‘Subscribe’ People’s Leasing IPO says SC Securities

SC Securities is recommending the investing public to subscribe to People’s Leasing Company’s Initial Public Offering (IPO) worth Rs 7 billion, the country’s biggest in recent years.  The IPO involving 390 million shares at Rs. 18 each is now up for subscription whilst its official opening is on 3 November. Here are excerpts from SC Securities report on the PLC IPO:

Facts for subscribe

People’s Leasing Company Ltd. (PLC) is the largest specialised leasing company in Sri Lanka. PLC is backed by the second largest commercial bank of the country, the State-owned People’s Bank, which would have a shareholding of 72% post IPO in the company.

Having commenced operations in 1995, the company steadily progressed into becoming a giant in the leasing and hire purchase industry by surpassing some of the well-established registered finance companies and specialised leasing companies in the country to command a market share of above 20% measured in terms of annual disbursements.

PLC’s brand name, the strength of its parent and the extensive branch network, through People’s Bank, which has a wide geographical coverage, has ensured a distinctive advantage over its competitors. PLC owns six subsidiaries which operate in four sectors including Insurance, Finance and Property Development.

The leasing portfolio grew by 115% YoY during FY2011 on the back of reduced import duties on brand new and unregistered vehicles in June 2010. HP portfolio too witnessed an impressive growth of 81% during the same period but witnessed lesser demand compared to leasing.

HP was more popular during the previous year as the second hand market was highly active as a result of fewer brand new and unregistered vehicles being imported due to the high import duty on vehicles and the adverse economic conditions in the country that prevailed during FY2009 & FY2010.

PLC has a clear edge over its competitors on wining public trust and confidence through the backing of People’s Bank, which over the years has won a reputation for its financial strength and stability. The brand name of People’s Bank which is one of the top brands in the country has provided PLC with a customer perception of confidence and trust in the group, which is vital for the business operations and future growth of a financial institute.

The opening up of window offices within the premises of a People’s Bank branch has provided PLC with a unique cost advantage over its’ competitors. The cost of operating a window office on average is Rs. 45,000 per month compared to Rs. 90,000 per month of a mini branch.

PLC has a wide range of leasing, HP and term loan products to cater to the customer demand. Lease and HP account for more than 80% of the total assets of the group. PLC’s leasing and HP portfolio of Rs. 52.2 b grew by a noteworthy 96% YoY from Rs. 26.7 b in FY10. Further the total portfolio has witnessed a CAGR of 36% during FY07-FY11.

The Group’s bottom line has grown by 126% YoY to Rs. 2.6 b in FY11. PLC’s net margin also improved 24% in FY11 from 14% in FY10.

We believe PLC will continue to be the dominant player in the high growth leasing and HP industry reaping the benefits of the post war economic boom. With the Government of Sri Lanka targeting per capita income levels to improve to US$ 4,000 in 2016 from present levels of US$ 2,500, we also believe the insurance business and finance company business along with the micro operations would grow at a healthy level, reaping the benefits of apparent synergies between the leasing and HP business of PLC.

With the strong growth potential and fair valuations the issue price of Rs. 18 depicts an attractive offer. Further, the share is fairly valued at a PER of 6.9x on FY12E earnings (10.0x on recurring earnings) and 7.4x on FY13E earnings. The company’s impressive forecast, translate into an attractive valuations compared to the listed industry rivals.

Moreover, the company is on a strong credit position with strong growth in revenue streams and profits. Thus the IPO offers good value at the issue price of Rs. 18 and given the strong investor appetite. We recommend SUBSCRIBE.

Company profile

People’s Leasing Company Ltd. (PLC) is the largest specialised leasing company in Sri Lanka. PLC is backed by the second largest commercial bank of the country; State-owned People’s Bank, which would have a shareholding of 72% post IPO in the company.

Having commenced operations in 1995, the company steadily progressed into becoming a giant in the leasing and hire purchase industry by surpassing some of the well established registered finance companies and specialised leasing companies in the country to command a market share of above 20% measured in terms of annual disbursements.

PLC’s brand name, the strength of its parent and the extensive branch network, through People’s Bank, which has a wide geographical coverage, has ensured a distinctive advantage over its competitors. PLC owns six subsidiaries which operate in four sectors including Insurance, Finance and Property Development.

The product portfolio of the PLC group primarily consists of leasing and hire purchases whilst the rest comprises of term loans, insurance and microfinance.

Leasing and Hire Purchase

Leasing & Hire Purchases (HP) portfolio of PLC accounts for 39.80% (Rs. 30.12 b) and 41.83% (Rs. 31.66 b) of total assets of the group respectively. The leasing and HP portfolio of PLC has grown at a CAGR of 33% during the last four years whilst the Group has recorded a growth of 96% YoY in FY2011.

PLC made disbursements of 19.5 m (47%) for leasing and 20.6 m (49%) for HP during FY2011.The leasing portfolio grew by 115% YoY during FY2011 on the back of reduced import duties on brand new and unregistered vehicles in June 2010.

