bank shows a comforting trend. The liquidity situation of the bank has improved in general over the period under review, with increasing earning assets to total assets and a declining trend in advance to deposit ratio (ADR). This was possible because of the steady inflows, particularly foreign inflows that continued to provide liquidity support despite SBP's tight monetary policy during the last two years. The ADR of the bank has shown a decline over this period because of heavy growth in bank's deposits, outpacing the otherwise moderate advances growth rate.

The generally increasing deposits relative to the increasing non-performing loans of the bank may be of concern as it may pose liquidity problems in the future. However, the deposits have posted a decline in 2007 from 2006, along with a decline in advances net of provisioning which has been seen as an increase in the advances to deposits ratio. The deposits, both term and savings have declined, while the remunerative deposits from financial institutions have increased.

As for the industry, the deposit base rose significantly in 2006 due to a booming economy, apart from higher foreign inflows through workers remittances and FDIs as well as expanding branch networks, product innovation and better marketing. In 2007, the deposits slightly declined. The banks are now introducing new products for the public to attract fresh deposits.

The asset quality has shown a deteriorating trend. The NPLs have increased in 2007 after remaining steady for the last two to three years. The NPLs, as a proportion of advances, have increased to 0.022% mark, although, general level is about 0.02%. The increase in NPLs may be indicative of a slightly risky credit risk position for the bank. The NPL situation of the bank may be expected to improve in the coming years with an amendment in its lending policy with greater long-term loans. Its effect is yet to be seen. A decline in the provisioning for the NPLs that is being substituted by longer-term loans was anticipated, however, for the year 2007 the effect has been increased provisioning.

With regard to the entire industry, credit just grew by a mere 3% in 9 months of 2007. The deceleration in the credit expansion is mainly attributed to the increase in NPLs for the whole banking sector. The major portion of these NPLs has been constituted by consumer loans.

The solvency contour of the bank shows a deteriorating sign with all the three ratios decreasing in 2007. Equity financed 3.2 percent of assets in CY03, 3.65 percent in CY04, 6 percent in CY05, 7.3 percent during CY06 and 5.44 percent in 2007. The earning assets to deposits ratio for the bank declined in 2007, as the rate of decrease in equity was greater than the rate of decrease of deposits. The debt as apportion of assets witnessed an increase over here, perhaps due to the longer-term loans. However, at such high levels, debt may become risky for the company as its cost may out do the cost of equity. The bank is recommended to increase its equity base. Perhaps, the old management was waiting for the new sponsors to consolidate the bank by injecting fresh equity.

The market value of the bank portrays mixed results with the market to book value ratios increasing markedly in 2007. However, the price to earnings ratio declined. This may be attributed to negative EPS of the bank due to lower profitability figures.

The price per share has increased reflecting better future prospects of the bank. The price per share may be expected to continue the same momentum in the future. The bank is currently under the expansion phase and has made a significant investment in that regard. Therefore, it has not adopted a dividend distribution policy right now. However, the bank in terms of its profitability has not been performing that well, this investment in expansion may predict a better performance in the future. This may be complemented by a rise in the earning assets of the bank and a decrease in its NPLs with the enactment of an amended lending policy.

FUTURE OUTLOOK The current growth momentum of the banking industry is likely to hinder if certain factors are not taken care of. The banks should reduce their NPLs structure and should recover their bad loans to offset the likely impacts that will go to hurt their profitability. Attempts are required to improve the performing loans portfolio to earn a greater return on deposits. The SBP has reduced the Special Cash Reserve requirement from 15% to 5% on total deposits on daily basis. This step will help the banks to overcome the liquidity problems. In addition, the implementation of Basle II will help in strengthening the credit standards for better risk management.

As regards the bank, it has not been performing well especially with regards to its performance in 2007. However, it will show some signs of improvement in the future if appropriate actions are taken to reduce its NPLs and increase its equity through which it will receive dividend income that may help to alleviate the impact of higher NPL provisioning. The investment picture of the bank also needs to be further improved. This will help the company to safeguard itself against various risks.

The consortium of International Finance Corporation, Bank Muscat, Nomura International and Sinthosis Capital has acquired a controlling stake in the Saudi Pak Bank around 86%. The investment of Rs 213 million translating into Rs 29.30 per share but after the company declared a right issue, the price fell to Rs 20.72 a share. The bank will need to be very aggressive to thrive in deteriorating economic conditions, coupled with falling banking sector spreads.

Habib Metropolitan Bank Limited

Sat, 09 Aug 2008 21:42:33 EST

Habib Metropolitan Bank Limited - by xpertwriter

The profit after tax of Habib Metropolitan Bank in the quarter ended June 30, 2008 increased to Rs 892.026 million as compared to Rs 510.733 million in the corresponding period in 2007. The board of directors of the bank in its meeting held here declared that the bank's earning per share increased to Rs 1.48 in the period under review against Rs 0.85 in the same period of last year.

According to the financial results, the bank's mark-up/return/interest earning increased to Rs 3,744.44 million in this quarter against Rs 2,862.171 million in the same quarter last year while the mark-up/return/interest expenses stood at Rs 2,683.241 million in this period against Rs 1,966.489 million previously.

Total non-mark-up/interest income of the bank increased to Rs 1,254.639 million in this quarter against Rs 754.158 million in the same quarter last year. The bank's profit before tax increased to Rs 1,298.209 million in this period against Rs 1,033.182 million in the same period a year back.

Unilever Pakistan Limited Review

Sat, 09 Aug 2008 21:22:37 EST

Unilever Pakistan Limited Review - by xpertwriter

The profit after tax of Unilever Pakistan Food Limited has increased to Rs 91.132 million in the quarter ended June 30, 2008 as compared to Rs 65.784 million earned in the corresponding period in 2007. The company's earning per share increased to Rs 14.80 in this quarter against Rs 10.68 in the same period last year.

The board of directors of the company in its meeting on Friday recommended an interim dividend for the quarter at Rs 22 per share ie 220 percent as compared to Rs 75 per share ie 750 percent paid in the same quarter in 2007. The company's profit after tax surged to Rs 204.088 million (EPS Rs 33.14) in the half year period ended June 30, 2008 as compared to Rs 113.428 million (EPS Rs 18.42) earned in the corresponding period in 2007.

