brs-ipo document peoples leasing company limited
TRANSCRIPT
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Equity Research Report
17 October 201165, Braybrooke Place, Colombo 2, Sri Lanka
[email protected], +94 11 5260200
Equity ResearchPeoples Leasing Company Ltd (SUBSCRIBE : LKR 18.00)
12 Months TB Yield
ASPI Movements
Sector PER and PBV Trend
BRS Research Team
IPO - Salient Features
Peoples Leasing Company, the market leader in the growing leasing industry, will
go public with an IPO on 3rd November 2011. At the offer price of LKR 18.00, we
believe PLC, a subsidiary of the state owned Peoples Bank, offers compelling in-
vestment value. In addition to the access to captive leasing portfolios of the par-
ent, PLC is also able to operate on a significantly lower cost model with their ability
to piggyback on the parents branch network. With a leasing portfolio of 25% of
the specialized leasing companies asset base, PLCs disbursements dwarf even the
Licensed Commercial Banks leasing segments. Our TP of LKR 22.00 is based on
relative multiples (earnings and book) considering PLCs competitive positioning.
SUBSCRIBE.
Loan book to see a 26% growth in FY 2012E with access to captive disbursements
We expect the Peoples Leasing Company Ltd (PLC) loan book to grow to LKR 70.2bn in FY
2012E and LKR 83.3bn in FY 2013E securing a YoY growth of 26% and 19% respectively. IPO
proceeds of LKR 7bn will also aid to leverage the balance sheet facilitating the portfolio
growth.
Profits to rise to LKR 2.9bn in FY 2012E (+13% YoY) on lower operational costs
We expect PLC to see a recurring net profit of LKR 2.9bn (+13% YoY) for FY 2012E and LKR
4.0bn (+35% YoY) for FY 2013E. Increase in core income (Net Interest Income to grow 20% YoY
to LKR 6.0bn in FY 2012E) on the back of expected growth in business volumes, growth in fee
based income We expect a recurring EPS of LKR 2.16 for FY 2012E and LKR 2.49 FY 2013E re-
spectively.
Valuation - Target price LKR 22.03, upside potential 22%
Based on forward earnings (FY 2012E), PLC has a forward PER of 8.3x and a historical PER of
8.65x cf. to the sector multiple of 14.1x (Oct 14, 2011). PLC trades at a historical PBV of 2.26x
where the sample finance / leasing companies of comparable size trade at approximately 3.1x
and the sample banking sector stocks trade at 1.95x. Based on relative valuations, the stock
has a target price of LKR 22.03 with an upside of 22%.
PLC - EPS
Research Manager - Nikita Tissera
Senior Research Analyst - Nusrath Mohideen
Research Analyst - Vajirapanie Bandaranayake
Research Analyst - Sahani De Silva
Research Analyst - Jennita Silva
Research Analyst - Thilini Yatawara
Research Analyst - Rakshila Perera
Technical Analyst - Stefan Jurianz
BARTLEET RELIGARE SECURITIES
Disclaimer : In compiling this report, Bartleet Religare Securities (Pvt) Ltd has made every endeavour to ensure its
accuracy but cannot hold ourselves responsible for any errors that may be found herein. We further disclaim all re-
sponsibility for any loss or damage which may be suffered by any person relying upon such information or any options,
conclusions or recommendations herein whether that loss or damage is caused by any fault or negligence on the part
of BRS.
