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Asia Asset Finance Plc (AAFL) is a Registered Finance Company (RFC) founded in 1970, formerly known as “Finance and Land Sales”. Following the company being fully acquired and re-structured by  Asia Capital PLC in 2004, the company was rebranded as Asia Asset Finance Limited.About the Company

In August 2014, Muthoot Finance Ltd, a company registered in India purchased 29.98% of AAF shares from Asia Capital PLC.   Muthoot Finance Ltd is an Indian Finance company headquarters in Kerala, having its operations throughout India, in around 4,400 branches, with its stocks listed in the National Stock Exchange and the Bombay Stock Exchange. It is known as the largest Gold financing company in the world and additionally offers Foreign Exchange Services, Money Transfers and Financing of Small businesses, Vendors, Farmers, Traders, SME business owners and Salaried Individuals.

Muthoot Finance Ltd increased its stake in AAF to 44.32% with the right issue made by the company and subsequently increased it to 51% with the mandatory offer made to the Asia Assets Finance Plc.

Following the changes in ownership, Asia Asset Finance PLC is now a subsidiary of Muthoot Finance Ltd and a fully licensed, deposit-taking institution registered in the Central Bank of Sri Lanka.

Company currently operates with branches spread across Western Province including Negombo, Kaluthara, Gampaha,Moratuwa and outstation branches at Jaffna, Galle, Kurunegala, Batticloa and Wennappuwa while head office based in Colombo.

Equity Research Report|May 2015
Equity Research Report

Trading Snapshot

Market cap (LKR Mn)1,594.5
Market cap/Total market cap0.05%
Public Holding (%) – March’1525.25%
52-week High/Low (LKR)2.00-1.60
Average Daily Volume (52 weeks)2,885,523
YTD ASPI return (%)0%
YTD Stock return (%)0.8%
Beta1.17
Share Price Movement
 Summary Financials – Year end 31st March
LKR Mn201320142015
Total Income624774948
Interest Income589732850
Net Interest Income252295369
PBT4543103
PAT6247101
EPS (LKR)0.110.080.15

Business Profile

The main line of business of the company is financial where public deposits are ploughed back to the financial system via range of financial products tailored to its niche market. The key revenue line of the Asia Asset Finance is the interest income generated through the lending portfolios having included leasing, higher purchase, personal loans, corporate loans, mortgage loan, and pledge loans. The company has a wide variety of products that covers range of personal and corporate financial services. These products cater to a wider market segment creating a loyal customer base to the company.

Industry Analysis

The Non-Bank Financial Institutions (NBFIs) sector comprises Licensed Finance Companies (LFCs) and Specialised Leasing Companies (SLCs). There were 48 LFCs and 8 SLCs by end 2014.

LFCs are the dominant contributor in the non-bank financial sector which primarily raise money from the public and lend it to customers by way of loans, leases and hire purchases. At end 2014, LFCs accounted for 6.4% of total financial sector assets of the country.

Source: Central Bank of Sri Lanka

In 2014 total asset base of the NBFI sector grew by 18.9% to LKR 853 Bn following the growth of 20.3% in 2013. The main contributory factor for the expansion of the asset base was the growth in the accommodations portfolio and liquid assets. Accommodations recorded a modest growth of 16% to LKR 641 Bn as at end 2014, compared to a growth rate of 17.3% during 2013. Finance leases, hire purchases and secured advances were the major sources of accommodation accounting for 43%, 27% and 19%, respectively. The investment portfolio of the sector, which comprised of equity and debt investments, recorded a notable increase of 39.6% during 2014 to LKR 42 Bn.

Source: Central Bank of Sri Lanka

Deposits were the main funding source for NBFI sector. The share of deposits among the funding sources of the sector increased to 48.5% in 2014 from 47% recorded in 2013, while the share of borrowings decreased to 25.4% in 2014 from 26.8% in 2013. The deposits grew by 22.7% to LKR 414 Bn as at the end of 2014, compared to a 32.7% growth in 2013. The deposit mobilisation was mainly through time deposits accounting for 96% of the total deposits. The total borrowings in the sector reached LKR 217 Bn, an increase of 12.9% as at end 2014 compared to the growth rate of 9.3% recorded in 2013.

During 2014, the LFC and SLC sector profits recorded an increase, mainly due to increased net interest income. The sector posted a profit after tax of LKR 13.9 Bn for 2014 compared to a profit of LKR 7.7 Bn during 2013. The profitability indicators of the sector, ROA and ROE increased to 3.0% and 13.1%, respectively, in 2014 from 2.1% and 8.2% in 2013.

Financial Analysis of AAF

Asset Quality

During FY2014/15 the total assets of the company increased by 35.6% compared to FY2013/14. The major influence factors of this improvement were the 39.3% increase in Loans and Advances and 35.6% increase in Lease and Hire Purchase portfolio. Loans and Advances accounted for 54% of the total assets of the company while Leases and Hire Purchases accounted for 23.4%.