According to the financial results, the company's sales increased to Rs 879.995 million in the three-month period this year against Rs 699.800 million in the same period last year. On the other hand, the cost of sales stood at Rs 520.529 million against Rs 434.915 million previously. The company's profit before tax increased to Rs 138.501 million in this period against Rs 101.294 million in the same period last year.

United Insurance Compnay ratings

Tue, 05 Aug 2008 09:52:36 EST

United Insurance Compnay ratings - by xpertwriter

The Pakistan Credit Rating Agency (Pacra) has maintained Insurer Financial Strength rating of the United Insurance Company of Pakistan Limited at "A-" (Single A Minus).

Meanwhile, Pacra has also maintained the positive outlook assigned to the rating. The rating denotes strong capacity of meeting policyholders and contract obligations. At the same time, risk factors are moderate, and the impact of adverse and economic factors is expected to be modest.

The rating reflects the strong risk absorption capacity of the company emanating from a sound solvency position. The management is following a well-conceived business strategy leading to a robust underwriting performance.

MCB Bank Limited Review

Tue, 05 Aug 2008 09:50:29 EST

MCB Bank Limited Review - by xpertwriter

MCB is among the oldest banks of Pakistan. It was among those private banks to be nationalized in 1974 after it was incorporated in 1947. Nationalization had a drastic impact on its performance as it affected the quality of loan portfolio and services.

Eventually it was privatized in 1991 and is currently owned by the Mansha group. Post privatization, MCB's focus has been on aggressive cost reduction. The bank has a deposit base of around Rs 290 billion and total assets of around Rs 410 billion.

MCB has network of over 1000 branches across Pakistan of which around 750 are automated. The bank offers various services to its consumers including personal banking, corporate banking, virtual banking, Islamic banking and other services. In this rapid expanding banking sector, MCB has been performing well to compete with its rivals. MCB has won the "Best Bank of Pakistan" award for the 5th time from 2001 to 2006. The Overall performance of banking sector can speak for itself as today banking sector has capitalized 1/3rd of the KSE.

Banking Industry (FY'07):The Bank industry witnessed a volatile year in 2007 in terms of profitability, with every quarter depicting a different picture. The total profitability improved from the first quarter to the second quarter but after the amendment in SBP's regulation regarding NPL and FSV, banks became more prudent in lending and total profitability declined in the following two quarters.

Non interest income grew significantly by 43% during the period under review. The net interest income earned by the banking sector in FY'07, also posted a growth of 17.4% and reached at Rs 203 billion as compared to Rs 173 billion in FY'06. The major reason behind this growth was the high level of spreads throughout the year, which remained at 7.29% on average, despite the SBP's further tightening of the monetary policy in July 07. SBP raised the discount rate by another 0.5% in January 2008, raising its benchmark policy rate to 10.5%. The lending rates increased while deposit rates were maintained by the banks.

The increasing lending rates not only deteriorated the debt servicing capacity of borrowers (both corporate and consumers) but also subdued the credit demand by the private sector resulting in slower advances growth. Also the country's large scale manufacturing activity slowed down. Due to this the banks are shifting from advances to investments as the key source of funds/ income for the bank.

Growth in investment by banks during the first nine months of 2007 was about 9 times of the increase in the advances in this period. It recorded an increase of PkR476.1bn, nearly 80% of assets increase during January-September 2007. As a result, the assets mix of the banks showed a slight shift from the previous trend.

Banks are now introducing new products for general public in the market to attract fresh deposits and increase in the weighted average deposit rates of the banking system, (4.14% at the end of Oct'07 up by 16 basis points from Jun'07). Moreover, the asset quality of the banks has been improving through strict policies and effective credit management.

Financial Performance (FY'03-FY'07):MCB Bank Limited (MCB) posted profit after tax of Rs 15.26b with the earnings per share of Rs 24.30 in FY'07 as compared to profit after tax of Rs 12.14b with earnings per share of Rs 19.33 in FY'06, depicting a significant growth of 26.0% during the year.

Following the industry trend, one witnessed a growth in the Net interest income of the bank by Rs 2.7b during FY'07, reaching at Rs 23.9b as compared to Rs 21.2b in FY'06.However, considering the size and operations of the bank, this is not a significant growth. An upsurge of 92% in the interest earned on the investments in available for sale securities and a 15% increase on the interest earned on the customers' loans were the major drivers behind the said growth.

Non-interest income also supported the bottom-line growing by 20.4% to Rs 6.0b in FY'07 from Rs 4.9b in FY'06 on the back of capital gain received on the sale of securities. Major contribution also came from a 14% surge in fee commission and brokerage income.

Overall MCB's profitability has been on a rise after 2004. The bank's profitability was low in 2004 as can be seen from the dip in the ratios. However, in 2005 the PAT shot up by 267% rising to Rs 8.92 bn. The growth momentum continued till the end of FY'07 when PAT crossed the 15 billion mark with a 3 and 4 year CAGRs of 23% and 84% respectively. This bottom line growth of MCB over the last couple of years, along with other banks, is due to high spreads of the banking system. It is worth mentioning that MCB enjoys one of the widest spreads and highest margins in the industry, backed by its low deposit rates.

The interest rate spread on outstanding loans and deposits had been hovering around 7.2 to 7.1 percent during FY'07. However, the spread on gross disbursements and fresh deposits remained lower, in the range of 5.1 to 6.5 percent. The squeezed spread in the later case mainly owed to shift in deposit structure with growing share of fixed deposits and relatively increasing pressure on interest rates on all deposits' categories.

Deposit base of MCB increased by 13.45% from Rs 292b in Dec'07 over Rs 257b in Dec'06, on the back of strong branch franchise. However, MCB lags behind the industry with a growth of 19%. The outer deposit circle (FY'07) and inner circle (FY '06) shows that the deposits largely comprise of low cost (CASA) savings deposits (54%) and current deposits (32-34%). Long-term deposits form 88% of the entire customer deposits indicating the bank's efficiency in maintaining the costs of funds on lower side. Fixed deposits have shown a decline by 2% in FY'07. Hence, there has been a shift in the deposits structure of the banking system where the banks are attracting longer-term deposits by offering higher returns, mainly due to CRR being zero-rated for time deposits. Deposits by financial institutions have risen but they still only form 3% of the entire deposits. ROD has increased from 3.14% to 5.2% from 2003 to 2007 as the profitability of the bank has improved significantly from effective utilization of the money deposited.

