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People's leasing company, a hidden gem? (an analysis)

+14
raa
WildBear
manula
swan03
greedy
Slstock
CSE.SAS
Redbulls
Kumar
yellow knife
rmark
Rajaraam
sriranga
anubis
18 posters

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greedy


Manager - Equity Analytics
Manager - Equity Analytics

anubis wrote:@greeedy: Many thanks for your input!

The 54.6 Mn employee shares, I thought they were transferred back to people's bank, or is this lot different from that?

Also, can you kindly explain the idea behind a provisions reversal a bit more? May be in layman's terms? I'm bit new to these economic stuff Smile

Thanks again!

You have got the answer for the first part. With regard to provisioning reversal, you need to understand how banks make provisions. See below abstracts from a Fitch Ratings;

Non-performing loans and advances
Non-performing loans and advances of banks & finance companies are classified into the following categories & specific loan loss provisions are made according to these classifications;

Irregular Accounts
Advances which are three months overdue but less than six months overdue.

Substandard Accounts
Advances which are six months overdue (but less than 12 months) in their payments or advances that display greater than normal risk of loss.

Doubtful Accounts
Advances with a high risk of partial default including those which are in arrears for between 12 and 18 months.

Loss Accounts
Advances which are considered unrecoverable including accounts which are over 18 months in arrears.


Provisioning


Specific Loan Loss Provision (Allowed under IFRS)
The following minimum provisions must be made based on the category of non-performing loan, but banks are free to make higher provisions if they desire. In making such mandated provisions, banks are allowed to set off the value of the underlying collateral. However, with a view to gradually improve provisioning standards, the CBSL has implemented new rules, effective January 2004, enforcing more prudent valuation criteria in assessing the collateral value that can be used for such set offs.

Classification Provision
Irregular No Provisions Mandated
Substandard Loans 20% of Unsecured Portion
Doubtful Loans 50% of Unsecured Portion
Loss Loans 100% of Unsecured Portion

General Loan Loss Provisions (Not allowed under IFRS)
While there are no guidelines on general provisions some banks maintain general provisions ranging from 0.5% - 1% of their loan portfolio.

[This general provision is not allowed under IFRS. And PLC states this as the reason for the reversal. However, they did not mention this in the prospectus]

The more stringent collateral valuation rule on provisioning requires banks to impose hair cuts on the carrying value of collateral in arriving at the unsecured portion for purposes of calculating minimum provisioning requirements

Basis for Discounting Value of Collateral Prior to Calculating Unsecured Exposure

Period NPL was Outstanding ============ % of Collateral that can be Counted as the Value of Security.

Outstanding for Over 6 Months ==============>75% of Forced Sale Value
Over 12m but Less than 24m ================>60% of forced Sale Value
Over 24m but Less than 36m ===============>50% of Forced Sale Value
Over 36m but Less than 48m ================>40% of Forced Sale Value
Over 48m ==============================>Management has Discretion to Apply Higher Hair Cuts

The underlying collateral or the security has to be valued at least once in three years by specified valuers. However, where the security is a residential property occupied by a borrower for residential purposes, the valuation can be carried out once in four years.

greedy


Manager - Equity Analytics
Manager - Equity Analytics

WildBear wrote:Some new factors to consider with new taxation on vehicles, one way interest rates are on rise discouraging leasing business, AND now vehicle prices.however buses and some heavy vehicles are not affected with new taxes, which is the largest market of PLC.

Motor vehicle sector has few blows now;

1) Rising interest rates
2) Depreciating Rupee
3) Ceiling imposed on loan portfolio of banks by CBSL (specific to motor vehicle import loans)
4) Increase in duties
5) Increase in fuel prices.

greedy


Manager - Equity Analytics
Manager - Equity Analytics

greedy wrote:
WildBear wrote:Some new factors to consider with new taxation on vehicles, one way interest rates are on rise discouraging leasing business, AND now vehicle prices.however buses and some heavy vehicles are not affected with new taxes, which is the largest market of PLC.

Motor vehicle sector has few blows now;

1) Rising interest rates
2) Depreciating Rupee
3) Ceiling imposed on loan portfolio of banks by CBSL (specific to motor vehicle import loans)
4) Increase in duties
5) Increase in fuel prices.


However, those companies with huge motor vehicle stocks may benefit in the short term.

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

@greedy: Thank you for the explanation on Loan Loss Provisions, now I have a better picture of leasing / banking business (I used to skip over loan loss provisions because I didn't know what that meant pig).

I suppose the next two quarters would tell us how the macro economic conditions are affecting the leasing industry. There are too many things going on and I'm finding it difficult to weigh in their impact on the industry.

Cheers!

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

@CSE.SAS Thank you for the news link. It's good to know that PLC would be in profits even if we discard the loan loss provisions.

And thanks everybody for contributing, I think we have dug up a lot on PLC and also educated ourselves (may be just myself Wink) in the process.

Cheers!

raa


Manager - Equity Analytics
Manager - Equity Analytics

I am a big fan of this share. PLC will post very good results for the year ending March 31st...however along with all the other leasing companies, this profit will get slashed for the next year due to interest rates, however even with a full year profit of over LKR 2.5bn next year (over LKR 4bn this year hopefully), they will trade at at a discounted P/E to the market.