Source: AAF

The substantial increase in the Personal and Corporate loans is the main factor behind the growth in the Loans and Advances of the company and Personal and Corporate loans accounted for 32.8% of the total loan portfolio of the company. However, company has given LKR 608 Mn as Group personal loans and it has increased 20.5% from LKR 559 Mn recorded in FY2013/14. The Mortgage loans and Pledge loans accounted for 16.3% and 13.4% of the company’s loans and advances respectively.

The Leases and hire Purchases accounted for 23.4% of the total assets of the company and recorded an increase of 35.6% in FY2014/15 to LKR 1,251 Mn compared to LKR 922 Mn in FY2013/14.

Source: AAF

Funding and Liquidity

Fixed deposits continued to account for the bulk of the Company’s funding base which was 68.7% of the AAF’s funding base as at end FY2014/15. The Fixed deposit base expanded substantially, growing 21% YoY to LKR 3.67 Bn during FY2014/15. The bank loans of the company recorded 437.4% growth during FY2014/15 mainly due to increase in securitization loans. AAF has taken Securitization loans for working capital requirements and as at end of FY2014/15, the Securitization loan balance was recorded at LKR 330.78 Mn.

Source: AAF

Meanwhile, Shareholders fund accounted for 24.1% of total funding in FY2014/15 compared to 18.8% in FY2013/14. The Stated capital of AAF increased with the right issue and company raised LKR 447.58 Mn from the right issue. On the other hand the Retained loss of the company reduced to LKR 140 Mn from LKR 258.6 Mn in FY2013/14 with 117.5% increase in the net profit of the company.

Performance Analysis

The Company’s income composition remained relatively unchanged and continued to be dominated by Interest income, which accounted for 89.7% income in FY2014/15. However, during FY2011/12 – FY2013/14 Interest income accounted for around 92%-92.5% of the Total income of the company. The Other operating income and Net trading gain on equity securities recorded growth rates of 100.6% and 333% respectively and increased their contributions towards the total income of the company.

Source: AAF

AAF’s Net interest income grew at a faster 25.3% in FY 2014/15, backed by a 16.1% YoY growth in Interest income, with contributions mainly stemming from Interest on loans. The growth in loan book aided by the increased level of new lending volumes contributed towards higher Interest income. However, interest on Leases and Hire purchases reduced by 18.5% and 7% respectively during the year.

Source: AAF

The growth in the Interest expenses slowed down to 9.9% in FY2014/15 from 29.9% growth recorded in FY2013/14 mainly due to the downward trend in the interest rates.

The Net Interest Margin (NIM) of the company marginally depleted to 8% in FY2014/15 from 8.5% in FY2013/14. The Interest earning assets of AAF recorded significant growth of 33.8% to LKR 4.6 Bn due to increase in the lending portfolio.

Source: AAF

The substantial increase in the Net operating income of the company led to significant improvement in the profitability of the company. Net operating income recorded a growth of 115.9% to LKR 124 Mn compared to LKR 57.5 Mn recorded in FY2013/14. The Net profit of AAF reflected a YoY growth of 117.5% to LKR 101.2 Mn, which is the highest profit figure recorded in AAF’s history. The EPS of the company climbed to LKR 0.15 compared to LKR 0.08 in FY2013/14.

Future Outlook

With the entrance of Muthoot Finance Ltd, AAF has been able to increase its capital base to LKR 1.3 Bn by the end of FY2014/15. The total assets of the company now stand at LKR 5.3 Bn which company expects to increase to LKR 7 Bn by end of FY2015/16.

Participation of Muthoot Finance Ltd to AAF opens the doors for sources for company’s growth and we expect performance to improve. AAF has already launched several new projects including property development projects and creative financial solutions with multi party transactions. Company also introduced gold loans with the technical assistance from the parent company.

Company’s plans to expand branch network will also provide a platform to reach new customers while providing enhance service to existing customers.

However, company has to seriously look at its assets and liability mismatch. The total lending portfolio accounts for 77.4% of the company’s total assets while 62.1% of the assets to mature within a year.

As a funding source, fixed deposits account for 68.7% of the company’s funding and 50.4% of the fixed deposits are maturing within a year. This assets liability mismatch shows the company’s high exposure to the credit risk and also company has to diversify its borrowing portfolio.

  1. Shareholding Structure

The issued share capital of the Asia Asset Finance Plc represents 839,207,833 of ordinary voting shares. AAF’s largest shareholder is Muthoot Finance Limited, with a 51% stake. The public holding as at 31st March 2015 is 25.25%.

In August 2014, Muthoot Finance Ltd, a company registered in India purchased 29.98% of AAF shares from Asia Capital PLC.  Muthoot Finance Ltd increased its stake in AAF to 44.32% with the right issue made by the company and subsequently increased it to 51% with the mandatory offer made to the Asia Assets Finance Plc.

