Packaging materials: Packages Limited - Analysis of Financial Statements Financial Year 2003 - 1 Q 2010
Packages Limited is a public limited company incorporated in Pakistan. It is listed on all the three stock exchanges of the country. It is principally engaged in manufacturing and sale of paper, paperboard, packaging materials and tissue products.
Packages Limited was established in 1957 as a joint venture between the Ali Group of Pakistan and Akerlund and Rausing of Sweden, to produce packaging material for the consumer industry.
It is the only company, offers complete range of packaging solutions, including offset printed cartons, shipping containers and flexible packaging materials to individuals and businesses world-wide. The clientele of Packages Limited includes illustrious names such as Unilever and Pakistan Tobacco Company, who have been its customers for over 50 years.
Packages is producing most of its packaging material and tissue range of products mainly from its factory in Lahore. It is also producing corrugated boxes from its plants in Karachi and Kasur since 2002 and 2007 respectively. Presently, it is the market leader in terms of total installed capacity. The Bulleh Shah project has increased the paper and paperboard production capacity of Packages by three times.
Packages has leveraged its products and increased its growth through association. Its business alliances have helped it manage its business more effectively, as well as helping Packages and its partners develop and diversify their interests. Customers also benefit from the increased knowledge base, as the company transforms its market awareness and shared technology into innovative and cost effective solutions for customers. The key business partners of Packages Group are Nestle Limited, Tri-Pack Films Limited, Packages Lanka Private Limited, First International Investment Bank Limited, Tetrapack Pakistan Limited, DIC Limited, IGI Pakistan and Coca-Cola Beverages Pakistan Limited. PKGS has a very strong investment portfolio.
Majority of the companies are either buyers of the company's products or suppliers of raw materials. This provides a strong backing to the company and thus mitigates any risk of bargaining power of customers. Over the years, the company has continued to enhance its facilities to meet the growing demand of packaging products in the country and abroad. In the midst of increasing buying power in the domestic market, the growth in sales is visible across all segments of the business and this increase in sales is because of the increase in demand of paper and paperboard in the country.
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RECENT RESULTS 1Q2010
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Financial Performance 1Q2010 1Q2009
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Rupees in million
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Gross Sales-Local 5,500 3,737
Gross Sales-Export 399 66
EBITDA (from operations) 462 98
Deprecations & amortisation -381 273
EBIT- operations 81 175
Finance cost -300 -335
Other operating income / expenses- net 11 -63
Dividend Income 742 161
Gain on Sale of long term investment - 8,867
Earnings before tax 534 8,455
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RECENT RESULTS 1Q10
During the first quarter of 2010, Packages has achieved local sales growth of 47% and export sales growth of approximately 5 times over the corresponding period of last year. Disaggregately under the company's paper and board division, Bulleh Shah Paper Mill (BSPM) generated external sales of Rs 1,065 million while board operations (both Lahore and BSPM) registered export sales of Rs 355 million during the first quarter of 2010 as compared to Rs 31 million in the corresponding period of 2009. Packaging division sales grew to Rs 2,254 million during the first quarter of 2010 as compared to Rs 2,048 million in the corresponding period of last year. The sales in consumer products division rose to Rs 497 million 1Q10 as compared to Rs 390 million of the corresponding period of last year, representing sales growth of 27%.
Thus the top line of the company has been quite impressive but the increasing sales growth is matched by the rising cost of sales which grew by 47.8% to Rs 4700 million in 1Q10 as compared to Rs 3181 million of the corresponding period. Material consumed salaries and wages and fuel and power are the main drivers of cost of sales, which grew by 9%, 33% and 68% respectively. Despite the concurrent increase in cost of sales, gross profit jumped approximately 11 times over the corresponding period of last year. Gross profit for 1Q10 stood at Rs 342.3 million as against Rs 27.3 million of 1Q09 mainly on the back of massive increase in export sales which rose 5 times as compared to the same period last year.
Company's operating expense reduced by 19% on the aggregate level. Although the administrative and distribution expenses increased by 11% and 49% respectively, but 75% cutback in other operating expenses are responsible for overall drop witnessed in operating expenses. In 1Q10 company has been able to curtail its finance cost by 10% which stood at Rs 299.7 million as compared to Rs 335.3 million over the same period last year. However, company also witnessed negative pressure on the investment income which decline by 92% in 1Q10.Due to the plunging investment income, EBT reduced by nearly 94% which further translated into lower PAT that stood at Rs 320.4 million as against Rs 6.3 billion over the corresponding period of last year.