0.0
1.0
2.0
3.0
3.0
8.0
13.0
18.0
2007 2008 2009 2010 2011 13-Oct-11
PBV (x)PER (x)PER PBV
3,500
4,500
5,500
6,500
7,500
8,500
10-Mar-10 19-Sep-10 31-Mar-11 10-Oct
5.00
8.00
11.00
14.00
17.00
20.00
2006 2007 2008 2009 2010 19-Aug-11
%
No of shares issued (mn) 390
Post IPO no of shares (mn) 1,560
Issue price (LKR) 18.00
Amount to be raised (LKR' mn) 7,020
Estim ated Market Capitalization (LKR' mn) 28, 080
Free Float % 25%
EPS 2012E (LKR) 2.16
EPS 2013E (LKR) 2.49
PER 2012E (x) 8.30
PER 2013E (x) 7.20
Net Asset Value per share 2012E (LKR) 11.30
Net Asset Value per share 2013E (LKR) 12.70
0.50
1.00
1.50
2.00
2.50
2008 2009 2010 2011 2012E 2013E
LKR
LKR 'mn 2008 2009 2010 2011E 2012E
Net interest income 2,537 3,455 5,014 6,012 7,567
Growth in net interest income % 40.0% 36.2% 45.1% 19.9% 25.9%
Net interest margin % 11.8% 12.9% 11.4% 9.2% 9.5%
Cost to income ratio % 30.8% 30.0% 29.4% 33.2% 31.4%
Earnings per share (LKR) 0.96 0.78 2.08 2.16 2.49
EPS growth % 33.2% -18.3% 164.6% 3.9% 15.5%
Book value per share (LKR) 4.65 5.28 5.85 11.83 13.95
DPS (LKR) 1.50 1.50 1.50 0.22 0.25
Return on assets % 4.5% 3.9% 5.4% 3.9% 4.3%
Return on equity % 23.0% 19.9% 35.9% 22.0% 19.9%
Lending portfolio 22,533 28,509 55,629 70,187 83,278
Borrowings 16,987 20,344 42,063 53,658 60,948
Total deposits - 1,667 4,647 7,900 10,270
Shareholders funds 5,439 6,173 8,383 18,456 21,755
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Peoples Leasing Company Ltd
Company profile
PLC was established in 1995 as a fully owned subsidiary of
the state owned Peoples Bank. PLC has six subsidiaries
under its purview. With its extensive reach (through itsbranch network of 37 and window - offices of 121) PLC
has gained a competitive edge in the industry and is
known to be the market leader among the Specialized
Leasing Companies. (SLCs)
Company Information Note
17 October 2011
Source: PLC Annual Reports, Prospectus, BRS Equity
Research
Disclaimer : In compiling this note, Bartleet Religare Securities (Pvt) Ltd has
made every endeavour to ensure its accuracy but cannot hold ourselves
responsible for any errors that may be found herein.
65, Braybrooke Place, Colombo 2, Sri Lanka
[email protected], +94 11 5260200
BARTLEET RELIGARE SECURITIES
1,812
7,567
40%
36%
45%
20%
26%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Net Interest Income % - LKR. Mn
(FY 2008-13E)
6.0%
8.0%
10.0%
12.0%
14.0%
2008 2009 2010 2011 2012E 2013E
Trend in NIM (200 6-12E)
19,222
83,278
17%27%
95%
26%19%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Lending Portfolio % - LKR.Mn
(FY 2008-13E)
14,752
60,948
15%20%
107%
28%
14%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Deposits % - LKR.Mn (FY 2008-13E)
Year Ending 31 March 2009 2010 2011 2012E 2013E
Summary Information
BRS EPS (LKR) 0.96 0.78 2.08 2.16 2.49
BRS EPS growth (%) 33.2% -18.3% 164.6% 3.9% 15.5%
P/E (x) based on BRS EPS na na na 8.3 x 7.2 x
Historical/current sector P/E (x) 4.4 x 11.6 x 17.9 x 14.2 x 14.2 x
Reported EPS LKR as per annual report 19.08 18.33 48.58 na na
NAV per share (LKR) 4.65 5.28 5.85 11.83 13.95
Tangible NAV per share LKR 4.63 4.97 6.88 13.85 13.61
P/BV (x) na na na 1.5 x 1.3 x
P/TBV (x) na na na 1.3 x 1.3 x
Historical/current sector P/BV (x) 0.6 x 1.5 x 2.8 x 2.2 x 2.2 x
DPS LKR 1.50 1.50 1.50 0.22 0.25
Dividend yield (%) na na na 1.2% 1.4%
Mkt price na na na 18.00 18.00
Weighted average shares (mn) 1,170 1,170 1,170 1,300 1,560
Average mkt cap (LKR'mn) na na na 23,400 28,080
Income Statement (LKR'mn)
