Brs-ipo Document Peoples Leasing Company Limited

8/3/2019 Brs-ipo Document Peoples Leasing Company Limited

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1

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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4

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.


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


5/13

5www.bartleetstock.com

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



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)


6/13


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.


817

2,758

20%26%

45%

30%

19%

2008 2009 2010 2011 2012E 2013E 2013E

Growth in Operating Cost % - LKR.Mn

(FY 2008-13E)


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


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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7

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.


Valuations


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


8/13


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 macroeconomic 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



9/13


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.



10/13


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



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Financial Analysis


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


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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Brs-ipo Document Peoples Leasing Company Limited

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