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

Here's my small analysis on PLC.N. Please note that I hold PLC.N, so take my analysis with a grain of salt (as necessary)

IPO price: 18.00
Current market price: 11.50 - 12.00 (a discount of around 35%)

+ No private placements.
+ No employee share option schemes (one was rolled back - http://cse.lk/cmt/uploadAnnounceFiles/2321325649133_1103.pdf)

- One of the arguments against PLC.N is, "the share volume is too high". Let's see if this is true:

[PLC.N]
Total number of shares as at 31/12/2011: 1,655,000,160 (1,655 Mn)
Percentage of shares held by the top 20 shareholders (mostly institutional): 91.98 (see quarterly report)
Therefore, the number of shares held by retail investors: 1,655,000,160 * (1 - .9198) = 132,731,013 (133 Mn)

[RICH.N]
Total number of shares as at 31/12/2011: 1,938,235,800 (1,938 Mn)
Number of shares held by the top 20 shareholders: 1,622,629,330 (1,622 Mn)
Therefore, the number of shares held by retail investors: 1,938,235,800 - 1,622,629,330 = 315,606,470 (316 Mn)

[JKH.N]
Total number of shares as at 31/12/2011: 840,244,106 (840 Mn)
Percentage of shares held by the top 20 shareholders (mostly institutional): 64.7
Therefore, the number of shares held by retail investors: 840,244,106 * (1 - .647) = 296,606,170 (296 Mn)

Given above numbers, is it correct to say that PLC share volume is high and thus is unlikely to move? Also note that most of the institutional investors in the PLC list most probably bought their shares at the IPO for a price of 18 Rs, and they are less likely to dump their shares in the open market at current prices (note that we cannot make the same comment about RICH or JKH).

- Another gray area for me was that PLC.N went for a dividend of .50 Rs (amounting to almost 800 Mn Rs.) months after the IPO. Why would they hold an IPO of around 7bn and give away almost 1bn right after? Well, we need to consider the fact that People's Bank owns 71.5% of the shares. So the actual dividend payout in total is around 240Mn, which is OK given their profits for the quarter (about 850Mn just for the 31/12/2011 quarter).

If I am to guess, I think the PLC.N share has come down because of the 8% of retail investors. Some of these retail investors are probably swapping their shares between one another in panic (or whatever other mental condition) that has lead to this downfall. I find it difficult to believe that this is some clever manipulation meant to grab poor retailer shares.

IMO, PLC.N is an out-of-favor, ignored share at the moment. But if you look at the financials (attached), you'll realize that it's an undervalued share (Note that for two of the quarters (shaded) I had to roughly calculate quarterly report values based on existing quarterly reports (on cse.lk) as well as previous annual reports (available at http://www.plc.lk/inpages/investor_relations/investor_relations_annual_report.php)).

Based on these observations I'm calling PLC.N a hidden GEM (especially at current prices). Please share your thoughts and correct me if I have made a mistake in my tiny analysis.

Cheers!

Thanks Anubis.

Valuable analysis anubis, I too realised this share couple of months ago and collecing even now at lowest price. Surely I too agree with you. PLC is a hidden Gem.

Thank you for the valuable information.

this is one of the best shares in the market...i too slowly colelct...thanx a lot for your analysis

Good Analysis Anubis.
Thanks mate.

Of course at this price level.

Good work Anubis.
Thanks.

Thank you Anubis.

Finance sector has several companies now trading around PE of 5-6. PLC is one of the good. .

anubis wrote:

[PLC.N]
Total number of shares as at 31/12/2011: 1,655,000,160 (1,655 Mn)
Percentage of shares held by the top 20 shareholders (mostly institutional): 91.98 (see quarterly report)
Therefore, the number of shares held by retail investors: 1,655,000,160 * (1 - .9198) = 132,731,013 (133 Mn)

If I am to guess, I think the PLC.N share has come down because of the 8% of retail investors. Some of these retail investors are probably swapping their shares between one another in panic (or whatever other mental condition) that has lead to this downfall. I find it difficult to believe that this is some clever manipulation meant to grab poor retailer shares.

Good analysis Anubis!!

However, I noted that the 1,655mn shares includes 95mn preference shares that should be excluded from your analysis I guess and also under top 20 shareholder list, 54.6mn shares are held by employees (Number 4 in top twenty list). These shares are in a lock in period of 12 months from the initial listing application.

And also the concerns are provisions reversal during the first quarter of 2011/12 amounting to LKR1,611mn (Page 84 of the prospectus). The provisions were reversed just before IPO stating that

"Upon the continuous review of accounting policy on general provisioning, the current provision of Rs. 1,611,476,404 was reversed. This was done as a result of the continuous increase in the quality of the Company’s lending portfolio, the improved economic conditions of the country in all key sectors and the deterioration in market risk which was evidenced by the strong economic growth rate of 8% in the year 2010."

However, the question now is will there be a pressure on quality of assets considering the increase in interest rates.

Apart from the above, I see the profit for the quarter ended 31/12/2011 & share price appears attractive.

P.S. I have not looked at this share in detail.

@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

Thanks again!

All say that this is a gem. I just saw 52 wk high price was 18.30. And IPO price also was 18. So, my question is, if this has a value, how its been 18.30?

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

Thanks again!