The assets base of the bank has been expanding rising from Rs 342.8bn (2006) to Rs 410.5 bn (2007). Unlike the FY'06 when growth in lending to financial institutions, advances and balances with other banks were responsible for the expanding asset base of the bank, a phenomenal increase has been witnessed in the investment portfolio of the bank, which enhanced by Rs 50bn to Rs 113bn in Dec'07 from Rs 63.48b in Dec'06. This is line with overall banking industry where the assets mix has shifted more towards investments than lending to FIs. MCB has major investments on Govt securities followed by shares in listed companies and TFCs & debentures.

The highly productive earning assets of the bank coupled with robust profitability resulted in the ROA to increase to 3.72% in 2007 (2006: 3.5%). Compared to the ROA of the banking sector of 2% this is very healthy and indicates the strength that MCB possesses is generating strong returns.

The banks equity base has been strengthening over the years, enhancing the bank's per party lending limit. It registered an increase of 72.1% in 2006 because of increase in bank reserves. The banks equity was 40.8bn in 2006. The reserves grew by a startling 172.4% to 24billion in 2006. Since 2003, the bank has raised Rs 2.9 billion through the issue of new shares. The ROE of MCB has dipped in the FY'07 to 27.7 (2006: 29.7%) largely because of greater reserves and fresh capital injections. However, in comparison to the banking sector average ROE of 27.7% MCB is still better off.

On evaluating the performance of MCB's earning assets we see that yield (markup or interest income as a % of earning assets) has shown on overall rising trend. Moreover, 'Cost of Funding Earning Assets' has also posted an increasing trend due to which the cost to income ratio has risen in recent years. Yet it is still lowest in the industry. A slight increase in 'cost of assets' coupled with returning higher profits is a good sign for any business and signifies its potential to produce/earn in future.

Post privatization, MCB's focus has been on expense reduction and sought for aggressive cost efficiency. It is also evident by a rising interest margin of MCB since markup/return/interest expensed has fallen more rapidly than the markup/return/interest income. Yields for FY06 and FY07 indicate that the returns would continue the upward march. However average deposit rates are also expected to increase which might impact MCB's high margins by eroding its low cost funding sources. Future expansion through low cost funding sources would be difficult resulting in declining spreads.

Advances have seen a growth of 225% since 2003 with a 4-year CAGR of 22.5%. The bank's advances mainly are comprised of short-term loans, which ensure a smooth liquidity position maintained by the bank. Analysis of the bank's advances portfolio reveals that the bank has diversified and expanded strategically with consumer portfolio being the lead driver behind the total advances growth of 10.5% to Rs 219b in Dec'07 over Rs 198b in Dec'06. However, this growth lagged the overall deposit growth, due to overall slow down in industry advances. As a result the ADR of the bank depressed marginally to 76% in Dec'07 from 77.0% in Dec'06.

The serious concern for the industry in general and MCB in particular is the increasing number of its non-performing loans (NPLs), which resulted in the high provisioning against it. During the FY'07 the bank's total provisioning increased phenomenally by 192% to around Rs 3b against Rs 1.1b in the corresponding period last year. MCB has been able to contain credit risk despite aggressive growth in advances to consumer and private sectors (forming around 95% of NPLs). This is further evident by the flat trend in provisions of NPLs ratio. On the flip side, one can witness a surge in NPLs as a percentage of advances in FY'07, due to changes in Risk Management policies of recognizing NPLs on obligor basis. Hence, change in the Prudential Regulations by SBP regarding the removal of FSV benefit will not have a very significant impact on MCB due to its own stringent and conservative policies.

We can see that the bank has made an extra ordinary effort to reduce its dependence on debt, as a source of finance. Debt management figures reveal that the bank has 96% of its assets financed by debt in 2003. However it had reached a very high level and there is always a potential to fall back from heights, same has been the case with MCB as it had to reduce its dependence on heavy debts. Furthermore, debt to equity ratio suggests a tremendous recovery by MCB to improve its credit rating upto AA+ in long term & A1+ in short term. Moreover, growth in profits and higher capital injections as well as the imposition of the enhanced Minimum Capital Requirement (MCR) has directed to equity-based source of financing in later years. Declining deposit times capital till FY'06 is indicative of the increasing capital of MCB, whereas a slight increase in FY'07 is attributed to 13.45% increase in deposits vis-à-vis a meager 2% surge in capital base (average).

The solvency situation for the industry as a whole has shown marked improvement in recent years, caused by increasing profitability and fresh inflows of capital. In MCB's case, was a slight deterioration in the solvency position in 2004 was due to extremely high growth in deposits (105%). This situation, has been improving since then on the back of substantial increase in equity mainly attributed to compliance with the MCR under the Basel II accord and for growth purposes. MCB complies with its MCR requirement with 6.2 b paid-up capital at the end of FY'07 only, against that of FY'09 required by SBP. Capital adequacy ratio of MCB stands at 17.88% in 2007 (2006: 18.65%) against SBP's minimum requirement of 8% of the risk-weighted exposure.

Rising equity base of the bank has resulted in the book value of MCB to climb to Rs 87.73 in 2007 (2006: Rs 74.8), enhancing it per party lending limit. Nevertheless, it has been matched by share price increase and in the year 2007 price was 3.8x the BV.

The price of MCB's share has fluctuated between Rs 247 to Rs 367 in the year 2007. The average price of MCB shared hovered around the Rs 43 mark in 2003 but the phenomenal success of the bank over the years has led investors to invest heavily in MCB's shares and as a result, the yearly average for 2006 was Rs 332. This has caused the share of MCB to operate at a high P/E multiple of 13.7 even though the bank recorded a high EPS of 24.3 in 2007. MCB has also issued GDR due to which it has to maintain strict policies of Accountability and Accountancy, which also plays a key role in investor's confidence.

On comparison with KSE 100 index we see that it has not outperformed the index yet almost rose to the index level by the end of FY'07.

