Packages Limited

Packages Limited (PSX: PKGS) is a public listed company incorporated in Pakistan. The company was established as a joint venture between the Ali Group of Pakistan and Akerlund & Rausing of Sweden in 1957. Initially, PKGS was engaged in converting paper and paperboard into packaging for consumer industry. Over the years, the company has enhanced its facilities to provide variety of packaging solution to a number of consumer brands across industries. It is also a leading manufacturer of tissue paper products. As of now PKGS is operating as a holding company and hence its performance is largely determined by the performance of its group companies – within and outside Pakistan.

Pattern of Shareholding

As of December 31, 2022, PKGS has an outstanding share volume of 89.380 million shares which are held by 4202 shareholders. Associated companies, undertakings and related parties have the highest shareholding of 42.8 percent in the company. This category is mainly dominated by IGI Investments (Pvt.) Limited with 29.88 percent shares. Local general public accounts for 21.79 percent of PKGS’s shares followed by foreign companies holding 10.23 percent shares. Modarabasand Mutual funds account for 6.60 percent of the company’s shares while insurance companies have 6.49 percent stake in PKGS. Directors, CEO, their spouse and minor children have 3.6 percent shares with similar number of shares held by Banks, DFIs and NBFIs. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-22)

PKGS’s topline has been riding an upward trajectory since 2018. On the contrary, its bottomline slid twice during the period under consideration i.e. in 2019 and 2022.PKGS’s gross and operating margins have been inclining since 2019. Conversely, its net margin drastically fell in 2019, recovered for the subsequent two years and then recorded a plunge in 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, PKGS’s topline grew by 15 percent year-on-year. This was on account of significant improvement in the core manufacturing operations of PKGS. Gross profit enlarged by 51 percent year-on-year in 2019 with GP margin rising up from 12.7 percent in 2018 to 16.7 percent in 2019 mainly on account of effective cost control mechanism put in place by the company. Investment income dropped by 30 percent year-on-year in 2019 due to decline in dividend income from Nestle Pakistan Limited and Tetra Pak Pakistan Limited. Other income grew by 325 percent in 2019 as a result of writing back of liabilities which were no longer payable. Administrative expenses and distribution expenses surged by 11 percent and 7 percent respectively in 2019. This was the consequence of higher payroll expense, freight & distribution as well as advertising and promotion expense incurred in 2019. Impairment of investment also pushed up other expense by 93 percent in 2019. PKGS recorded 48 percent bigger operating profit in 2019 with OP margin growing from 7.6 percent in 2018 to 9.7 percent in 2019. Due to high discount rate and increased long-term loan, finance cost grew by 75 percent in 2019. This coupled with the higher effective tax rate of 85.65 percent in 2019 versus 30.82 percent in 2018 pushed the net profit down by 76 percent in 2019 to clock in at Rs.278.06 million with EPS of Rs.1.71 versus EPS of Rs.10.34 in 2018. NP margin also plummeted from 2.2 percent in 2018 to 0.5 percent in 2019.

In 2020, performance of manufacturing operations remained vigorous resulting in 7 percent topline growth recorded by PKGS. Improved pricing and better volumes along with cost control resulted in GP margin clocking in at 20.4 percent with Gross profit mounting up by 30 percent year-on-year in 2020. Operating expenses remained in check during the year mainly on account of significantly lesser travelling charges and advertisement & promotion expense incurred during the year. PKGS operating performance was further strengthened by a massive growth in share of profit from associates and joint ventures.On the downside, investment income slid by 63 percent in 2020 primarily due to lower dividend income from Nestle Pakistan Limited. Lower write back of liabilities also drove other income down by 39 percent in 2020. Other expense slipped by 34 percent in 2020 due to lower impairment on investment. Consequently, PKGS registered 44 percent bigger operating profit in 2020 with OP margin rising up to 13.1 percent in 2020. Finance cost shrank during 2020 due to low discount rate as well as lower running finances obtained during the year. All these upbeat factors culminated into a bottomline growth of 1531 percent in 2020. The company’s net profit clocked in at Rs.4535.70 million in 2020 with NP margin of 7 percent and EPS of Rs.47.44.

2021 was another pleasant year for PKGS with net revenue registering stellar growth of 24 percent over the last year particularly on the back of sale of goods manufactured by the company on its own, High cost of sales and services kept GP margin in check which inched up to 20.8 percent in 2020 despite 26 percent increase in gross profit. Operating expenses grew in line with inflation and also because of increased payroll expense as the number of employees grew from 3228 in 2020 to 3271 in 2021. The company also incurred higher advertisement and freight expense in 2021.PKGS’s operating profit posted 43 percent rise in 2021 mainly on the heels of a massive growth in other income (reversal of impairment on fixed assets and associate), investment income and share of profit from associates. OP margin grew to 15.2 percent in 2021. Low discount rate coupled with better credit management resulted in low finance cost incurred during the year. This translated into year-on-year bottomline growth of 58 percent in 2021. PKGS’s net profit clocked in at Rs.7150.15 million in 2021 with EPS of Rs.71.41 and NP margin of 8.9 percent.