In FY08, company realised heavy gains on disposal of long-term investment in Tetrapack Limited of Rs 8,886 million, which gave extraordinary raise to the investment income. Thus in the absence of that, the company witnessed massive cut down (95%) in its profitability. The decline in investment income is not perceived as much concern to the company rather it signals the return of investment income to normal levels.
Keeping in view the diminished profitability, Packages posted EPS of Rs 3.85 as against Rs 75.31 recorded in previous corresponding period.
LIQUIDITY RATIOS
Company's liquidity position improved in 1Q10 compared to the corresponding period of last year. The current ratio enhanced to 0.72 from 0.54 in 1Q10, on the back of 30% increase in the current assets of the company. Trade debts and loans and prepayments increased ordinarily by 24% and 29% respectively, but cash and bank balances became the main drivers of increase in the current assets, which grew by 279.4%. This extraordinary increase in cash and bank balances has also been responsible for improving the quick ratio, which rose to 0.47 in 1Q10 from 0.30 in the previous corresponding period. Current liabilities could not keep pace with the growth of current asset rather it fall by 9% mainly due to the 11.2% declined in finance under mark-up arrangements and 10.2% decline in trade and other payables.
DEBT MANAGEMENT RATIOS
Company's debt-related ratios nearly remained similar to the previous levels of 2009 as there was hardly any major change witnessed in the overall debt position of the company for 1Q10. Both current and non-current liabilities tumbled by 9% and 1.5% respectively accompanied by minor 4.1% increase in total assets, thus reducing debt to asset ratio negligibly from 0.23 to 0.22 in 1Q10. Debt to equity ratio also declined slightly from 0.36 to 0.34 due to higher base effect as equity rose by 8% for the current quarter. Long-term debt fall by 1.5% but as mentioned above 8% increase in equity brought down the long tern debt to equity ratio of the company for the first quarter of 2010.
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Profitability 2009 1Q'09 1Q'10
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Profit Margin 24.58% 167.11% 5.43%
Gross Profit Margin 1.86% 0.72% 5.80%
Return on Assets 11.41% 18.14% 0.91%
Return on Equity 16.31% 28.82% 1.34%
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PROFITABILITY RATIOS
Company's profitability remained under pressure in 1Q10. PAT for the company this quarter reduced by nearly 95%. Although profit margin declined from record 167.1% in previous quarter, but the gross profit margin has improved from meagre 0.72% in 1Q09 to 5.80% in 1Q10 despite of nearly 48% increase in cost of sales. Gross profit in the current quarter grew extra ordinarily by more than times and stood at Rs 342 million as compared to just Rs 27.3 million in the same period last year. Rising export sales is the foremost reason for this increase in the gross profit.
The decline in net profit margin, ROA and ROE could be attributed to one time gain realised by the company in 2009 due to the sale of long-term investment in Tetra Pack Ltd. This transaction had extremely favourable impact of the bottom line of the company last year. Reduction in all the profitability ratios is thus signals return from unusual net income to the normal levels of the earnings. Apart from the lower the profitability, increased in equity (8%) and total asset (4.1%) also magnified the decrease in ROA and ROE due the higher base effect. For 1Q10 ROA stood at 0.87% whereas ROE remained 1.34% which is lower than achieved by the company in previous years.
MARKET VALUE
Packages posted an earning per share of Rs 3.8 in 1Q10 as compared to Rs 75.3 recorded in 1Q09. The negative bottom line (negative 95%) impacted the EPS for the company for the period under review. Company's prices to earning multiple improved from 1.7 to 36.7. This is due the increase in company's stock price which grew by 12% from Rs 125 (average) to Rs 140 during the first quarter of 2010. Company posted extraordinary EPS in 1Q09, which obviously created a high base effect on the price to earning multiple, thereby reducing it to below the very small level.
The 1Q10 returned to normal EPS along with rising stock price, thus we see boosting price to earning multiple. The company did not pay any dividend this quarter, which is similar to its previous trends of dividend payments. Book value of the common share remained stable with a minor increment from Rs 147 to Rs 148.3 which is mostly because of the increase 8% in common share equity of the company, whereby number of shares remained constant.