The bank has had a very open dividend policy. In 2005, it gave a 42.5% cash dividend worth Rs 1.71 billion. A dividend of Rs 3.96 billion was also paid in 2006 (32.6%). However, DPS of the bank has inclined sharply. The bank has announced a final cash dividend of Rs 5.0 per share in FY'07. This makes the total payout of Rs 12.5 per share for FY'07 vis-à-vis Rs 6.52 adjusted cash dividend declared in FY'06.

MCB has generally attracted investors due to its strong fundamentals, which has caused its share price to incline sharply. These cause a falling dividend yield till FY'06. However, the yield again rose in FY'07 on the back of higher DPS. The bank had retained greater profits in 2006, which promises future growth prospects. This has resulted in low dividend coverage in 2006, as high profits have not been passed onto the investors. The overall payout has increased in FY'07, as evident by declining dividend coverage.

Budgetary Impact:

Availability of Govt. Commercial Paper for maturities of 3 months, 6 months and 1 year, from commercial banks along with the 2% upward adjustment and quarterly revision in NSS rates shall further increase the attractiveness of these competing instruments and could significantly enhance competitive pressures and suck liquidity from the banking system. It might result in disintermediation of resources by attracting low cost current & savings deposits. It will drive up yield on short-term saving account deposits. It could also cause shifting of current deposits to savings deposits, especially if yields get very attractive. The burgeoning competition would further result in narrowing spreads and slower deposit growth.

Tax treatment of provisions for classified advances and off balance sheet items, allowing deduction on account of NPLs as per prudential regulation shall induce banks to either improve their recovery process or write-off the NPLs. Though the said change won't impact accounting earnings, it shall increase the cash taxation of banks from next calendar year.

The enhanced rate of FED from 5% to 10% on banks' fee-based services is largely neutral as the same shall be passed on to the end-customers. Similarly, WHT on cash withdrawal from banks enhanced from 0.2% to 0.3% is likely to have a neutral impact.

Future Outlook:

The recent Discount Rate hike to 13% and 100bp increase each in CRR and SLR to 9% and 19% respectively would translate into an increase in market interest rates and firmly restrain credit expansion. On the flip side, it is likely to have a positive impact on deposit mobilization as the banks struggle for liquidity, which had already started to become scarce.

Despite the contractionary monetary policy stance of SBP, the banking spread has increased by 20bps to 7.34% in May 2008 compared to 7.14% December 2007. However, the imposition of 5% minimum deposit rates on interest bearing checking accounts from July'08 onwards would squeeze NIM and result potentially higher credit costs (due to asset quality deterioration), thereby potentially trimming net interest income and reducing MCB's future profitability.

Higher than average ROE posted by MCB seems sustainable over next few years. Overall, the risk profile and asset quality of MCB has vastly improved over the years. However, the possibility of rising NPLs/advances ratio in FY'08 could be ruled out. To cater to this, the bank has pursued stringent policies and made adequate provisioning, thus, the future profitability of the bank will not be impacted so greatly.

Another positive sign for the bank is Malaysian Maybank's plans to acquire another 5% stake in MCB Bank by August 2008. The 5% option is part of the initial deal for acquisition of 20% stake in MCB Bank. Maybank has already acquired 15% stake in MCB from Nishat group in May 2008 and was required to acquire the remaining within a period of 12 months.

At an agreed price of Rs 490/share, an upside of 82% from MCB's current market value, the incremental 5% stake in MCB, Maybank would generate foreign inflow of US $218mn. Moreover, partnership with Maybank is expected to add more value to MCB going forward. The deal could have a long run positive impact with technology transfer and infrastructure investment boosting depositor density and improving loan penetration in trade financing, Islamic Banking and SME Business.