In 2022, PKGS’s topline boasted a staggering 52 percent year-on-year growth mainly on account of better core operations. During the year, all the categories of PKGS’s core operations i.e. paper & paperboard produced, paper & paperboard converted, plastics converted and inks produced witnessed considerable improvement. High inflation, energy tariffs and escalated cost of raw materials didn’t let the company realize any growth in the GP margin which remained at 20.8 percent – same as last year. This was despite 52 percent year-on-year rise in PKGS gross profit in 2022. The company’s investment income also buttressed its financial performance in 2022 as dividend income from its long-term investments grew by 29 percent year-on-year. Other income also registered a tremendous 435 percent year-on-year rise in 2022 mainly on the back of bargain purchase gain on the acquisition of its subsidiary, Tri-pack Films Limited (TPFL). Higher scrap sales, WPPF provision written back also majorly contributed in the growth of PKGS’s other income in 2022. Share of profit from associates and joint ventures declined by 63 percent in 2022. The company also booked net impairment loss on financial assets which included amount due from Packages Lanka (Private) Limited and Flexible Packages Converters (Proprietary) Limited in respect of management fee receivable. Other expense also mounted by 168 percent in 2022 on the back of exchange loss incurred during the year as well as impairment on assets of Flexible Packages Converters (Proprietary) Limited. All these factors culminated into 57 percent higher operating profit recorded by PKGS in 2022 with OP margin slightly moving up to clock in at 15.7 percent. Finance cost amplified by 180 percent year-on-year in 2022 on account of high discount rate and also because of a whopping increase in running finances and long-term finances obtained during the year. Increased borrowings during the year are also reflected in the company’s gearing ratio jumping up from 40 percent in 2021 to 51 percent in 2022. This coupled with the higher effective tax rate of 41.4 percent in 2022 versus 25.57 in the previous year translated into 2 percent year-on-year erosion in PKGS net profit in 2022. Net profit stood at Rs.6979.83 million in 2022 with EPS of Rs.72.12 and NP margin of 5.7 percent.

Recent Performance (9MCY23)

2023, despite all the challenges it carried along, proved to be welcoming for PKGS as its topline rose by 33 percent year-on-year during 9MCY23. This was particularly on the back of local sales of goods and services by the company. Improved core operations of the company coupled with the upward price revisions drove up its gross profit by 55 percent in 9MCY23 with GP margin climbing up to 25.25 percent versus 21.6 percent during the same period last year. Administrative & distribution expenses surged by 26 percent and 61 percent respectively during 9MCY23 on account of inflationary pressure and increased operational activity. Other expense soared by 45 percent year-on-year during the period which supposedly have a considerable contribution of exchange loss. Other income improved by 42 percent during 9MCY23. PKGS’s net impairment loss on its financial assets magnified by 87 percent during the period while its investment income slid by 11 percent. This was because during the period, Flexible Packages Converters (Proprietary) limited was sold to a third party as it was unable to meet its liabilities towards the creditors. Hence, the group derecognized the net assets of FPC and didn’t expect any future inflow from this investment. During 9MCY23, gains relating to business combination as well as share of profit from associates & joint ventures by 43 percent and 12 percent respectively. This translated into 54 percent higher operating profit recorded by PKGS in 9MCY23 with OP margin of 19.73 percent versus 17 percent during the same period last year. Finance cost doubled during the period on account of monetary tightening and increased borrowings majorly to acquire shares of HPL. Net profit grew by 22 percent during 9MCY23 to clock in at Rs.8924.86 million with EPS of Rs.83.66 versus EPS of Rs.72.69 in 9MCY22. NP margin fell from 8.12 percent in 9MCY22 to 7.45 percent in 9MCY23.

Future Outlook

Amidst highly challenging and competitive environment, the company is thriving on the heels of its core function of providing packaging solutions across the industries. PKGS is also taking tremendous benefit from the superior performance of its subsidiaries, investments and joint ventures. The associated companies of PKGS are serving across various sectors of the economy, providing their holding company the benefit of income diversification. Moreover, its foreign-based subsidiaries will continue to be the source hefty exchange gain amidst depreciation in Pak Rupee. The company recently completed the acquisition of 35 percent in Hoechst Pakistan Limited (HPL) formerly known as Sanofi-Aventis Pakistan Limited. PKGS now has 41.07 percent stake in HPL. This further diversified PKGS’s sources of earnings, making it less vulnerable to unfavorable conditions in a particular industry.