In terms of their NPL's, as I understand it, the majority of their leases are commercial and as a result I do not expect their defaults to rise as much as other leasing companies who's ratio of commercial to personal leasing might be less favourable.

Also, with regard to new business, it depends on their ability to raise new money if they can. All the banks are raising money from abroad to expand and PLC will need to do that too in order to expand new business.

The share came down because their was a big foreign seller right after the IPO (stupid move) and market conditions were such that there was no buyers in the market.

My gut feeling is that if PLC can delay their march 31st qtr statement long enough and this market picks up in the next few weeks, their results might force a lot of people to take notice and I hope there can be some appreciation of the share. I have shares at an average of LKR 15 and i continue to collect small quantities when i can.

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

@raa: I thought the increased interest rates would drive profits up, since borrowers will have to pay more for their loans (unlike fixed deposits where banks have to pay more). Can you kindly explain?

Many thanks for your input.

Cheers!

raa


Manager - Equity Analytics
Manager - Equity Analytics

Here's the thing. Leases are given out at fixed interest rates for tenures of up to several years. The key here is fixed interest rates...

The same companies have to fund the leases they give out, this is by borrowing externally at market rates or through deposits. Most finance and leasing companies offer attractive rates of interest for your deposits, and most deposits are short term i.e 3 months, 6 months to a year. The interest on these deposits or any borrowing the company does will be at prevailing market rates...

So, You have a company which gave out a lot of long term leases and got a lot of new business in 2011 when interest rates were low. Suddenly interest rates have gone up... Now they are paying a higher market rate of interest to raise new funds via borrowing or new deposits. Their profit is the difference between the interest they get from leasing and the interest on their deposits and borrowings so as their revenue is fixed but their cost rises, their margins will be squeezed. I think its called a liability asset mismatch. This depends on the profile of its deposits, borrowings and leases... if they have a lot of long term deposits at lower interest rates then the effect is negated.

Also, with fuel, electricity, and depreciation their overheads would go up so you have a negative effect of interest margins and net profit margins.

The reverse happens when interest rates fall presumably.

anubis


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

@raa: Got it! Thanks for the explanation.

It would be great if we can analyse PLC's profile of deposits, borrowings and leases. I will see if I can dig up some information.

Cheers!

35People's leasing company, a hidden gem? (an analysis) - Page 2 Empty PLC Stock Movement-March 2012 Tue Apr 03, 2012 6:28 pm

SRIAS


Manager - Equity Analytics
Manager - Equity Analytics

People's leasing company, a hidden gem? (an analysis) - Page 2 Plc10

Good to collect under 12.

econ

econ
Global Moderator

Their profit margins may go down drastically in next few quarters due to recent vehicle tax increase, policy rate increase etc.. so I expect all the financial sector companies badly affect in next few quarters..

raa


Manager - Equity Analytics
Manager - Equity Analytics

Well its not clear cut... and I think they would still be one of the better performers off a bad bunch. The other would be LFIN because, a lot of its aggressive pawning business amassed gold which is the best hedge against depreciation.

Definitely a decline in new businesses, no question about it. However if PLC raises dollar denominated funds from abroad then it would not be limited in giving leases. There will be a fall in demand as the rates are very high.

While the vehicle tax increase will effect everyone across the sector, I feel commercial vehicle leases will be slightly more dependable and personal leases will see the bulk of the defaults. This is with regard to all the existing leases for vehicles. Exposure to small vehicle leases will be most at risk..anybody willing to pay LKR 25mn will certainly not default over another LKR 2mn whereas first time car buyers and working class are more likely to feel the effects of the duty and may choose not to purchase the vehicles.

Net profit margins will be squeezed even more as most of these companies have engaged in aggressive expansion so the fall in revenue or revenue growth will combine with higher overheads.

Which is why I say PLC might cross LKR 4.0bn for 2011 and maybe LKR 2.5bn for 2012 which is still mighty damn good. As long as the continue to dish out LKR 1.0 - LKR 2.0bn as dividends. They have already declared LKR 800mn as INTERIM dividend and I am hoping that unlike other companies (who say interim but don't declare again for the year), they will declare a final or second! dividend of another 50cents. Very Happy Very Happy

ccsentha


Vice President - Equity Analytics
Vice President - Equity Analytics

anubis wrote:@CSE.SAS Thank you for the news link. It's good to know that PLC would be in profits even if we discard the loan loss provisions.

And thanks everybody for contributing, I think we have dug up a lot on PLC and also educated ourselves (may be just myself Wink) in the process.

Cheers!

PLC is really under valued, but what about the future growth potential? Currently there are several factors against motor purchase and leasing. But i believe that as time goes by use of vehicles will increase and thus leasing too would increase.

Nandana Withanage


Equity Analytic
Equity Analytic

ccsentha wrote:
anubis wrote:@CSE.SAS Thank you for the news link. It's good to know that PLC would be in profits even if we discard the loan loss provisions.

And thanks everybody for contributing, I think we have dug up a lot on PLC and also educated ourselves (may be just myself Wink) in the process.

Cheers!

PLC is really under valued, but what about the future growth potential? Currently there are several factors against motor purchase and leasing. But i believe that as time goes by use of vehicles will increase and thus leasing too would increase.  



Agreed PLC has good potential to reach Rs 15 levels.

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