With SBP raising the upper limit of retail exposure to PkR75mn (not be more than 2% of gross retail portfolio of the bank) in case of consumer loans and small business loans, MCB has increased its penetration this high margin segment. Despite the challenges of declining demand & rising NPLs due to higher interest rate vulnerability and late entry along with established brand equity of existing players like UBL, Consumer financing continues to be a profitable niche for MCB.============================================================================================================ MCB Financials ============================================================================================================ BALANCE SHEET FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Cash and Balances with treasury banks 24,053,669 23,833,253 23,665,549 32,465,976 39,683,883 Balances with other banks 1,302,682 5,708,323 1,466,045 6,577,017 3,807,519 Lending to Financial Institutions 10,130,450 10,965,297 9,998,828 21,081,800 1,051,372 Investments 128,276,812 67,194,971 69,481,487 63,486,316 113,089,261 Advances 97,200,179 137,317,773 180,322,753 198,239,155 218,960,598 TOTAL ASSETS 272,323,619 259,173,808 298,780,780 342,108,243 410,485,517 Bills Payable 8,396,320 7,566,684 8,536,674 7,089,679 10,479,058 Borrowings from Financial Institutions 32,627,951 7,590,864 27,377,502 23,943,476 39,406,831 Deposits and Other Accounts 211,511,393 221,069,158 229,341,890 257,461,838 292,098,066 sub-ordinated loans 1,599,360 1,598,720 1,598,080 1,597,440 479,232 TOTAL LIABILITIES 261,214,926 244,620,924 275,046,484 301,263,929 355,365,842 Share Capital 3,065,273 3,371,800 4,265,327 5,463,276 6,282,768 Reserves 4,379,255 5,661,553 9,054,940 24,662,426 34,000,638 Unappropriated Profit(Ret. Earnings) 281,636 165,208 4,990,260 5,530,973 5,130,750 ------------------------------------------------------------------------------------------------------------ INCOME STATEMENT FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Interest earned 10,369,994 9,083,863 17,756,232 25,778,061 31,786,595 Interest expensed 2,932,693 2,057,640 2,781,468 4,525,359 7,865,533 Net Interest Income 7,437,301 7,026,223 14,974,764 21,252,702 23,921,062 Provisions 781,081 279,690 1,144,355 1,182,737 3,065,051 Net interest income after provisions 6,656,220 6,746,533 13,830,409 20,069,965 20,856,011 Total non mark-up / return / interest income 0 4,232,988 5,753,669 4,991,416 6,011,291 Total Non markup Interest expenses 0 7,435,657 6,565,591 6,560,711 5,559,267 PROFIT BEFORE TAXATION 6,656,220 4,057,716 13,018,487 18,500,670 21,308,035 PROFIT AFTER TAXATION 6,656,220 2,431,532 8,922,415 12,142,398 15,265,562 Basic Earnings per Share 6.61 5.99 17.43 23.40 24.30 Diluted Earnings per Share 6.61 5.99 17.43 19.33 24.30 ------------------------------------------------------------------------------------------------------------ LIQUIDITY FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Earnings Assets to Assets 86.52% 84.87% 85.18% 84.67% 81.84% Yield on earning assets 45.96% 54.21% 70.52% 77.76% 75.92% Advance to deposits 4.40% 4.31% 5.65% 8.02% 9.35% Cost of Funding earning assets 1.24% 0.91% 1.17% 1.67% 2.55% Net Interest Margin 3.16% 3.26% 5.76% 7.51% 7.18% ------------------------------------------------------------------------------------------------------------ SOLVENCY FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Equity to Assets 4.08% 4.83% 6.86% 10.08% 12.75% Equity to Deposits 5.25% 5.93% 8.50% 13.27% 17.46% Earning Assets to Deposits 111.39% 97.47% 113.28% 109.84% 114.04% ------------------------------------------------------------------------------------------------------------ DIVIDEND PAYOUT FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Dividend Coverage 2.06 2.39 4.33 2.668 1.94 DPS 3.20 2.50 4.02 7.24 12.5 Dividend Yield 0.07 0.045 0.03 0.02 0.03 Dividend 983457 843000 1715000 3960000 7853460 ------------------------------------------------------------------------------------------------------------ EARNING FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Return on Assets 2.44% 0.94% 2.99% 3.55% 3.72% Return on Equity 59.92% 16.71% 37.59% 29.73% 27.70% Return on Deposits 3.15% 1.10% 3.89% 4.72% 5.23% ------------------------------------------------------------------------------------------------------------ ASSET QUALITY FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Non-Performing loans to Advances 11.32% 6.44% 4.66% 4.32% 4.90% Provisions to Non-Performing Loans 0.62 0.76 0.93 1.00 1.00 ------------------------------------------------------------------------------------------------------------ MARKET VALUE RATIO FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ BV 36.24 43.16 55.64 74.76 87.73 Price-Earnings ratio 6.63 9.21 6.48 16.79 13.70 Market-Book value ratio 1.21 1.28 2.03 4.34 3.79 Weighted average Shares outstanding 306,527 337,180 426,533 546,328 628,277 Average price per share 43.85 55.18 113.00 324.60 332.92 ------------------------------------------------------------------------------------------------------------ DEBT MANAGEMENT FY '03 FY '04 FY '05 FY '06 FY '07 ------------------------------------------------------------------------------------------------------------ Debt to Equity 23.51 19.71 13.57 7.78 7.38 Debt to Asset 0.96 0.95 0.93 0.89 0.88 Deposits time Capital 19.04 17.23 11.98 6.45 7.15 Capital (avg of asset and liabilities) 11,108,693 12,830,789 19,143,590 39,899,428 40,844,314 ============================================================================================================

Meezan Bank Limited at a Glance

Tue, 05 Aug 2008 09:47:35 EST

Meezan Bank Limited at a Glance - by xpertwriter

The after tax profit of Meezan Bank Ltd has declined to 192.562 million in the quarter ended June 30, 2008 as compared to Rs 240.381 million earned in the corresponding period last year. The bank's earning per share stood at Re 0.42 in the period under review against Re 0.95 in the same period last year.

The board of directors of the bank in its meeting has not declared any interim cash or stock dividend. The bank's profit after tax for the half year period ended on June 30, 2008, however, increased to Rs 443.145 million against Rs 430.958 million in the same period last year.

According to the financial results, the bank's profit/return earned on financing, investments and placements increased to Rs 1,467.915 million in the quarter ended June 30 as compared to Rs 1,091.887 million in the same quarter in 2007. The bank's profit before tax stood at Rs 255.498 million in this quarter against Rs 323.523 million in the same quarter last year.

ABN Amro Bank Limited At Review

Fri, 01 Aug 2008 10:11:18 EST

ABN Amro Bank Limited At Review - by xpertwriter

ABN Amro Bank (Pakistan) Limited (AABPL) is a newly merged entity, resulting from the merger of ABN Amro N.V-Pakistan branches with and into Prime Commercial Bank Limited effective from September 01, 2007. ABN Amro N.V-Pakistan branches had been operating in Pakistan since 1948, as a scheduled commercial bank, under a banking licence from the State Bank of Pakistan.

While the Prime Commercial Bank Limited was incorporated on September 30, 1991 as a public limited company. On March 5, 2007, ABN Amro N.V entered into an agreement to buy 93.4% stake in Prime Commercial Bank Limited, later it offered to purchase the remaining stake in the bank. AABPL is a majority owned subsidiary of ABN Amro Bank N.V., Amsterdam. ABN Amro Bank N.V. held a total of 99.22% shareholding of the bank as at December 31, 2007.

After the amalgamation, AABPL became the second largest foreign bank as it was able to expand its local operations with a network of 82 branches (including 3 Islamic Banking branches) in Pakistan and Azad Jammu and Kashmir. The bank is principally engaged in retail banking, corporate banking and treasury-related activities.

The last quarter of 2007, brought about more significant changes in the ownership structure of the bank as on the global front, ABN Amro Bank N.V was acquired by a consortium led by The Royal Bank of Scotland. ABN Amro Bank (Pakistan) Limited would be renamed as 'The Royal Bank of Scotland Limited' in the next few months.

BANKING INDUSTRY (FY07) The banking industry witnessed a volatile movement in 2007 in terms of profitability, with every quarter depicting a different picture as shown in the graph below. The total profitability improved from first quarter to the second, but after amendment in the SBP's regulation regarding NPLs and FSV, the banks became more prudent in lending and total profitability declined in the following two quarters. Likewise, AABPL also revised its credit policy.

Non interest income grew significantly by 43% during the period under review. The net interest income earned by the banking sector in FY07, also posted a growth of 17.4% and reached at Rs 203 billion as compared to Rs 173 billion in FY06. The major reason for this growth was the high level of spreads throughout the year, which remained at 7.29% on average, despite further tightening of the monetary policy by the SBP in July 07. The SBP raised discount rate by another 0.5% in January 2008, raising its benchmark policy rate to 10.5%. The lending rates increased while the banks maintained the deposit rates.

