Allied Rental Modaraba : ARM | Allied Rental Modaraba - Transmission of Quarterly Report for the Half Year ended 31 December 2022

DIRECTORS' REPORT

For the period ended December 31, 2022

The Board of Directors of Allied Engineering Management Company (Pvt.) Limited, the management company of Allied Rental Modaraba, is pleased to present to its certificate holders the Directors' Report together with Unaudited Financial Statements of the Modaraba for the half year ended December 31, 2022.

OVERVIEW

Like overall industry, the Modaraba, is also facing tremendous difficulties in doing business including, rise overall cost of doing business, high inflation, stringent IMF's funding program conditionalities, current account deficit and foreign payments building pressure on the Pak rupees parity, rising overall debts and increase in tariffs and taxes, increase in international crude oil and gas prices and ban on imports. However the modaraba was able to sustain its growth trend both in revenue and profitability. Net Sales for the half year ended December 2022 appreciated by 15% from the corresponding half year period to close at Rs. 2,535 million.

Rental Power segment continues to maintain our lead segment in terms of Sales and profitability. All segments of Rental Power performed according to the benchmark and targets set for the period. The segment was able to record better deployments of diesel generators especially large MW units. Similarly, gas segment also showed improvement in deployment and resulting in higher revenues, however this segment will continue to remain a challenge due to availability and pricing of gas/LNG to captive power units.

Sales from construction machines, cranes and material handling equipment segment also improved marginally with 1% increase in sales. Sales from our Machines and Cranes and MHE segment maintained there last year levels as the business was adversely affected by the floods in the last quarter. Machine

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rental is very challenging business again due to market dominated by unorganized sector with extremely low-quality products and workforce.

Sales from our Outbound Logistics segment maintained its budgets level and showed slight improvement during the half year period compared to corresponding half year period last year. Our customer base for this segment mainly comprises of blue-chip companies in the FMCG sector, including Nestle, Engro, Dalda, Schlumberger, Pakistan Tobacco Company, etc. However, the business is full of challenges due to competitive pricing from unorganized sector, non-implementation of regulatory regime on Motorways and highways for Axel Load Compliance resulting in the menace of Overloading and non-availability of skilled and reliable manpower.

In line with the increase in rental revenue the operating expense for the period also showed an increase of 19% to Rs. 1,809 Million from Rs. 1,519 Million for the period. As compared to corresponding period last year Salaries and Wages increased by 16% due to overall increase in deployment of ijarah assets and increase in minimum wage rate by the Government. Major increase was noted in Fleet vehicles running cost and vehicle running expenses which raised by 59% and 64% respectively, due to overall higher transportation costs. Depreciation for the period dropped by 19% compared to corresponding period last year.

Administrative and distribution expenses also witnessed an increase of 19% to Rs. 168 Million (2020: Rs. 141 Million) primarily due to increase in vehicle running expenses due to increase in transportation costs. Further salaries and wages also went up by 19% as we set up of different business segments as we diversify into other sectors of our Rental portfolio and to handle increased business volumes.

Markup costs went up by 22 Million in the current period, mainly on account of increase in KIBOR Base rate. Provision against potential Ijarah losses and operation and maintenance income was recorded at Rs. 17.3 Million being in compliance with the requirements of international financial reporting standard IFRS - 9.

Restructuring of the Modaraba

As mentioned in previous annual and quarterly reports pursuant to withdrawal of the Tax Exemption on Modarabas from July 1, 2021, the Board in its meeting held on September 7, 2021 re-analyzed the strategy of continuing to operate the business under the legal structure of a Modaraba. It was discussed at the Board Meeting and the Board advised the Management to explore the opportunities of conversion of the Modaraba to two Private Limited entities to reduce the burden of regulatory compliance and accordingly reduce the cost of doing business, during the Financial year 2022, the draft scheme of arrangement was finalized and submitted to the SECP - Registrar Modarabas for its approval. The SECP vide a letter no. SC/M/PRDD/Allied/2022-RS 49 / 134 dated June 23, 2022 has issued a no objection certificate (NOC) on the scheme of arrangement. The draft Scheme was also approved by Competition Commission of Pakistan - CCP on August 1, 2022.

Upon successfully obtaining NOCs from all the creditors, the Modaraba have filed the petition with the Honorable Sindh High Court in the Month of October 2022, the first hearing at the Honorable Sindh High

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Court on the Petition was held on October 19, 2022, whereby, the petition was admitted and court instructed to issue notices to the petitioners and publication of the scheme in the official gazette thereafter, separate meeting of members of all the petitioners were held on November 25, 2022 whereby, the scheme was approved unanimously. Minutes of the meeting of the members were also submitted to the SHC subsequently within 7 days of the meeting. The Modaraba management company expects to get approval from the Sindh High Court, before June 30, 2023.

Going Concern Assumption of the Modaraba - Consequent to the above proposed resolution by the Board of Directors of the Modaraba Management Company, the Modaraba is no longer considered to be a going concern as the business of the Modaraba will in its entirety be transferred to two separate entities. The management intends to carry out transfer of assets and liabilities at the carrying values of assets and liabilities appearing in the books of Modaraba at the date of transfer subject to the approval of the relevant authorities.

We would like to highlight that no adjustments have been made in the carrying value of assets and liabilities held by the Modaraba and the classifications of balances between long-term and short-term have not been adjusted as the transaction is at the preliminary stage, subject to the final approval of High Court of Sindh and the businesses and balances will be transferred on going concern basis at the carrying values.

Further, since more than 90 percent of the certificates are held by the associates and the group companies by virtue of which this transaction will be considered as a transaction under common control and will be accounted for as predecessor accounting in accordance with the requirements of "Accounting for Common Control Transactions" standard (which specifies the accounting for common control transactions) issued by the Securities and Exchange Commission of Pakistan (SECP). The management believes that in cases where there is insignificant non-controlling interest, the receiving entity will be carrying out predecessor accounting whereby assets and liabilities appearing in the books of Modaraba will be transferred at the same values on the date of transfer. Therefore, there is no potential impact that requires adjustment to the carrying values and classification of assets and liabilities currently being carried in the books of the Modaraba as at the reporting date as a result of Modaraba no longer being a going concern.

Future Prospects

The management is vigilant with respect to ongoing economic situation of the country, with increase in inflation, restrictive imports, internal economic disturbance facing the industry / country. The Management appreciates the initiatives and measures taken by the Government to confront the economic challenges being faced by the Country. However, the Company urges the Government to reconsider its restrictions placed on Machinery imports. For the above reasons the Management will remain cautious and prudent for its investment strategy on all segments of the business.

The Management is positive of the rental industry potential, CPEC development and tremendous opportunities it has to date generated for the Modaraba. We always strive to keep special emphasis on

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customer satisfaction, also ensuring in the process that we always follow the Islamic Shariah principles in all our business transactions.

Acknowledgement

The Board wishes to place on record its sincere gratitude to the Registrar Modarabas, his support staff at SECP, Religious Board, bankers, customers and its business partners for their continued support and guidance.

On Behalf of the Board

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