Merit Packaging Limited

Merit Packaging Limited (PSX: MERIT) is a prominent name in the printing and packaging industry of Pakistan. The company has over 25 years of experience in providing quality products to its customers. Merit Packaging was incorporated in 1980, and its production facility is located in Korangi Industrial area of Karachi.
Merit Packaging is part of the highly recognised Lakson Group, which was founded in 1954. Lakson Group has presence in various industries of Pakistan and employs over 3,000 people. Some of the other companies operating under the Lakson Group umbrella include Colgate-Palmolive, Century Paper and Board, Lakson Investments, Century Insurance and Cybernet.
Historical performance Over the last five years' financial performance of the company has been erratic, to say the least. Sales have been up and down, while margins have also fluctuated. From FY11 to FY16, Merit Packaging had posted losses in FY12, FY13 and FY14.
In FY13, the management of the company announced a 750 rights issue at Rs 10. (par-value). The purpose of this rights issue as per the notification to the exchange was to have liquidity for working capital. Previously the capital base of the company was small and the management had to borrow additional loans. Apart from that, the funds were to be used for enhancing production capacity and capital expenditure.
After the rights issue and much needed liquidity injection, the performance of the company started improving. In FY14, the top line of the company grew by over 35 percent and gross margins almost doubled as compared to FY13. There was improvement across all segments of the company.
In FY15, Merit Packaging returned to profitability. Sales grew by seven percent year-on-year, and for the first time in its history, the company crossed Rs 2 billion in annual turnover. The capital expenditure during the previous year brought significant improvement in production capacity and efficiency across the board. The FMCG sector, which is the main target sector of Merit Packaging, demand was picking up which meant that company could maintain its margins.
However, energy cost prevented the company from achieving its desired profitability targets. The whole packaging sector has been marred by energy costs over the years.
Later in FY15, there was a fire incident which affected the Gravure unit of the company. The production in that unit had to be suspended and outsourced to other factories.
The fire incident took toll on the company's performance in FY16 as well. Significant expenditure had to be done to get suspended production back online in the Gravure unit. Also some ageing machines had to be replaced. All this meant that financials of the company suffered from top to bottom. Sales declined by almost 20 percent and net profit went down by 78 percent.
Recent performance 9MFY17 During the first nine months of the fiscal year, the sales of the company went up by 10 percent as compared to previous. The increase in top line can be attributed to utilisation of capacity, which was previously not being used. Over the last few years the company has done expenditures to get the production facilities back in shape and the results of these efforts are being witnessed now.
However, the bottom line of the company decline by 55 percent with earnings per share of Rs 0.09. The main dent to the earnings came from the finance cost, which increased by about 25 percent. Overall the gross margins improved by 2 percent, while net margins declined by 0.03 percent.
Shareholding pattern Majority of the shareholding of the company is held by the sponsors and associated companies of the Lakson group. Amongst the institutions, NIT has over 10 percent holding, while mutual funds hold about 14 percent of the company. The general public holds around 28 percent shareholding of the company.
Stock performance The stock price of Merit this year has fluctuated a lot, but over the course of last twelve it has largely outperformed the benchmark KSE-100 index. Investors after witnessing the turnaround flocked into the stock and exceptional volumes were seen after the reporting of quarterly results.
Future outlook Looking forward, the company should be able perform at its full strength after some forgetful years of underperformance due to various issues. With a wide variety of services and a growing economy, the company should make sure that it regains its market share by targeting the FMCG sector, which are the main buyers of its products and services.

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Pattern of Shareholding (As of June 30, 2016)

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Directors, CEO, and their Spoces and minor children         74,915       0.19%

Associated Companies, Undertakings and related part     22,545,364      55.92%

SIZA (Private) Limited                                   3,907,159           -

SIZA Services (Private) Limited                          5,560,819           -

SIZA Commodities (Private) Limited                       4,529,488           -

Premier Fashion (Private) Limited                        8,545,602           -

NIT and ICP                                              4,211,732      10.45%

Banks, DFI, NBFI                                               385       0.00%

Modarabas and Mutual Funds                               5,741,889      14.24%

General Public                                          11,255,164      27.92%

Others                                                     696,482       1.73%

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Source: Company Accounts Note: Some shareholder are reflected in more than one category

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Merit Packaging Limited

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Rs. (Million)                       9MFY16    9MFY17          YoY

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Sales                                1,232     1,360        10.4%

Cost of Sales                        1,137     1,228         8.0%

Gross Profit                         94.71     132.5        39.9%

GP Margin                               8%       10%   up 200 bps

General and Admin Expenses           25.18      32.2        27.9%

Selling and Distribution Expenses     26.1      26.3         0.8%

Other Income                          22.6       0.2       -99.1%

Other operating expenses              0.23      0.32        39.1%

Operating Profit                     63.59      72.9        14.6%

Finance Charges                       55.6      69.3        24.6%

Profit Before Taxation                0.79      0.35       -55.7%

Taxation                                 -         -         0.0%

Profit After Taxation                 0.79      0.35       -55.7%

NP Margin                            0.06%     0.03%   down 3 bps

EPS                                    0.2      0.09       -55.0%

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Source: Company Accounts

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Nestle Pakistan

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Rs(mn)                       IQCYI7    IQCYI6       YoY

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Sales (net)                  30,417    26,733       14%

Costs of goods sold          18,997    17,009       12%

Gross profit                 11,420     9,725       17%

Distribution & selling exp    4,385     3,511       25%

Administrative exp              767       669       15%

Operating profit              6,269     5,545       13%

Finance cost                    195       258      -24%

Other operating exp             468       447        5%

Other income                     45        52      -14%

Profit before tax             5,651     4,893       15%

Taxation                      1,550     1,451        7%

Profit after tax              4,100     3,442       19%

EPS (Rs/share)                90.42     75.89       19%

Gross margin                 37.55%    36.38%

Operating margin             20.61%    20.74%

Jet margin                   13.48%    12.87%

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