Interest income 5,745 6,776 8,916 11,298 13,345
Interest expenses (3,208) (3,322) (3,902) (5,286) (5,778)
Net interest income 2,537 3,455 5,014 6,012 7,567
Other operating income 523 489 594 753 974Non operating income 128 163 477 204 245
Total income 3,189 4,106 6,085 6,969 8,786
Personnel cost (323) (431) (686) (870) (1,028)
Other cost (658) (802) (1,103) (1,446) (1,730)
Loan loss provisions (55) (540) (52) (284) (125)
Value added tax on financial services (270) (275) (401) (260) (337)
Profit from operations 1,882 2,059 3,844 4,109 5,566
Share of associates /(loss) - - - - -
Exceptionals/non-recurrings - - - 1,386 -
Tax expense (843) (906) (1,231) (1,150) (1,558)
Net income 1,040 1,153 2,612 2,958 4,008
Minorities & preference dividends - - - - -
Profit attributable to equity holders 1,040 1,153 2,612 2,958 4,008
Balance sheet (LKR'mn)
Cash & short-term funds 1,654 2,196 3,013 9,551 8,737
Lease, HP receivables and loans and advances 22,533 28,509 55,629 70,187 83,278
Property plant & equipment 628 980 1,624 2,222 2,904
Intangible assets 20 361 333 453 524
Other assets 702 844 3,253 4,424 5,123
Total Assets 25,538 32,890 63,852 86,837 100,565
Total deposits - 1,667 4,647 7,900 10,270
Borrowings 16,987 20,344 42,063 53,658 60,948
Other liabilities 3,113 4,699 8,659 6,723 7,493
Shareholders funds 5,439 6,173 8,383 18,456 21,755
Minorities - 6 100 100 100
Total liabilities and equity 25,538 32,890 63,852 86,837 100,565
Interest bearing assets 23,726 30,032 57,727 73,042 86,583
Interest bearing liabilities 16,987 22,012 46,710 61,558 71,218
Growth rates and marginsGrowth in interest income % 44.6% 18.0% 31.6% 26.7% 18.1%
Growth in interest expense % 48.4% 3.5% 17.5% 35.5% 9.3%
Growth in net interest income % 40.0% 36.2% 45.1% 19.9% 25.9%
Growth in personnel cost % 23.2% 33.3% 59.1% 26.9% 18.1%
Net interest margin % 11.8% 12.9% 11.4% 9.2% 9.5%
Cost to income ratio % 30.8% 30.0% 29.4% 33.2% 31.4%
Return on assets 4.5% 3.9% 5.4% 3.9% 4.3%
Return on equity 23.0% 19.9% 35.9% 22.0% 19.9%
Interest income to interest bearing assets 26.7% 25.2% 20.3% 17.3% 16.7%
Interest expenses to interest bearing liabilities 20.2% 17.0% 11.4% 9.8% 8.7%
Growth in interest earning assets % 23.0% 26.6% 92.2% 26.5% 18.5%
Growth in interest bearing liabilities % 15.1% 29.6% 112.2% 31.8% 15.7%
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72%
88% 100% 100% 100% 100% 100%
People's Finance PLC
(SMLL)People's Insurance Ltd
People's Microfinance
Ltd
People's Leasing Fleet
Management Ltd
People's Leasing
Property Development
Limited
People's Leasing
Property Development
Limited
People's Leasing Company Limited (PLC)
Peoples' Bank
Bartleet Religare Securities (Pvt) Ltd BRS Equity Research
www.bartleetstock.com
Peoples Leasing Company Ltd (PLC) was established in 1995 and is a subsidi-
ary of the state owned licensed specialized bank Peoples Bank. PLC has six
subsidiaries under its purview. The notable contributors to the bottom-line
being the holding Company- Peoples Leasing, and Peoples Leasing Finance
Company. PLC has a competitive edge on its peers with its access to the
leasing portfolio of the parent company Peoples Bank and the ability topiggy back on the parents extensive branch network to create low cost
window offices. PLC holds ~25% of the specialized leasing sectors asset
base. Even with the inclusion of the licensed commercial banks leasing
portfolios, PLCs leasing disbursements dwarf the rest of the sector. Post
IPO, Peoples banks holding of PLC will reduce to 72%.