The HP portfolio too witnessed an impressive growth of 81% during the same period but witnessed lesser demand compared to leasing. HP was more popular during the previous year as the second hand market was highly active as a result of fewer brand new and unregistered vehicles being imported due to the high import duty on vehicles and the adverse economic conditions in the country that prevailed during FY2009 & FY2010.

PLC has been a preferred choice for the leasing facilities in the acquisition of busses over the years. The company continues to enjoy a considerable market share in the leasing of buses. It is noteworthy that 75% of the leasing disbursements and 73% of HP disbursements of PLC have been for income generating vehicles which comprise of lorries, dual purpose vehicles and buses.

PLC has effectively used the benefits of being a subsidiary of State-owned People’s Bank to expand its leasing and HP operations. The geographical reach of PLC through window offices has been a major factor for business growth in the leasing and HP business segments of the company.

Further the strength and reliability of People’s Bank and its wider acceptance as a giant in the financial sector has provided confidence to the public to seek leasing and HP facilities from PLC. Moreover, it being hassle free, flexible and speedy in providing the lease or HP facility to the client have helped the company in having a satisfactory level of repeat customers.



Financial review

Interest income

PLC’s interest and similar income has witnessed a robust growth of 32% YoY recording a value of Rs. 8.9 b in FY11. The growth is chiefly supported by the interest income from finance leases and Hire Purchases (HP). The segment has contributed circa 87% to the total interest income and saw a 36% YoY growth during FY11.

Further, positive macro economic conditions along with reduced vehicle import duty has aided to the sharp growth. PLC’s interest income on loans and advances also grew by a notable 58% YoY to Rs. 352.59 m in FY11 and accounted for 4% of total interest income. Further we believe interest income will see growth of 33% YoY for FY12E. Interest income has witnessed a CAGR of 28% during FY07-FY11.

Interest expenses

Interest expense of PLC has risen by 17% YoY to Rs. 3,901.93 m in FY11. The company incurred higher interest expenses on short term borrowings. PLC paid circa 1.7 b as interest on short term borrowings during FY11, which accounts for 44% of the total interest expense.

PLC mainly uses promissory notes for borrowings of which the shorter term promissory notes have resulted in higher interest expense to the company. Further the company also uses asset backed securities to borrow.

PLC has paid Rs. 870.5 m as the interest cost for asset backed securities during FY11. PLC’s long term borrowing interest also has increased by 19% YoY in FY11. We also anticipate the interest expenses will continue to grow at a lower rate than interest income.

Net interest income

Net Interest Income (NII) has recorded an impressive YoY growth of 45% recording Rs. 5 b in FY11. Hence PLC has maintained the Net Interest Margin (NIM) at 10% in FY11. This is chiefly due to the strong credit profile of the company, which is evident through Fitch rating’s recent rating upgrade to “A” (lka) with stable outlook coupled with the backing of PB (the second largest bank in Sri Lanka).

Going forward we believe growth in the business volumes will facilitate the growth of NII irrespective of possible adverse variables in the form of a slight rise in interest rates. Hence we anticipate the NII will grow by 26% YoY in FY12E, maintaining the NIM at same level.

Other income sources

PLC also has other operations such as vehicle sales (seized vehicles), Islamic finance and fee-based operations other than the core operation of leasing and HP. Income from other operations has grown by 64% YoY to Rs. 1,070.61 m in FY11. PLC also realised a profit of Rs. 273.3 m from dealing securities.

Further, the Group’s fee based income (Includes margin trading, insurance) has grown by 3% YoY to Rs. 351 m. PLC also plans to expand the margin trading segment to facilitate borrowing needs of investors for equity investments. Further PLC’s insurance arm enjoys apparent synergies between the core operations of the group, leasing and HP.

We believe the contribution from fee-based income will increase in the future.

Operating expenses

PLC’s total operating expenses have risen by 59% YoY in FY11. Staff costs accounts for 37% of the total expenses while recording Rs. 685.54 m in FY11. Currently PLC has staff strength of 964 serving at 37 branches and 121 window branches.

Going forward, we believe the group will increase the staff strength further to cater to the demand. The Group’s other operating expenses have increased by a sharp 50% due to the promotional activities.

However, with the backing of the parent company People’s Bank, PLC has reduced the branch expansion cost by developing window offices. Further the operating cost of the branches is relatively lower than operating a standalone branch. Since the window offices operate with a low cost base, the breakeven period is much shorter compared to a mini branch.

Further, through this expansion strategy the group has been able to tap the low income earning segment of the economy and rural market. We believe other operating costs will increase on the backdrop of the IPO costs of Rs. 225 m possibly being accounted for under other operating cost. The company has made a Rs. 1.6 b provision reversal during 1QFY12 to comply with IFRS requirement.

Operating profit has witnessed a notable growth of 82% YoY to post Rs. 4.2 b in FY11. Further, PLC’s Ebit margin has increased to 40% in FY11 from FY29% in FY10.

Bottom line growth

The Group’s bottom line has grown by 126% YoY to Rs. 2.6 b in FY11. PLC’s net margin also improved 24% in FY11 from 14% in FY10. The growth is mainly backed by the core leasing and HP operation. We also anticipate the company will maintain the same growth momentum in the future. Hence we believe the company will post a recurring profit of Rs. 2,849.49 in FY12E (up 22% YoY).