Top five shareholders as at 31st March 2015

Name of the ShareholderNo of Shares% Holding
Muthoot Finance Limited428,011,71151.00
Asia Capital Plc79,731,3959.50
Pan Asia Banking Corporation Plc/Asia Capital Plc77,600,0009.25
Pan Asia Banking Corporation Plc-Hiniduma Liyanage Lakpriya41,963,6805,00
People’s Leasing & Finance Plc/M.I.M.Rizly & F.R Hassan17,000,0002.03
ASIA ASSET FINANCE PLC
Statement of Comprehensive Income
Year ended 31 March – LKR
20112012201320142015
Interest Income206,628,351378,483,748589,316,038732,367,042850,447,095
Interest Expense(147,370,897)(207,019,231)(336,876,108)(437,557,304)(480,997,160)
Net Interest Income59,257,454171,464,517252,439,930294,809,738369,449,935
Net Trading Gain/(Loss) on Equity Securities(24,957,371)(2,679,882)5,684,33524,610,913
Other Operating Income120,965,49256,858,18637,484,29136,349,47972,900,766
180,222,946203,365,332287,244,339336,843,552466,961,614
Less: Operating Expenses
Personnel Costs(32,329,757)(76,401,233)(118,289,225)(127,219,068)(178,237,431)
Provision for Staff Retirement Benefits(981,375)(489,287)(1,516,681)(1,947,985)(2,630,870)
General and Administration Expenses(65,837,692)(81,167,316)(86,840,420)(120,329,338)(137,297,937)
Impairment Charge for Lease Rentals Receivable, Hire Purchase and Loans and Advances(2,826,184)(21,624,545)(25,973,097)(29,886,795)(24,748,372)
(101,975,008)(179,682,381)(232,619,423)(279,383,186)(342,914,610)
Operating Profit before Value Added Tax on Financial Services78,247,93823,682,95154,624,91657,460,366124,047,004
Value Added Tax on Financial Services(11,615,996)(7,125,027)(9,316,115)(14,261,408)(21,284,545)
Profit before Taxation66,631,94216,557,92445,308,80143,198,958102,762,459
Income Tax Reversal5,363,33131,428,57716,382,9923,318,687(1,576,656)
Profit for the Year71,995,27347,986,50161,691,79346,517,645101,185,803
Actuarial Loss on Retirement Benefit Liability(41,739)(196,156)(1,049,754)
Income Tax on Other Comprehensive Income11,68754,924293,931
Other Comprehensive Income for the Year Net of Tax(30,052)(141,232)(755,823)
Total Comprehensive Income for the Year71,995,27347,986,50161,661,74146,376,413100,429,980
Statement of Financial Position
Year ended 31 March – LKR
20112012201320142015
ASSETS
Cash and Cash Equivalents31,979,59466,804,910193,568,463229,616,166446,524,236
Investment in Reverse Repurchase Agreements against Treasury Bills and Bonds94,592,86088,255,490129,938,359184,467,915259,698,505
Other Financial Assets40,863,010204,666,796242,652,390112,059,6859,254,835
Financial Assets – Held For Trading56,210,47323,323,8636,775,85581,008,25069,263,955
Loans and Advances1,153,795,6332,002,530,7341,375,481,6052,072,624,3902,887,370,640
Lease Rentals Receivable and Hire Purchase1,125,867,338922,245,0211,250,527,130
Financial Assets – Available for Sale7,949,8947,771,958578,617578,617578,617
Vehicle Stock33,118,25022,935,1438,755,4538,928,57146,797,426
Real Estate Inventories41,698,793
Other Assets84,428,291108,035,93647,411,82736,756,09523,966,862
Advances and Prepayments45,229,99847,495,23947,261,648
Income Tax Receivable9,175,8256,759,6996,252,7693,870,5783,472,184
Property, Plant and Equipment28,264,50950,676,54057,152,75542,909,61467,526,350
Investment Property32,934,51742,934,51732,934,51798,352,11780,842,794
Deferred Tax Assets13,887,93453,786,05077,714,47988,626,96997,845,584
Intangible Assets10,823,75911,778,038
Total Assets1,587,200,7902,678,481,6363,350,314,4253,940,362,9865,344,407,597
LIABILITIES
Due to Customers1,351,662,0501,921,449,8932,591,165,5543,033,741,5053,672,180,230
Due to Banks20,231,3451,95078,787,24662,326
Other Borrowed Funds76,551,11748,544,21464,106,983344,516,666
Other Liabilities15,424,72627,067,94214,201,20715,548,19931,553,729
Retirement Benefit Liability2,754,7503,244,0374,802,4576,703,59810,384,222
Total Liabilities1,369,841,5262,048,544,3342,658,715,3823,198,887,5314,058,697,173
SHAREHOLDERS’ FUNDS
Stated Capital580,538,748945,130,285945,130,285945,130,2851,388,935,273
Retained Earnings(363,179,484)(315,192,983)(296,626,732)(258,620,113)(140,013,447)
Other Reserves43,095,49054,965,28336,788,597
Total Equity217,359,264629,937,302691,599,043741,475,4551,285,710,423
Total Equity and Liabilities1,587,200,7902,678,481,6363,350,314,4253,940,362,9865,344,407,596
Commitments and Contingencies52,534,82323,394,39124,439,125