Irregularities in the Air Link’s IPO find

The Company earning per share (EPS) should have been Rs 4.93 based on June Profit after Tax and 300 million outstanding shares

KARACHI: Some financial irregularities in the Initial Public Offering (IPO) of the Air Link Communication Limited have been found. Pakistan Stock Exchange (PSX) and Securities and Exchange Commission of Pakistan (SECP) need a close scrutiny and investigation of the company’s prospectus which reveals its bleak picture.

According to the company’s prospectus, the Company earning per share (EPS) should have been Rs 4.93 based on June Profit after Tax and 300 million outstanding shares. Thereby the resultant P/E is 11.3 times, contrary to the 9 times falsely claimed in the Prospectus.

With the expected public issue of 90 million shares at floor price of Rs 65 per share, Air Link would be able to trap public funds of Rs 5.85 billion. Incidentally, Air Link has Rs 9.15 billion of other receivables, besides Rs 4.66 billion of Trade Debts and further Rs 4.61 billion in Stock in Trade, under Current Assets of Rs 20 billion (as per 30 June 2020 balance sheet). Such huge receivables make the company a high risk proposition.

As elaborated in the prospectus, other Receivables of Rs 9.15 billion which is inclusive of Rs 2.66 billion due from principles. For the remaining amount, no details have been provided.

Out of the Rs 5.85 billion, Rs 3.9 billion is the new issue, whereas offer for sale is Rs 1.95 billion. Essentially this Rs 1.95 billion will be pocketed by the sponsors of the company.

Furthermore, Air link should have provided audited accounts for the past 5 years (from 2016 till 2021) in its prospectus, which it failed to do.

In addition, Air Link should have provided a complete feasibility report, regarding their investment in a Mobile Assembly Plant and the 150 outlets, as it has mentioned in its prospectus.

Judging by the past trend from the prospectus, between FY2017 till 1H2021, Profit after Tax Margin of the Air Link has steadily declined from 5.08% to 3.4%.

In actual, injected equity is around Rs 1.25 billion only, whereas conversion of an additional Rs 1.75 billion is through bonus shares (totaling Rs 3 billion paid up capital). It is pertinent to mention that mostly conversion of bonus shares were due to reserves piled up during fixed tax regime; tax deducted/paid at import stage. Once normal tax regime was implemented, it resulted in the decline of Net Profit, i.e. from 5.08% to 3.4% (as mentioned in the point above).

As per the prospectus, under auditor certificate, the breakup value of Air Link is Rs 15.11 per share, which includes the effect of the fixed tax regime (bubble). However, under this IPO the company is offering its shares at Rs 65 per share, which can go up to Rs 91 per share (subject to bidding). This premium being charged is illogical and made out of fictitious financial maneuvering, and aimed at cheating innocent general investors.

Since 24 Mobile Device Manufacturing (MDM) license have been issued (Air Link being one of them) by Pakistan Telecommunication Authority (PTA), how does it plan to compete with the remaining 23 MDM license holders. One of these competitors is the leading Lucky Group, which has the sole manufacturing rights of Samsung mobiles in Pakistan. Therefore, Air links manufacturing share is significantly impaired.

Another poignant point to mention here is that there is no clear disclosure regarding Air Links Mobile Assembly Plant. There is no information whether the company owns the land on which this Facility is built or whether it is a rented premise. If it is on a rented premises, than that is a significant financial risk for the investors in case of eviction.

Moreover, it has been noted that PCF Communication was incorporated as a Company on November 13, 2018 and within 2 months of its incorporation, lent Rs 400 million to Air Link Communication. No details as to sponsors, beneficial ownership and financial statements of PCF are available in Prospectus.

In the business that was earlier run in the AOP set up that too in the mobile distribution that is primarily done in cash, the material amount of Rs 5.3 Billion raises alarm bells. Pg. 48 of the Prospectus containing Balance sheet refers to this amount. PSX must enquire into details and nature of other receivables as this figure if not checked may result in fraud with general public.

The Company has used EPS of Rs 6.24 per share which gives it a value of 9 times P/E based on the floor price of Rs 65 per share

Accordingly in order to protect public money, there is an immediate need to get answers to all the issues raised above before the public subscription of the Air Link Communication Ltd.

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