Lending Portfolio
PLCs main concentration is on Leasing and Hire Purchase products. We
expect the lending portfolio to grow to LKR 70.2bn in FY 2012E and LKR83.3bn in FY 2013E securing a YoY growth of 26% and 19% respectively.
Growth in the lending portfolio is expected to stem from business volume
growth on the back of increased economic activities and positive develop-
ments in the macroeconomic front. IPO proceeds of LKR 7bn will also aid to
leverage the balance sheet facilitating the portfolio growth. PLC achieved a
heavy portfolio growth of 95% in FY 2011. However, despite seeing a high
growth in the lending portfolio, PLC managed to achieve a sound asset qual-
ity during FY 2011. According to Company sources, in FY 2011 the Gross -
Investment Case
Group Structure - Post IPO
Financial Outlook
Company Profile
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Non Performing Advances (NPA) ratio stood at a stellar 1.2% compared to the SLC
industry average of 5% (source: CBSL Annual report) and the NPA ratio for the
Licensed Commercial Banking industry. Healthy asset quality depicts PLCs strong
recovery efforts and industry best practices in ascertaining creditworthiness.
Funding
PLCs main source of funding is borrowings. However, owing to the strong paren-
tal backing and reputation, PLC has been able to source funds from diversified
avenues like promissory notes, securitization, long-term loans, debentures and
short-term loans. Majority of PLCs borrowings comprised of promissory notes
(~40% as at end FY 2011). Promissory notes are less expensive compared to other
modes of borrowings, easing the burden on interest expense. Also, promissory
notes with long term maturity assist PLC to weather maturity mismatch problems.
We believe that receipt of IPO proceeds will aid to reduce PLCs reliance on ex-
pensive short-term borrowings. On that note, we have factored a fall in short-
term borrowings for FY 2012E and FY 2013E respectively. We expect PLCs bor-
rowings to grow YoY 28% (LKR 53.6bn) and 14% (LKR 60.9bn) in FY 2012E and FY
2013E respectively to aid the lending portfolio growth.
PLC is at a distinct advantage compared to other SLCs as the Group has access to
low cost deposits following the acquisition of former Seylan Merchant Leasing PLC
(now renamed as Peoples Finance PLC) in FY 2010. We expect the Groups de-
posit base to see a growth of 70% to LKR 7.9bn in FY 2012E partly owing to the
low base effect. For Q1 FY 2012E, the Group deposit saw an impressive growth of
32% (for the first 3 months of FY 2012E) to LKR 6.1bn. In our view, high growth in
the SMLL deposit base shows the return of public confidence to the former dis-
tressed registered finance Company SMLL, which is now under the purview of a
new management; PLC.
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BRS Equity ResearchBartleet Religare Securities (Pvt) Ltd
19,222
83,278
17%27%
95%
26%19%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Lending Portfolio % - LKR.Mn
(FY 2008-13E)
14,752
60,948
15%20%
107%
28%
14%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Deposits % - LKR.Mn (FY 2008-13E)
Source: PLC Annual Reports, Prospectus, and BRS Equity Research
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Net Interest Income
We expect Net Interest Income (NII) to see a YoY growth of 20% (LKR 6.0bn)
and 26% (LKR 7.6bn) in FY 2012E and FY 2013E. Growth in business volumes
is expected to facilitate the growth in NII despite a low interest rate envi-
ronment. We have factored an interest rate differential of 2% between
leasing and hire purchase yields for FY 2012E and FY 2013E. However, we
expect Net Interest Margins (NIM) to come down to 9.5% in FY 2012E from
11.4% in FY 2011 on the back of low rates environment. Yet, expected high
volume growth will result in increasing NII despite falling NIMs and squeez-
ing spreads.
Operating Cost
We have factored a 30% and a 19% growth in opex on the back of expected
business expansion. However, it is interesting to note that, PLC has a high
operating efficiency level as depicted by its low cost to income ratio. PLCs
cost to income ratio stood at 29.4% in FY 2011 and we expect this to slightly
edge up to 31.4% by FY 2013E. However, PLCs operating efficiency ratio is
remarkably better than its competing SLCs, RFCs and even banking peers.