Greeedy is right... 54.6mn shares given to the employee and lock for one year period of transaction... after it come to the market price can fluctuation ... easily same way for the market behavior.

manula wrote:

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

Thanks again!

Greeedy is right... 54.6mn shares given to the employee and lock for one year period of transaction... after it come to the market price can fluctuation ... easily same way for the market behavior.

Guys see the annoucement below
http://www.cse.lk/cmt/uploadAnnounceFiles/2321325649133_1103.pdf

slstock, So no more shares in the hands of employees of PLC.

greedy wrote:And also the concerns are provisions reversal during the first quarter of 2011/12 amounting to LKR1,611mn (Page 84 of the prospectus). The provisions were reversed just before IPO stating that

"Upon the continuous review of accounting policy on general provisioning, the current provision of Rs. 1,611,476,404 was reversed. This was done as a result of the continuous increase in the quality of the Company’s lending portfolio, the improved economic conditions of the country in all key sectors and the deterioration in market risk which was evidenced by the strong economic growth rate of 8% in the year 2010."

However, the question now is will there be a pressure on quality of assets considering the increase in interest rates.

Apart from the above, I see the profit for the quarter ended 31/12/2011 & share price appears attractive.

P.S. I have not looked at this share in detail.

There was a news about this subject.
Please see the link.
http://forum.srilankaequity.com/t11429-sri-lanka-people-s-leasing-provision-reversal-due-to-accounting-rules-official?highlight=people

Rajaraam wrote:slstock, So no more shares in the hands of employees of PLC.

I think so. See this news article below;

People’s Leasing Company employees lose treasure trove
Bank union agitation compels return of free shares

Employees of People’s Leasing Company (PLC) have returned 54.6 million shares in the company issued to them last year by their parent, People’s Bank, for what the company said was a "nil cash consideration."

This transfer follows SEC approval granted by their letter of November 23, 2011, PLC said addling that the transfer of these shares to the People’s Bank will be completed by Jan. 31, 2012 as required by the SEC.

The return of these free shares have cost particularly senior employees of PLC shares worth million. Middle and lower level employees too were big losers.

On June 30, 2011, a sum of approximately Rs.4.09 billion standing to the credit of the reserves of the then unlisted People’s Leasing Company was capitalized by the issue of 28 million fully paid ordinary voting shares at a consideration of Rs.146 per share in its entirety to the People’s Bank, sole shareholder of PLC at the time of the issue.

The People’s Bank adopted a resolution on the same day renouncing 3.64 million of the new shares to employees of PLC "in recognition of their commitment, dedication and service rendered to the company, which over the years have enabled PLC to accelerate its growth and gain the market leadership in the leasing industry," the PLC prospectus issued last October said.

Noting that the renunciation by the People’s Bank was at zero consideration, allotments to employees were made taking into consideration their years of service and the position they occupied in the company.

Following the capitalization of PLC reserves and the allotment of free shares to employees, each existing share was sub-divided into 15, substantially increasing the number of employees’ shares which amounted to 4.67% of the issued capital of the company.

Senior managers of the company including its Managing Director, Mr. D.P. Kumarage, had substantial shareholdings of PLC at the time of listing with Mr. Kumarage being the second largest shareholder of the company with nearly 4.3 million shares. Several other senior managers too had holdings of over 1 million shares.

The PLC prospectus listed the names of over 600 employees of PLC who had been issued shares.

The decision to ‘voluntarily’ return these shares to the People’s Bank was taken following pressure exerted by employees of the People’s Bank who held a picketing campaign outside PLC, issued bulletins and conducted a poster campaign over the issue of free shares to PLC employees.

The Union took up the position that PLC was in fact the leasing arm of the People’s Bank which had no leasing department.

"Thus, when a customer came to any People’s Bank branch seeking leasing facilities, they were directed to PLC which did the business," a union official explained.

PLC reserved 10% of the shares on offer at its recent IPO for its employees who were free to buy shares at the Rs.18 price if they so chose.

The company paid a dividend of Rs.0.50 per share on December 16 last year prior to the transfer of the free shares granted to employees back to the People’s Bank. Thus employees would have benefited from this payment.

Source: http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=42742

CSE.SAS wrote:

greedy wrote:And also the concerns are provisions reversal during the first quarter of 2011/12 amounting to LKR1,611mn (Page 84 of the prospectus). The provisions were reversed just before IPO stating that

"Upon the continuous review of accounting policy on general provisioning, the current provision of Rs. 1,611,476,404 was reversed. This was done as a result of the continuous increase in the quality of the Company’s lending portfolio, the improved economic conditions of the country in all key sectors and the deterioration in market risk which was evidenced by the strong economic growth rate of 8% in the year 2010."

However, the question now is will there be a pressure on quality of assets considering the increase in interest rates.

Apart from the above, I see the profit for the quarter ended 31/12/2011 & share price appears attractive.

P.S. I have not looked at this share in detail.

There was a news about this subject.
Please see the link.
http://forum.srilankaequity.com/t11429-sri-lanka-people-s-leasing-provision-reversal-due-to-accounting-rules-official?highlight=people

Yes. This IFRS thing was in my mind. Thank you for providing the link. I have come across situations where banks and finance companies make a general provision against a loan book. In this case, the new standards require provisions to be made against specific loans & advances.

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.

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

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.

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 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.

@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 ).

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!

@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 ) in the process.

Cheers!