Loan book growth

PLC has a wide range of leasing, HP and term loan products to cater to the customer demand. Lease and HP account for more than 80% of the total assets of the group. PLC’s leasing & HP portfolio of Rs. 52.2 b grew by a noteworthy 96% YoY from Rs. 26.7 b in FY10. Further the total portfolio has witnessed a CAGR of 36% during FY07-FY11.

Moreover, the group will utilise the funds collected through the IPO (Rs. 7 b) for leasing and HP disbursements, which would further improve the loan portfolio. Going forward we anticipate the loan portfolio will grow by 42% YoY to reach Rs. 74.4 b in FY12E.

HP portfolio accounted for 54% of total loan portfolio and witnessed an 81% YoY growth to Rs. 28.1 b in FY11. The surge is on the back of favourable VAT reduction coupled with increased volume in registered vehicle market.

However going forward we anticipate a declining trend on HP demand with the registered vehicle market activity lessening due to the lower import duty which makes brand new and unregistered vehicles more affordable. Further, we expect the PLC’s HP operations to witness a lesser growth in FY12E compared to the current growth rates.

PLC’s lease portfolio has witnessed an impressive growth of 115% YoY to Rs. 24 b in FY11 accounting for circa 46% of the total lease portfolio. Notable growth in per capita income coupled with the lowering of import duty for vehicles has contributed to the growth. Going forward we believe the lease portfolio will grow by 35% YoY in FY12. Moreover we believe, PLC will further expand the leasing portfolio by absorbing the business volume growth in the sector.

Investment portfolio

PLC has an extensive investment portfolio including Government securities investments, equity investments and bank deposits. The group has invested Rs. 1.2 b in Treasury bills whilst investing Rs. 48 m in Treasury bonds.

Further, the company invested Rs. 246.3 m in investment securities (quoted and non-quoted). However, the total investments accounts for less than 5% of the total assets. Going forward we believe PLC will further increase the securities investments, primarily in Government securities and quoted securities.

Non Performing Advances

PLC’s NPA reduced to Rs. 5.4 b in FY11 from 6 b in FY10 which also resulted in a decline in NPA ratio to 1.2% in FY11 from 2.9% in FY10. PLC’s NPA is well below the peer group average of 3.2%. Despite the increase in disbursements PLC succeed in maintaining a better asset quality. Going forward we believe the company will maintain NPA at lower levels as compared to its competitors.

Funding strategy

PLC uses various methods to raise funds. Borrowings remain the primary source of funding. PLC primarily uses promissory notes to raise funds. Promissory notes accounts for circa 34% of the total liabilities. PLC had Rs. 18.9 b promissory notes in FY11 which are issued both on short term and long term basis. PLC incurs a higher interest cost on the short term promissory notes.

The Group also uses asset-backed securities (securitisation) method of funding which accounted for 13%. The Group’s deposit base has grown by a remarkable 179% YoY to Rs. 4.6 b in FY11. Fixed deposits accounts for 90% of the total deposit base whilst Savings deposits accounts for the remaining.

PLC also acquired synergic advantages through the acquisition of former Seylan Merchant leasing PLC (renamed as People’s Finance) to access low cost deposits. The deposits base of People’s Finance has grown by 32% in the three months ending 1Q12.

Future outlook

We believe PLC will continue to be the dominant player in the high growth leasing and HP industry reaping the benefits of the post war economic boom. With the Government of Sri Lanka targeting per capita income levels to improve to US$ 4,000 in 2016 from present levels of US$ 2,500 coupled with the growth in private sector credit and lowering of interest rates which are expected to be maintained at present levels, the leasing and HP sector is set for robust growth during the next three to five years and we believe PLC through its extensive geographical reach, stability and the backing of Sri Lanka’s second largest commercial bank, People’s Bank, will be on a better footing over its peers to absorb the growth in the leasing and HP sector.

Moreover, we believe the insurance business and finance company business along with the micro operations would grow at a healthy level reaping the benefits of apparent synergies between the leasing and HP business of PLC.

Valuation and recommendation

With the strong growth potential and fair valuations the issue price of Rs. 18 depicts an attractive offer. The economic stability in the country coupled with increase in per capita income has facilitated the group to record an impressive growth in its top and bottom lines.

Further, PB’s back up and strong credit profile has poised the company to gain an advantage over its rivals. Thus we forecast PLC to post a net earnings of Rs. 4,130.3 m (recurring profits of Rs. 2,849.5 m) in FY12E and Rs. 3,876.6 m in FY13E. Further, the share is fairly valued at a PER of 6.9x on FY12E earnings (10.0x on recurring earnings) and 7.4x on FY13E earnings.

The company’s impressive forecasts, translate into attractive valuations compared to the listed industry rivals. Moreover, the company is in a strong credit position with strong growth in revenue streams and profits. Thus the IPO offers good value at the issue price of Rs. 18 and given the strong investor appetite. We recommend SUBSCRIBE.