LIQUIDITY (FY03-FY09)
The liquidity position for Packages has remained stable over the years with considerable improvement in CY07 while current ratio jumped from 1.48 in CY06 to 2.46. This sharp increase came on the back of 41% YoY increase in current assets along with 15% YoY decline in current liabilities for the year. In CY08 current ratio decreased from a high of 2.46 to 1.50. Although the current assets rose by (42% YoY), but it was offset by a larger increase in current liabilities (134% YoY).
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Liquidity 2009
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Current Ratio 4.58
Quick Ratio 2.22
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In CY09, Packages was able to enhance its liquidity condition, as its current ratio swelled to 4.58, similarly the quick ratio also showed a sharp increase to 2.22x in CY09. This healthy position was attained by lowering its current liabilities, as its finance under the mark-up arrangements profoundly reduced to Rs86m from Rs2587m in CY08.
This segment of the current liabilities has mostly been responsible for the volatility in company's liquidity position for the past four to five years. Further more, the current assets, which grew from Rs 199 million in CY08 to Rs 455 million in CY09 have also created the favourable impact on the company's liquidity position.
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Asset Management Ratios 2009
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Inventory turnover 155
Day sales outstanding 38.68
Sales/Equity 0.66
Total Asset Turnover 0.46
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ASSET MANAGEMENT RATIOS
Since CY05, we witnessed an upward trend in inventory turnover. In four years, the inventory turnover has increased from 68.42 (CY05) to 113.12 (CY08). Increase in the inventory turnover reflects greater increase in sales as against the stock in trade. In CY08 the inventory turnover increased to 113.12 on the back of a 37% YoY increase in sales invoiced as compare to 17% in stock in trade.
In CY09 the inventory turnover increased to 155 days, which indicates that it took more days in CY09 to sell of the inventory. Cost of sales grew by strong 21%, however, stock in trade rose insignificantly which led to a rise in turnover. The day sales outstanding (DSO) had increased slowly from CY03 to CY05 then afterwards it became volatile. However in CY09 it remained similar to the levels of CY08.
The sales to equity ratio has shown a continued decline (from CY03 to CY07), though it increased in CY08. Sales have showed handsome rates of growth. The year on year increase in sales for the last three years was 11% (CY06), 17% (CY07) and 36% (CY08). But even with increasing sales, the ratio has continued to decline. This shows that the increase in sales is dwarfed by the increase in equity (except for CY08).
In CY09 the sales/equity ratio continued its declining trend, as the proportional increase in sales is less than the increase in the equity, thereby showing a decreasing result. As can be noted, the equity increased by 53%, on the other hand the sales only increasing by 17%, showing the low revenue generated by the equity ploughed in the company.
Total assets turnover has also being declining for the last many years, except CY08. The decline in the ratio can only be attributed to the larger increases in total assets when compared against the sales. Total assets increased by 95.16% in CY06 and 47.48% in CY07. The increase in CY08 was low in relation (4.77% YoY). Compared to these, the increase in sales was 11% (CY06), 17% (CY07) and 36% (CY08). The Bulleh Shah project had contributed mainly to the increases in assets.
The major increases could be seen under the heads of property, plant and equipment and investments. In CY08, the turnover improved to 0.41. This progress was witnessed due to a lower increase in assets as compared to the increase in sales. Amongst assets, investments and long-term loans and deposits decreased (-17% and -36% YoY respectively), while rates of growth in other assets slowed down considerably. Overall, assets increased by only 4%, as compared to 47% (CY07).
In CY09, total assets turnover continued the same declining trend indicating that the sales are not generating up to the mark of the assets employed. The ratio declined to 46% in CY09.
DEBT MANAGEMENT RATIOS
Debt to asset ratio of the company has remained on the higher side since 2005. Escalating debt incurred for the purpose of financing the expansionary activities has been responsible for the mounting debt to asset ratio. It also indicates that the debt has grown at faster rate (22.89% YoY CY08) than the assets (4.77% YoY CY08).
The debt to equity ratio remained under the multiple of one until 2007, which indicates that equity has provided the majority of financing for the assets. In CY08 ratio increased and stood at 1.15. This was caused by loss incurred by the Packages, which reduced its unappropriated profits by 104% YoY. Thus the increase in the ratio was fuelled by the decrease in equity.