According to the prospectus, cost to income ratio for the SLCs usually hov-
ers at 70% while BRS research has witnessed that in the domestic Licensed
Commercial Banks industry the ratio stands on average 50%+.
PLCs high operating efficiency is attributable to its exclusive structure. PLC
had a branch network of 37 as at June 2011. Other than the branch net-
work, PLC operates through window offices by leveraging on the extensive
reach of Peoples bank island wide network. Peoples Bank is the largest
bank in the country in terms of branch network. By March 2011, Peoples
Bank had a network of 329 branches. PLC has window offices in 121 of
Peoples Banks branches as at present. According to Company sources,
operating cost of window office is 50% less compared to a traditional
Source: PLC Annual Reports, Prospectus, and BRS Equity Research
BRS Equity ResearchBartleet Religare Securities (Pvt) Ltd
6.0%
8.0%
10.0%
12.0%
14.0%
2008 2009 2010 2011 2012E 2013E
Trend in NIM (2006-12E)
1,812
7,567
40%
36%
45%
20%
26%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Net Interest Income % - LKR. Mn
(FY 2008-13E)
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cost of a window office is 50% less compared to a traditional branch unit.
Cost savings arising from lean structure has enabled PLC to provide addi-
tional provision over and above regulatory requirements against loan
losses.
Profitability
We expect PLC to see a recurring net profit of LKR 2.9bn (+13% YoY) for FY
2012E and LKR 4.0bn (+35% YoY) for FY 2013E. Increase in core income on
the back of expected growth in business volumes, growth in fee based in-
come and positive impact from corporate and VAT tax cuts will be the driv-
ers for the recurring profit growth.
We expect the net profit inclusive of non-recurring items to be LKR 3.9bn in
FY 2012E. This is inclusive of LKR 1.6bn provision reversal PLC did in Q1 FY
2012E and the IPO cost of LKR 225mn.
BRS Equity ResearchBartleet Religare Securities (Pvt) Ltd
817
2,758
20%26%
45%
30%
19%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Operating Cost % - LKR.Mn
(FY 2008-13E)
Source: PLC Annual Reports, Prospectus, and BRS Equity Research
803
4,008
29%
11%
126%13%
35%
2008 2009 2010 2011 2012E 2013E 2013E
Growth in Net Profit % - LKR. Mn
(FY 2008-13E)
15.0%
21.0%
27.0%
33.0%
39.0%
3.5%
4.0%
4.5%
5.0%
5.5%
2008 2009 2010 2011 2012E 2013E
ROEROATrend in ROA and ROE (2007-12E)
ROA ROE
Source: PLC Annual Reports, Prospectus, and BRS Equity Research
6.0%
8.0%
10.0%
12.0%
14.0%
2008 2009 2010 2011 2012E 2013E
Trend in NIM (2008-13E)
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PLC trades at a historical PBV of 2.26x where the sample finance / leasing compa-
nies of comparable size trade at approximately 3.1x and the sample banking sec-
tor stocks trade at 1.95x. BFI sector index trades at 2.2x. We believe that PLC
should trade closer to the banking sector multiples, given the size of the leasing
portfolio and the superior asset quality of PLC even in comparison to the Licensed
Commercial Banks. Although banks have lower deposit costs and higher asset
bases, the overall leasing portfolio of PLC supersedes the banks.
Given the relative valuations, and the comparative strengths of PLC, we believe
the Company should trade at a fair value of LKR 22.03 with a 22% upside to issue
price.