The increasing lending rates not only deteriorated the debt servicing capacity of borrowers (both corporate and the consumers) but also subdued the credit demand by the private sector resulting in slower advances growth. Also, the country's large scale manufacturing activity slowed down. Due to this, the banks are shifting from advances to investments as the key source of funds/income for the bank. On the flip side, the asset quality of the banks has been improving through strict policies and effective credit management.

There is also a trend of growing consolidation in the banking sector, in order to meet the Minimum Capital Requirement set by the SBP. However, ABN Amro Bank N.V- Pakistan merged into and with Prime Commercial Bank Ltd. not to meet the MCR regulation but as a move to enter the middle market which includes private firms, smaller listed companies as well as new and expanding businesses. Prior to the acquisition, the ABN Amro had large corporate and consumer business but lacked in the middle business area. AAPBL, however, will face tough competition with other big players in the industry

FINANCIAL STATEMENT ANALYSIS (FY02-FY07) ABN Amro Bank (Pakistan) Ltd. showed a rising trend of profitability over the years and in 2006, the bank earned a considerable profit of Rs 2.4 billion. However in 2007, the acquisition year, the bank made a loss of Rs 1.56 billion. The bank went through significant changes during the year and its overall performance was impacted during the merger.

The merged entity's loss before tax for FY07 was Rs 1.37 billion (including the PBT of ABN Amro N.V-Pakistan Branches reported up to 31 August 07 and LBT (of Rs 2.8 billion) of the new merged entity - ABN Amro Bank (Pakistan) Ltd for the year ended 31 December 2007).

A quarter-on-quarter analysis reveals that AABPL's PAT decreased gradually during the whole year and during the last quarter of 2007, when the merger became effective, the bank made a colossal loss. The deteriorating profits of the bank can be attributed to the changes in the bank's consolidation and the management's preoccupation with it.

However, the main reason the bank incurred losses for the year 2007 was a huge increase in provisioning in line with the SBP's directions regarding FSV. AABPL made adequate provisioning against its advances portfolio. Due to this specific loan loss amounting to Rs 3.78 billion against non-performing loans was recognised as against Rs 861 million in the year ended December 31, 2006. The total provisions increased by 350% amounting to Rs 1,358.226 million. Therefore, despite an increase in the net interest margin by 4.82% from 06 to 07 the increased provisions caused the net interest income after provisions to decrease by 54% in 2007 compared to 2006.

Also the total non-interest income decreased, resulting mainly from a Rs 298 million loss on sale of the government securities - Pakistan Investment Bonds (PIBs) - and some listed shares.

As the total income decreased in 2007, an increase in total expenses by 51% surpassed the income earned by ABN Amro Bank (Pakistan) Ltd resulting in a loss for the year 2007. Major increase was seen in the administration expenses mainly because the bank was newly merged and had to spend considerably on growth initiatives, integration and alignment processes.

All the earning ratios of the newly merged entity- ABN Amro Bank (Pakistan) Ltd. show a dismal picture because of the loss made by the bank in 2007. As a result, the earning per share for the year-ended fell from Rs 1.78 to Rs (1.16).

Taking into account the ongoing consolidation and rationalisation of certain investments and advances portfolio, the net advances and investments of the bank witnessed a 10% and 36% decline respectively, thereby reducing the earning assets of the bank considerably. This has hampered the income of the bank and the bank was unable to maintain its solvency ratios in the post merger period. It is not clear whether the solvency situation will be improved.

This decline in earning assets coupled with a decrease in cash and balances with the treasury further lowered the total assets of the bank in 2007 by 13%. The bank has increased its authorised capital (by issuing 800 million ordinary shares of Rs 10 each) as approved by the members in an EOGM held on July 27, 2007. Despite this the equity base of the bank decreased by 41%, due to negative reserves and loss made during the year 2007.

Deposits of the bank decreased by Rs 3.453 billion in 2007 compared to 2006 despite an 8% growth in deposits witnessed during the Q3'07. The fixed deposits and saving deposits fell by 3.8% and 0.25% respectively, while the current accounts increased by 1.7% in 2007. With total advances of Rs 64.468 billion, Rs 4.49 billion were placed under non-performing advances status in FY07, which were 122.7% more than the previous year of Rs 2,016.839 million.

Thus, due to the increased NPLs, provisioning and reduced advances, there was a significant increase in all the asset quality ratios of the bank. The average NPL to advances ratio of the top 5 firms is 0.01 while that of AABPL is 0.07. This shows that AABPL needs to manage its credit risk tactfully. On the flip side, the bank seems to be already working on improving its asset quality as it revised its credit policies and procedures (which is also believed to have resulted in the decrease in advances for the year 2007).

The debt management of AABPL seems to have worsened as the debt ratios have increased. Even though the liabilities of the bank have decreased due to reduced borrowings and deposits by 11%, the equity and assets base of the bank have also deceased during the same time period for above mentioned reasons. The net assets have decreased (by 41%) more than the deposits (4%) explaining the rise in deposit times capital.

The bank has been able to maintain its earning assets-to-asset ratio at 0.82 in 2007 in line with the industry trend. However, the main driver is declining assets base rather than increase in earnings assets. AABPL's advances form 73% of the total earning assets. Investments are 19% and lending to financial institutions constitute just 8% of the total earning assets. AABPL must expand its advance portfolios and consider efficient portfolio diversification. It should also consider investments as a source of income.

The ADR was went down from 0.77 to 0.71 from 06 to 07, as the declining deposits (3.7%) lagged the declined in advances (10%). This shows that AABPL's liquidity position has gone down when compared to its liquidity position in the prior years. However, with ADR above that of the industry (0.68 in FY07), it is still in a comfortable situation to guard against any credit risks. The yield on earning assets was 0.02 in 2006 but has become negative (-0.02) in 2007 due to a loss incurred by the bank.

BUDGETARY IMPACT The "accumulated loss" of an amalgamating banking company could be set-off or carried forward against the business profits and gains of the amalgamated company up to a period of six tax years. This is expected to bode well for the M&A activity in the sector. Tax treatment of provisions for classified advances and off balance sheet items, allowing deduction on account of NPLs as per prudential regulation shall induce banks to either improve their recovery process or write-off the NPLs. Though the said change won't impact accounting earnings, it shall increase the cash taxation of banks from next calendar year.