The long-term debt to equity ratio accelerated from CY05 to CY07 substantially. The growth slowed in CY08. As mentioned before, the equity increased consistently from CY03 to CY07, after which it decreased in CY08. For Packages, long-term debt has increased also continually from CY03 to CY07 (+500% YoY in CY06 and +105% YoY in CY07). In CY08, total long-term debts decreased slightly by 1.18%. This should have led to a decrease in the ratio. Instead it appeared as an increase due to the greater decrease in equity (-10.45% YoY).
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DEBT MANAGEMENT RATIOS 2009
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Debt to Asset 0.23
Debt to Equity Ratio 0.32
Long Term Debt to Equity 0.32
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Packages showed less dependence on the dept in CY09. The company was able to reduce its debt to a considerable level. Equity became the main source of financing of the assets. It was done so as to curtail the mounting financial charges, which created negative bottom line impact in the previous years of high debt.
Long-term finances reduced dramatically for the period CY09, leading to a decline in debt to asset ratio to 0.23. Likewise, the debt to equity ratio could be seen as 0.32 in CY09, owing to the fact that more of equity was used to generate the finance for the company. Of the profitability ratios, the return on asset, the net profit margin and the return on common equity all have shown a similar trend. They depressed in CY05, and then spiked in CY06. Since then, they have showed a downward movement.
The gross profit margin, on the other hand, has shown a consistent decline since CY03 (when it was 18.97). Sales have shown continued increases throughout (CY03-CY08), with the year on year rate of increase jumping from 16.75% (CY07) to 35.68% (CY08). Sales in CY08 touched an all time high of 14 billion rupees. On the contrary, gross profit has declined over the same period on the back of escalating cost of goods. The cost of goods being sold increased continuously due to inflation and increase in imported raw material costs along with increase in power and fuel charges. In CY08, it spiked by 44.09% reaching 11.28 billion rupees. Therefore, the increasing sales could not be converted into higher profits for the company. The gross profit decreased by 7.36% (CY07) and -21.34% (CY08).
From CY03 to CY05, the net profit margin remained around twelve and thirteen. It spiked in CY06, reaching 67.58. This huge increase was due to a large increase in the net profit on the back of high investment income. Investment income increased 824.75% YoY, ie from around 0.6 billion to around 5.6 billion rupees. This coupled with a low tax expense translated into a huge -500% YoY increase in net profit. Since CY06, the trend has shifted towards a decreasing net profit margin.
In CY08, the net profit declined by -104.53%, which took Packages into the red. This decline is due to the huge increase in financing costs (352.42% YoY), due to depreciation of the rupee. Packages has large amount of debt denominated in foreign currencies. Thus, devaluation had a large impact on its financial position. Another major cause for decrease was the fall in investment income (78.5% YoY). Thus currently (CY08), the net profit margin stands around -1.37% which depicts a net loss for the company. Though this loss may be temporary, due to unusual market difficulties (high inflationary pressures, high rupee devaluation) of the CY08, the fact that the gross margin has continued to decrease is alarming.
The return on assets (ROA) depicts the amount of income generated as per the assets. It is proportional to the net profit of the company depending upon the trend of the assets. Packages has shown a continued increase in the amount of its assets (though the rate has slowed). The net profit had showed a decrease (CY03-CY05) followed by a spike (CY06) and then again a decrease (CY07-CY08). The ROA has also followed this trend. It spiked from 8.74 (CY05) to 26.91 (CY06). It then started falling and was -0.56 in CY08. The negative value of the ratio is a bit disconcerting as it shows that each rupee in asset value is producing a loss for the company.
The return on common equity (ROE) has also followed the trend of the net profit margin. The ROE increased when profits increased and decreased when profits decreased. The equity for the company has continued to increase due to good profits (except in CY08) and issuance of new shares. Total equity increased by 76.74% in CY06 and 32.90% in CY07, before decreasing by 10.45% in CY08. The fall in equity in CY08 was due to the large decrease in unappropriated profits (-104.53 YoY) even though new shares worth around 110 million rupees were issued. Thus since CY06 when the ROE peaked (44.62), it has continued to decline. In 2008 the ROE stands at -1.2 which signifies a negative return. The negative value is significant because it suggests that any investment in the company would produce negative returns, ie would not yield a return.