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Valuations
BRS Equity ResearchBartleet Religare Securities (Pvt) Ltd
Shareholder List
Pre IPO
% % No of shares (mn)
People's Bank 95.0 72.0 1,115.4
Employees of PLC group 5.0 3.0 54.6
IPO Shareholders - 25.0 390.0
Total 100.0 100.0 1,560.0
Post IPOShareholder
Peer Group Comparison
PLC CFIN LOFC COMB HNB SAMP
Price 18.00 250.00 10.20 111.70 196.00 215.00
NBVPS 7.87 121.62 1.32 50.07 98.97 138.81PBV ( x on current price) 2.29 2.06 7.73 2.23 1.98 1.55
EPS (FY2012E) 2.16 12.16 0.45 8.93 15.47 24.06
Forward PER ( x on current price) 8.33 20.56 22.92 12.51 12.67 8.94
Total Assets -LKR mn 63,852 43,645 24,291 397,734 355,932 223,100
Lease portfolio LKR mn 61,774 17,495 16,439 15,246 18,641 5,828
Cost to Income Ratio (%) 28% 42% 34% 47% 64% 58%
No of Branches 37 57 42 215 212 199
No of Employees 964 1,818 na 4,420 4,424 2,964
No of shares (mn) 1,170.00 104.88 2,800.00 817.45 357.54 156.33
Source: Company Annual Reports, PLC Prospectus, and BRS Equity Research
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According to the CBSL, Countrys leasing and hire purchase industry is
driven by 15 licensed commercial banks, 34 registered finance companies
and 21 Specialized Leasing Companies (SLC). The total assets of Specialized
Leasing Companies (SLC) recorded at LKR 154bn, up 38% YoY (source: Cen-
tral Bank of Sri Lanka Annual Report 2010). Rise in assets was driven by
surged demand for accommodation on the back of low interest rate envi-
ronment and custom duty and excise tax on vehicle imports. Consequently,
SLC industry saw its interest margin increasing to 7% in 2010 from 5% in
2009. According to the CBSL sources, total accommodations grew at 32%
YoY despite Non Performing Accommodations (NPA) slowing down to 5% in
2010 from 8% in the previous year on the back of positive development in
the macro- economic front and low interest rate regime.
Competition
Competition within the sector has grown fiercely with Licensed Commercial
Banks (LCBs) also entering to the leasing and hire purchasing businesses to
enjoy higher returns and infringed tax incentives. LCBs are in a better posi-
tion to offer competitive rates facilitated with low cost funding supported
by their wider reach. However, PLC is at a distinguished advantage than
many of its peers, since the Company is strongly backed by the exclusively
wider window offices operated in121 Peoples Banks branch network.
Presently, PLC has its own branch network of 37. The ability to have win-
dow offices at the approximate cost of LKR 45,000 p.m has given the Group
a significant cost advantage over the peers with the clear lead on Cost to
Income ratios.
Negative maturity gaps
Maturity mismatches are quite common in the leasing industry. This is be-
cause the industry players find the longer end of the yield curve relatively
illiquid to invest in long-term products like leasing and hire purchase.
Hence, the industry is compelled to borrow short term to lend long term. In
PLCs case, there is a wide negative maturity gap in less than 1 year bucket
and more than 5 years bucket. However, PLC is at a distinct position when
compared to its peers as the Group has easy access to money markets and
credit lines backed by its strong parental presence, reputation and healthy
earnings. PLC also has a high concentration on promissory notes (it is the
main source of funds for PLC 39% of borrowings as at end FY 2011.) as a
source with long-term maturities to help with maturity mismatches. In-
creasing the reliance on fee based income and timely re-pricing will aid to
cushion maturity mismatches to a certain extent. Another advantage PLC
has over the peers in specialized leasing group is their link to Peoples Leas-
ing Finance, which is authorized to accept deposits. We see PLCs ability to
source low cost financing from both the parent- Peoples bank and Peoples
Leasing Finance as a significant strength.
Strategic Industry Overview
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Less diversity in the product mix
Domestic leasing market has a less diversified product mix and vehicle fi-
nancing is the most popular product. According to the Asian Development
Banks (ADB) Report and Recommendation on Proposed Loans (October
2007), vehicle financing is the single largest product constituting to 81% inthe leasing product portfolio. Readily available market for repossessed vehi-
cles id the prime driver behind high concentration on vehicle financing.
However, the industry still has not properly tapped in to infrastructure fi-
nancing, which we believe has a strong growth potential given the positive
developments in the macroeconomic front. The main downside of infra-
structure financing which make the product unattractive is poor resale
value.