Availability of Govt. Commercial Paper for maturities of 3 months, 6 months and 1 year, from commercial banks along with a 2% upward adjustment and quarterly revision in NSS rates shall further increase the attractiveness of these competing instruments and could significantly enhance competitive pressures and suck liquidity from the banking system. It might result in disintermediation of resources by attracting low cost current and savings deposits. It will drive up yield on short-term saving account deposits. It could also cause shifting of current deposits to savings deposits, especially if yields get very attractive. The burgeoning competition would further result in narrowing spreads and slower deposit growth.

The enhanced rate of FED from 5% to 10% on banks' fee-based services is largely neutral as the same shall be passed on to the end-customers. Similarly, WHT on cash withdrawal from banks enhanced from 0.2% to 0.3% is likely to have a neutral impact.

FUTURE OUTLOOK The recent DR hike to 13% and 100bps increase each in CRR and SLR to 9% and 19% respectively would firmly restrain credit expansion while making banks to struggle for liquidity, which had already started to become scarce. Despite the contractionary monetary policy stance of SBP, gross advances of the banking sector during 1HCY08 have shown a growth of 11%.

The persistent rise in inflation witnessed due to exogenous and endogenous shocks have meant that despite a rise in nominal interest rates, real lending rates in the economy have been negative. Another factor of the rise in advances is the increase in working capital financing due to rising input costs. Moreover, the latest data reveals that the banking spread has increased by 20bps to 7.34% in May 2008 compared to 7.14% in December 2007. However, the imposition of 5% minimum deposit rates on interest bearing checking accounts from July-08 onwards could squeeze NIM and result potentially higher credit costs (due to asset quality deterioration), thereby potentially trimming net interest income and reducing banking sector's profitability.

The bank is in the final stage of merger and the process of integration and alignment has reached near completion. The bank made a loss this year, but it expects to make future gains from its new vast network of branches and improved products and services. The bank is expected to diversify its advances portfolio and intends to enter the Pakistan's fast growing SME segment. It will be greatly helped by Prime Commercial Bank Limited's strength and established client base in the SME segment.

The bank is expected to use its expanded branch network to increase its deposits. It will focus on increasing current and saving deposits because they are low cost deposits and the bank needs to improve its overall cost structure. Another positive sign for the bank is the decision of the Royal Bank of Scotland to retain ABN Amro's operations in Pakistan. The credit rating of the bank has also increased and this shows the strengthened position in the local banking industry.

The bank can expect better results in the future by focusing on its Islamic banking as the Islamic banking sector is experiencing robust growth. AABPL has three Islamic branches and it intends to open more. In 2007, the bank's NPLs resulted mainly from the advances portfolio of Prime Commercial Bank Limited and the consumer loans of ABN Amro N.V Pakistan Branches. However, the bank has made a provision of more than 88% against total NPLs. Thus, the future profitability of the bank will not be impacted so greatly in the future.

Unilever Pakistan Limited At a Glance

Wed, 30 Jul 2008 22:58:12 EST

Unilever Pakistan Limited At a Glance - by xpertwriter

Unilever Pakistan Limited, formerly known as Lever Brothers Pakistan Limited is a wholly-owned subsidiary of Unilever Overseas Holdings Limited, UK, whereas its ultimate parent company is the consumer products giant, Unilever PLC, UK.

Following a series of high-profile acquisitions, including US-based Bestfoods, Unilever's foods business is the world's third largest after Nestle and Kraft. It is a global leader in culinary foods, ice cream, margarine and tea-based beverages. Major brands include Knorr, Lipton and Magnum.

Unilever was incorporated in Pakistan in 1948 as Lever Brothers Pakistan Limited and merged with Lipton in 1989 and Brooke Bond in 1997. It became the largest ice cream manufacturers in Pakistan through an amalgamation with Polka in May 1999. These acquisitions have further strengthened the distribution network of Unilever. It is listed on all the three stock exchanges of Pakistan.

Currently, the company is the largest fast moving consumer products (FMCG) company in Pakistan. It is engaged in manufacture and marketing of home and personal care products, beverages, ice cream and spreads.

Unilever has adapted Unilever global brands such as Lifebuoy, Lux, Surf and Walls to local consumer needs at affordable prices. It has increased its leading market position over the years in most of its core home and personal care and food categories, eg personal wash, personal care, laundry, beverages (tea) and ice cream.

Unilever Pakistan has been exporting a range of products catering to the "external constituency", for the last forty years. Since 1998, Unilever has been entrusted with the responsibility of developing the Afghanistan business through a dedicated sales and distribution network. A wide range of home care, personal care, foods, ice cream and beverage brands are offered for export.

In June 07, Unilever Overseas Holding Limited, a wholly owned subsidiary of Unilever PLC, UK, the ultimate parent company, purchased all the shares held by the government of Punjab. This has increased Unilever's shareholding in the company from 67.04% to 70.4%.

Segments at a glance (FY07)

UNILEVER COMPRISES OF 4 SEGMENTS:

-- Home and personal care - represents laundry and a wide range of cleaning, skin care, hair care and oral care products

-- Beverages - represents tea

-- Ice cream - represents ice cream

-- Other - represents margarine

HOME AND PERSONAL CARE It continues to be the major driver behind the top and bottom line growth. In FY07, sales of this high margin segment increased by 26% (13% from volumetric growth and remaining via price increase), thereby increasing its contribution to the top line to around 52% from 47% last year. Unilever maintains its market leadership in laundry detergent powders, hair and personal wash categories. The star performers were Surf detergent powder, Sunsilk shampoo & Lux beauty soap. Sales of newly introduced Clear shampoo were also in line with forecast. Despite this impressive turnover, the unprecedented rise in palm oil, tallow prices and other materials resulted in decline of margins.

BEVERAGES Gross sales for FY07 were down 3% due to lower selling prices and volume loss to small local brands in rural areas that are using cheap smuggled tea. Lower tealeaf costs resulted in consumer price reduction by 5%. Following the normalisation of very high tea prices arising from severe drought conditions in 2006 in Kenya, normal gross margins have been restored. Lipton Yellow Label continues to grow, amidst cutthroat competition in a mature tea market, due to various promotional campaigns and trade offers.

