Growth Fund: PICIC GROWTH FUND – Analysis of Financial Statements Financial Year 2002 – Financial Year 2009

OVERVIEW (January 01 2010): PICIC Asset Management Company Limited (PICIC AMC) is a wholly owned subsidiary of NIB Bank Limited (NIB). NIB is a subsidiary of Fullerton Financial Holdings Limited which is wholly owned by Temasek Holdings, the investment arm of the Government of Singapore.

MARKET SCENARIO

During FY09, the KSE-100 Index fell by 41.72% from 12,289 to 7,162 as compared to a decline of 10.77% during FY08. Market capitalization during FY09 fell by 43.86% from Rs 3.777 trillion to Rs 2.12 trillion, as compared to a decline of 6.02% during FY08. The index showed extreme volatility. Average daily volume stood at 106 million shares as compared to 242 million shares in FY08. The total Index Points Movement (IPM) during the period under review was 7,406 points as compared to 4,514 points in FY08.

Sectors, which contributed almost 67% of the market capitalization were Banking (-7% under-performance), Oil & Gas Exploration (8% out-performance) and Fertilizer (8% out-performance). The top three out-performing sectors versus the KSE-100 Index during this period were Chemicals (26% out-performance), Power Generation & Distribution (25% out-performance) and Oil & Gas Exploration Companies (8% out-performance). The top three under-performing sectors versus the KSE-100 Index during this period were Insurance (23% under-performance), Technology & Communication (13% under-performance) and Textile Spinning (12% under-performance).

The socio-political and macroeconomic environment faced a severe setback mainly due to the worsening law and order situation in the country coupled with fiscal and budgetary imbalances; as a consequence, the risk-premium on equities scaled up and dwindling liquidity resulted in erosion of equity values. This culminated in the second worst annual decline in equity markets after 1998 (-44%). PICIC Growth Fund (PGF) is a closed-end equity fund.

The objective of the Fund is the capital growth of the certificate holders for which investments would be made in the best available opportunities, while considering acceptable risk parameters and applicable rules and regulations. In FY09, 41.94% of the certificates were in the hands of individuals. These amounted to approximately 119 million certificates. The 10% of the certificates are owned by the management company, ie PICIC Asset Management Company Limited and 10.73% certificates are owned by the Pakistan Reinsurance Company Limited. The other largest certificate holders are insurance companies holding 16.44% certificates cumulatively.

FINANCIAL PERFORMANCE

The dividend income had shown continuous growth from FY02 to FY07. Since then, it has moved along a receding trend. The dividend income was around 190 million in FY02. By FY07 it had reached almost 600 million. It decreased to around 465 million in FY08, and then further to around 442 million in FY09. The capital gain showed a continuous improvement until it spiked in FY06. Since then, it has continued to fall. The capital gain for FY02 was around 42 million. In FY06, the capital gain spiked to around 4.2 billion rupees. It then came back, in FY07, to 882 million. It has declined continuously touching 184 million in FY08, and ending in a capital loss in FY09 of around 2 billion rupees. These events unfolded due to continuous pressures on the stock markets in the country and abroad. Capital gain as a percentage of total income has shown a varied performance. Since FY02, it had increased at varying rates until FY06.

Thereon, it declined for two years, before rising up again. The ratio increased from 16.85% (in FY02), to 116.85% (FY06) and then decreased, touching -63.31% (FY08) before rising up in FY09 when it was 92.53%. A higher value of this ratio signifies that a higher proportion of the total income is generated through the gain on sale of assets. Dividend income as a percentage of total income had more or less decreased since FY02 to FY08. It was 75.89% in FY02 which then decreased to 51.58% (FY05). The ratio touched 14.35% and -159.99% in FY07 and FY08 respectively. The ratio increased to -20.32% in FY09 due to 5.11% (YoY) decrease in dividend income amid a 647% YoY decrease in total income.