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Profitability 2009
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Profit Margin 24.58%
Gross Profit Margin 1.86%
Return on Assets 11.41%
Return on Equity 16.31%
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In CY09, the company's profitability saw a huge increase, the Net profit was in Positive figures in CY'09 and the ratios too showed a high return to the investors.
The Gross profit margin though was very low at 1.86%, however due to the Investment income in CY09 of Rs 9,179 million the company was able to post a positive return of 24.58%. Therefore the return on the assets as well as ROE showed a positive sign for their respective ratios. ROE posted a 16.31% growth compared negative 1.2% in CY08. Similar explanation is for the ROA ratios. Thereby, increasing the profitability of the company and also regaining the company in the eyes of shareholders and investors.
The EPS for the company remained a little under 20 from CY03 to CY05. It spiked in CY06 reaching 87.3 and then started declining. In CY07, EPS was 51.27 while in CY08 it was -2.32. The sudden increase in CY06 was due to a large increase in earnings (net profit increased 500.85% YoY) with no increase in the number of outstanding shares. The subsequent fall (CY07) was due to issuance of new shares, which enhanced the base effect coupled with a decrease in net profit (-29.09% YoY). In CY08, the company witnessed a loss. This loss translated into a negative EPS. Furthering its fall was the issuance of new shares.
The book value for the company shows the value of ownership per share of the investors. The book value had shown a continuous increase since CY03 to CY07 (at an average of 35.95% per annum). It decreased in CY08. The reason for the increase was that the equity was increasing at a greater rate than the issuance of new shares. Continuous profits were being added to the general reserve and the unappropriated profits sections. This increased the equity for the company from around 3 billion rupees in CY03 to around 18 billion rupees in CY07, at a average of around 3 billion per year. This boosted the book value.
In CY08, the number of shares outstanding increased as new shares were issued. Also, total equity decreased due to a huge decrease in unappropriated profit (-104.53% YoY) to adjust the losses incurred in that year. This had a negative impact on the book value, and thus the book value decreased to 192.85 (CY08).
The dividends per share have also decreased. For CY03 and CY04, per share dividend was set at 8.5. This decreased to 6 per share for CY06 and CY07. There was no dividend given in CY08 due to the loss faced by the company. This decrease in dividend payout is not a unique aspect of Packages. CY08 was a very difficult year for businesses globally and especially in Pakistan. High inflation wreaked havoc with the demands for goods and decreased the buying power of the consumers. High rupee devaluation led to higher costs of goods (for imports and import derivatives) and also higher costs of financing (external/foreign debts). Both factors led to poorer performance of companies generally. Packages Ltd decided not to give dividends for CY08, as its performance was poor.
As the company was able post a higher return in CY'09, the Earnings for the shareholder too saw a worthwhile return, with its EPS jumping to Rs 48.16 from a negative Rs 2.53. This high increase was beneficial for the new shareholders, who had invested in CY08 as the company issued new shares in the market.
FUTURE OUTLOOK
In consideration of the current economic situation, rising raw material prices surging energy prices and electricity shortages, the management will continue its focus to improving shareholder's value through price rationalisation, product and process optimisation, reduction of operating costs and efficient working capital management.
The company has commenced Total Productive Maintenance (TPM) program of Japan Institute of Plant Maintenance, Japan (JIPM) across all its business units that is expected to result in greater production Efficiencies and resultant positive effects on the bottom line results of the company.
A review of the paper and paperboard market indicates that Pakistan's consumption pattern is around 6 kg per capita, which is 1/10th of the world average. It is for this reason that the company, taking a long-term view, decided to establish a new paper and board production site with the requisite infrastructure in Kasur. The Bulleh Shah Paper Mill, which has a potential capacity of more than 500,000 tons per annum, shall satisfy the long-term demand ensuing from increasing urbanisation, population growth, changing lifestyles of the rural population in the country and shifting trends from non-packaged to packed products. The company, as a premier paper and board supplier, is well equipped to take advantage of this growth potential provided the macroeconomic indicators of the country move in the positive direction.
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Financial Performance 2009 2008
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(Rupees in million)
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Invoiced Sales-Gross 16,533 14,300
EBITDA (from operations) 719 954
Finance cost -1,278 -1,662
Investment income 9,180 949
Income (net) 220 337
Profit / (loss) after tax 4,064 -196
Basic Earnings per share - rupees 48.16 -2.32
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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