ICE CREAM AND SPREADS Gross sales for Walls in FY07 increased by 9%, well below expectations. In FY07, the monsoon was earlier and more severe, there were acute power shortages in the south and there were delays in completing the factory expansion project, resulting in serious supply disruption in Q2'07. This damaged the ice cream sales, which were countered by leasing cold storage facilities in Karachi and Lahore. Hence higher distribution and additional factory costs resulted in lower profits and eroded the gross margin.

On spreads side, Blue Band Margarine registered a 23% sales growth due to successful brand activation programmes. However, the overall margins remained flat at 40%.

FINANCIAL PERFORMANCE (DEC03-DEC07) Overall, the sales grew by an impressive 11.17% (2006: 18.77%) as it built on the growth momentum started in 2005 with a 3-year CAGR of 9%. Sharper focus and increased resource allocation in marketing and customer management were the prime drivers. The sales mix improved with robust growth in home and personal care. The sales of beverages declined due to lower market selling prices and lower volumes. Ice cream performance was flat due to an unfavourable business environment.

However, this overall sales growth did not trickle down to the bottom line mainly due to cost pressures, high distribution expenses and restructuring costs, thereby eroding the operating and net profit margins respectively. Despite high COGS, overall gross margins improved slightly in FY07 on the back of double-digit growth in HPC segment, which contributed 60% to the gross profit. ROA showed a decline due to a higher increase in assets base due to expansion in the ice-cream business along with declining profits. Similarly, ROE showed a negative trend on account of declining profit after tax.

The overall PAT in FY07 increased by a meagre 2%, lagging the robust bottom-line growth. This was due to the volume decline in tea business along with lower ice cream sales for reasons mentioned above. All the liquidity ratios have posted a declining trend over the 5-year period. The current ratio has decreased from 1.04 in 2003 to 0.73 in 2007. This shows that company's current liabilities (mainly the short term borrowings) are rising far more than its current assets, reflecting a decline in company's ability to pay off its short-term obligations. Quick ratio, a better measure of liquidity followed a trend similar to current ratios, first increasing slightly in 2004 and then declining onwards.

Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO though, has declined during 2004, but has been on a slight rise then onwards. The slight increase is indicative of Unilever's declining operational efficiency with growth in net sales lagging behind the growth in inventory kept by the company. Reasonable ITO shows that Unilever is able to efficiently turn its inventory into sales.

Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid the risks of bad debts. The trend line indicates a sharp decline in this ratio in 2004 after which it has been on a constant rise (slightly) due to a growth in net sales lagging behind that in trade debts (37% in FY07) indicating that perhaps the company is deliberately pursuing easy credit policy to attract large number of creditors. However, its DSO is still very negligible compared to ITO. The operating cycle of Unilever hence followed the same trend as that of ITO in the respective years. Initially it was much higher than the industry average but later it started declining to converge with the industry trend.

TATO has remained flat at 3 over the period under review, reflecting that the company is anticipating any increase in its sales and responding to it in a timely fashion by enhancing its assets base accordingly. The sales/equity on the other hand shows a rising trend after 2004 on account of declining equity base in subsequent years. Also, sales in FY07 have registered a positive growth which explains the rise in that year.

As far as debt management is concerned, both D/A and D/E ratios after 2004 (the decline in 2004 is because the Unilever retired significant amounts of debt in that year) show Unilever's increased reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.63 to 0.75) ratio has remained almost stable over the years while D/E ratio has increased significantly (1.8 to 3.08) owing to increasing long term debts (as further evident by the long term debt to equity ratio) to finance the expansion, coupled with the declining equity base in the subsequent years.

The TIE ratio has increased in 2004 but again nose-dived in 2005 due to high interest rates offsetting the increase in EBIT, thus having an adverse impact on Unilever's interest covering ability. Even though this ability increased in 2006 (owing to comparatively lower finance costs), a massive surge in finance costs (70.64%) vis-à-vis a 3% increase in EBIT, was responsible for a plunge in FY07 TIE ratio. Looking at this, we can that infer that Unilever's is being adversely affected due to higher markups in high interest rate regime.

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). Unilever's EPS has been erratic (fluctuating between 120 and 130) driven mainly by any changes in company's profit after tax (as its number of shares have been constant so far in last 5 years).

The year-end market prices of the company have been increasing over the 5-year period. Consequently, the P/E ratio also followed a rising trend driven by the increases in market price of shares, reflecting the investor's confidence in Unilever. As evident from the price chart, Unilever has outperformed the 100 index in all years under consideration.

Initially, its book value per share was very high, however, in 2004 onwards its book value per share plummeted on account of declining equity base (due to decline in reserves) but it again surged in FY07 on the back of higher reserves, compared to no change in the number of shares outstanding.

Also, the company's DPS followed the same trend as that of book value per share till 2005. However, unlike book value per share, it showed a slight increase in FY06. The company has followed the policy of maximum DPO averaging 100% and the dividend yield has been constant at 5-6% over the last 5 years. Despite a decline in real payout (with inflation growth surpassing the dividend growth), the major beneficiary of this nominal growth is Unilever's associated undertaking (Unilever Overseas Holdings Ltd). Overall, both DPS and BPS of Unilever are greater than the average industry showing that the good return to shareholders is the primary objective of Unilever.

FUTURE OUTLOOK The Pakistan market has become very lucrative for fast moving consumer goods (FMCG) businesses and to new entrants, both local and international players, in the wholesale and retail industry due to sustained economic growth, rising rural incomes and changing lifestyles. On the flip side, the market environment remains very competitive and Unilever continues to invest heavily behind its growing brands. Restoring beverage margins and returning Brooke Bond Supreme to growth is of key importance in FY08. Recent announcements by the Engro and the Dawn Bread to enter the ice cream and spreads business also pose serious rivalry for Unilever in these segments.

Unilever is concerned about the increasing volume of smuggled teas, rapidly rising input costs driven by high international oil costs and the impact on profit from the recently imposed tax on turnover. Social disruptions also make markets nervous, disrupt the trade and shakes local consumer and international confidence.

Keeping in view, Unilever's strong competitive edge of continuous innovation, global and local scale delivering cost advantages and deep local roots, one hopes that it will be able to face these challenges.