DEBT MANAGEMENT

The debt to assets ratio had followed an increasing trend from FY02 (ratio being 0.57%) to FY06 (6.53%). The ratio then decreased to FY08, touching 0.96% before increasing again in FY09 to 1.56%. The sharp decline of FY08 was due to a large decrease in total liabilities (-84.48% YoY) amid a smaller decline in total assets (-19.72% YoY). The following period witnessed an increase in the ratio. This happened because in this period, the decrease in total assets (-41.85% YoY) was larger than the decrease in total liabilities (-5.24% YoY).

The debt to equity ratio also followed a similar path. It was 0.57% in FY02, whence it increased continuously to 6.99% in FY06. Thereon, the ratio decreased for two years touching 0.97% in FY08. FY09 witnessed a slight increase in the ratio, bringing it to 1.59%. The sharp decrease from FY07 to FY08 was due to a large decrease in total liabilities (-84.48% YoY) and a small decrease in equity (-16.34% YoY). The subsequent increase of FY09 was due to a reverse phenomenon. The decrease in total liabilities (-5.24% YoY) was dwarfed by the decrease in total equity (-42.20% YoY).

CAPITAL ADEQUACY

The paid-up capital to equity ratio has shown a varied performance. The ratio decreased from 0.34 in FY02 to 0.19 in FY03. The ratio remained stable till FY05 whence it increased to 0.24 (FY06) before decreasing again to 0.21 (FY07). Thereon the ratio increased to 0.43 (FY09). The increases in the ratio were based on continuing decreases in total equity. Total equity decreased 16.34% and 42.20% respectively in FY08 and 09, therefore the ratio increased.

The equity to assets ratio has remained stable around unity. This is due to a very low debt (as is usual in such funds). Therefore, equity is always nearly equal to the total assets. The lowest this ratio has seen was in FY06 when it touched 0.93.

MARKET VALUE RATIOS

The net assets had continued to rise until FY07. Since then it has fallen considerably. Net assets reached its apex in FY07 almost touching the 13.5 billion mark. Since then, it has fallen to a little over 6.5 billion (FY09). The main proponents of the demise of this figure were large decreases in investments. Investments in AFS fell by 46.97% (YoY) while that in HFT declined by 34.56% (YoY). Also, other assets declined by 63.11% YoY.

The average net asset value (NAV) peaked in FY05 and has since declined. It was 21.02 in FY02, which increased to 55.75 by FY05. The NAV decreased and then stabilized, and then decreased again. It touched 44.78 in FY07, 43.69 in FY08 and ended at 31.41 for FY09. The NAV at the end of FY09 was 23.01. The earnings per certificate have followed a varied trend. In FY02, it was 2.36. It increased to 8.05 in FY03 and then decreased to 3.56 by FY05. The EPC surged in FY06 touching 15.28 and has since continued to decline. It entered the red in FY08 and in FY09 was -8.26. This meant that it showed a loss of over eight (8) rupees for each certificate issued.

DIVIDEND RATIOS

The dividend per share has shown a varying performance. It increased from 2.60 (FY02) to 4.50 (FY04) and then decreased to 1.00 in FY06. The dividend surged in FY07 to 4.25 and then declined to 2.50 in FY08. For FY09, the board of directors announced no dividend. The dividend payout was 13.30% in FY02. It increased in FY04 to 22.02% and then decreased in FY06 to 7.83%. The ratio surged in FY07 touching 26.42% and went on to 30.39% in FY08. Dividend payout for FY09 was zero (0) as no dividend was given for this year.

The dividend yield decreased in FY03 from 8.80% (FY02) to 6.70%. It increased slightly in FY03 to 8.33% and then fell to 2.38% by FY06. The yield increased in FY07 (8.39%) before again falling down. The yield touched 6.28% in FY08 and continued its decline. It was 0% for FY09.

FUTURE OUTLOOK

The market has entered a recovery phase after absorbing the pressures resulting from broker defaults. It has already crossed the 9000 point mark, surging from a low of 4815 points of January 26, 2009. Though the market is still volatile, daily volumes have shown considerable improvement. The company expects further easing of the monetary pressures amid fresh inflows. The economy is expected to maintain the recovery process. Pakistani equities are heavily discounted as compared to others in the region; the company believes that this will lead to improvement in FY10.

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