Booming SME sector
Small and Medium Enterprises (SME) sector is a key priority of the Govern-
ment. This is a market which the leasing industry can tap in to as the formal
banking sector (except for few banks like Hatton National Bank, Commercial
Bank, Development Finance Bank and Sanasa Development Bank) is some-
what resistant on the back of relatively high credit risk. This has also re-
sulted in SME loans being charged high rates to compensate the risk of de-
fault. According to the ADB report, the formal banking sector is reluctant to
enter in to the SME lending owing to strong risk adverse bias and weak-
nesses in the judicial system. However, PLC has already realized the poten-
tial in this niche industry by having its presence in the industry by establish-
ing a micro finance subsidiary (Peoples Microfinance Limited) in 2010. We
believe PLCs extensive reach offers a unique competitive advantage in ex-ploiting the SME financing market.
Macro economic developments
Reduction in import duties for vehicles in June 2010 acted in favour of the
sector increasing the demand for leasing products. This also resulted in
shifting a considerable demand from the Hire Purchase to Leasing products.
According to the Department of Motor Traffic, new vehicle registrations
saw a heavy 75% YoY in jump in 2010 (359,243 new registrations). The
Budget 2011 proposed to remove VAT on leasing for passenger transporta-
tion buses, lorries and tractors in aid to facilitate economic growth. Accord-
ing to statistics released by the CBSL (Bulletin June 2011) the move by the
government has been positively welcomed by industrialists. As per the sta-
tistics, in Q1 2011 new registration of passenger transport buses and trac-
tors have seen staggering growth YoY. Further, economic development ac-
tivities in the North and East provinces have created fresh demand for leas-
ing and hire purchasing products particularly in Agriculture, Fisheries and
Trading sectors. Increasing disposable income will also foster volume
growth in the vehicle financing segment.
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Government increasing vehicle taxes
The motor vehicle industry in Sri Lanka is regulated to a great extent and is
subjected to ad-hoc changes in import duties. However, going forward we
are of the view that the increases in taxation for vehicles maybe limited
given that vehicle imports constitute only ~4% of the total imports in the
2010 even accounting for the recent surge in vehicle imports. According to
Finance Ministry officials, (source: LBO Duty Gains 25.08.2010) the Gov-
ernment has earned LKR 1.7bn in July 2010 on vehicle import tax revenue
following import tax cut in June 2010. Since the domestic leasing industry
lacks diversity of product mix and places a high reliance on vehicle financ-
ing, a further increase in import and duty taxes may affect negatively to the
industry growth.
Funding
PLC (the leasing Company) is not allowed to accept public deposits the way
a licensed commercial bank or a registered finance Company is allowed to.
However, PLC is at a special advantage here as in June 2010 the Company
acquired the controlling stake of former Seylan Merchant Leasing Co (Now
renamed as Peoples Finance PLC) which is a registered finance Company
with an asset base of LKR 8bn (12.5% of PLC Group assets). Given the fact
that PLCs funding alternatives are limited to loan capital and equity, the
sources of funding for leases maybe more expensive than that of a licensed
commercial bank. We however see the IPO consideration of LKR 7.02bn
being a strength for PLC making way for significant gains for the Group.
(approximately LKR 842mn at a cost of 12% interest payable p.a).
Interest rate risk
Adverse interest rate movements could have a negative impact on PLCs
cost of borrowings as well as yield on assets giving a cascading negative
impact on margins, spreads and asset quality. However, the CBSL expects to
keep inflation rates under a single digit level, which will have a cascading
effect on reducing the pressure on interest rates. The CBSL has not changed
its policy rates since January 2011, signaling its intention to keep cost of
funds at a low level to promote economic growth. We expect deposit rates
to climb upwards in future on the back of high competition among financial
institutions to mobilize low cost funds. However, with the surge in demand
for credit from the private sector, we expect interest rates to make a slight
upward movement in the future.
Risk Evaluation
BRS Equity ResearchBartleet Religare Securities (Pvt) Ltd
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Financial Analysis
BRS Equity ResearchBartleet Religare Securities (Pvt) Ltd
Income Statement - People's Leasing Co Limited
All numbers in LKR' mn 2008 2009 2010 2011 2012E 2013E
Interest Income 3,973 5,745 6,776 8,916 11,298 13,345
YoY Growth % 44.6% 18.0% 31.6% 26.7% 18.1%
Interest Expense (2,161) (3,208) (3,322) (3,902) (5,286) (5,778)
YoY Growth % 48.4% 3.5% 17.5% 35.5% 9.3%
Net Interest Income 1,812 2,537 3,455 5,014 6,012 7,567
Other Operating Income 488 523 489 594 753 974
Non operating income 129 128 163 477 204 245
Total Income 2,429 3,189 4,106 6,085 6,969 8,786
Operating expenses (817) (981) (1,232) (1,787) (2,316) (2,758)
Operating profit before loan loss provisions 1,612 2,208 2,875 4,298 4,653 6,029
YoY Growth % 37.0% 30.2% 49.5% 8.3% 29.6%
Loan loss provisions (223) (55) (540) (52) (284) (125)
VAT on financial services (36) (270) (275) (401) (260) (337)
Recurring profit before tax 1,353 1,883 2,060 3,845 4,109 5,566
YoY Growth % 39.1% 9.4% 86.6% 6.9% 35.5%
Income tax expense (550) (843) (906) (1,231) (1,150) (1,558)
Recurring profit after tax 803 1,040 1,154 2,613 2,958 4,008
Attributable to:
Recurring Profits to equity holders of the parent 803 1,039 1,153 2,605 2,958 4,008
Recurring profit after tax 803 1,040 1,154 2,613 2,958 4,008
Profit after tax (with non recurring items) (Note 1) 803 1,040 1,154 2,613 3,956 4,008
EPS (Note 2) 0.72 0.96 0.78 2.08 2.16 2.49
Source: Company Financial Reports, Prospectus and BRS Equity Research
Note 1 : Includes cost of IPO (LKR 225mn) and reveresal of general provision reserve (LKR 1.6bn)
Note 1: Based on earnings as reported (recurring) share data adjusted for bonus issue and share split and preference dividends
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Financial Analysis
BRS Equity ResearchBartleet Religare Securities (Pvt) Ltd
Balance sheet - People's Leasing Co Limited
All numbers in LKR' mn 2008 2009 2010 2011 2012E 2013E
Assets
Cash and short term funds 409 461 673 914 6,697 5,432
Securities purchased under re-sale agreement 25 143 629 1,416 1,925 2,230
Deposits with banks and financial institutions 50 1,050 894 683 929 1,076
Inventories 252 163 45 269 366 424
Dealing securities - - 27 64 87 101
Investment securities 50 51 246 246 335 388
Loans and other advances 536 1,063 1,770 3,345 4,549 5,268
Lease and Hire Purchase receivables 18,686 21,471 26,739 52,284 65,639 78,010
Deferred tax assets 44 - 28 - - -
Investment in subsidiaries - - - - - -
Other assets 321 489 498 2,673 3,635 4,210Property plant and equipment 279 628 980 1,624 2,222 2,904
Investment property - - - - - -
Intangible assets 20 20 361 333 453 524
Total Assets 20,672 25,538 32,890 63,852 86,837 100,565
Liabilites
Deposits - - 1,667 4,647 7,900 10,270
Short term borrowings 1,009 485 783 1,359 2,650 3,010
Other liabilities evidenced by paper 8,527 10,782 15,271 26,122 33,122 37,622
Borrowings 5,217 5,720 4,290 14,582 17,886 20,316
Tax payable 115 321 871 664 575 779
Deferred tax payable - 250 - 44 44 44
Samurdhi authority 147 145 25 25 25 25
Other liabilities 2,039 2,397 3,802 7,927 6,079 6,644
Total Liabilities 17,055 20,099 26,711 55,369 68,281 78,710
Equity
Stated capital 850 1,850 1,850 1,850 12,488 12,288
General reserve 300 300 300 300 300 300
Tax equilisation fund 100 100 100 100 100 100
Reserve fund 113 166 226 376 524 724
Investment fund reserve - - - 71 244 469
Retained earnings 2,254 3,023 3,698 5,686 4,799 7,874
Shareholders' Funds 3,617 5,439 6,173 8,383 18,456 21,755
Minority interest - - 6 100 100 100
Total Liabilities & Equity 20,672 25,538 32,891 63,852 86,837 100,565
Source: Company Financial Reports, Prospectus and BRS Equity Research
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