SS Oil Mills Limited

SS Oil Mills Limited (PSX: SSOM) was incorporated in 1990. Its business relates to extracting, refining, processing, and sale of edible oil, meal and their by-products. Canola oil, sunflower oil, and soybean oils and meals are some of the company's offerings. SSOM has an edible oil solvent extraction plant at Vehari with a capacity of processing 90,000 tons of oilseeds annually.
Industry overview
Though Pakistan has annual per capita consumption of 17kgs, there are limited crops of oilseeds under acreage or edible oil production, making Pakistan one of the top edible oil importing countries in the world. Palm oil consists of about 94 percent of edible imports.
In recent years, there has been a significant increase in soybean oil imports. Soybean seeds are also used in the poultry sector as vegetable protein for feed. The crushing of soybean seeds produces oil which is absorbed by the edible oil market.
The Pakistan Edible Oil Conference held earlier this year estimated total consumption of oils and fats to be about 4.41 million tons in 2017. There has been growing awareness about the health benefits of edible oil compared to other cooking fats, which has resulted in an increase in consumption.
Production numbers of ghee have declined significantly on a year-on-year basis in the aftermath of Punjab Food Authority's ban on manufacturing, sale and purchase of Vanaspati. Still, ghee is in high demand with production in FY17 more than three times that of cooking oil production.
Among listed companies, the sector consists of Punjab Oil Mills, SSOM, and newcomer, Unity Foods. While Unity has enjoyed significantly higher margins in the first few months of operations, POML contends that the edible oil industry has low margins and operates in an intensely competitive environment.
Financial history
SSOM has faced a somewhat volatile trend with regards to sales over the last few years. After achieving nearly 50 percent increase in sales in 2012, its top-line declined in 2013 and 2014 by 4 percent and 33 percent, respectively. Global economic recession, domestic uncertainty, law and order situation, drastic decrease in oil prices in local market amid increased prices of raw material, were cited as reasons for decrease in sales and profits.
Sales recovered somewhat in 2015 before dipping down in 2016. Despite the increase in sales, SSOM's profitability suffered as oil prices remained depressed in the local market while crude oil prices in international market slumped. Management tried to hold stocks of seeds and oil to buffer sales and profits but this also resulted in an increase in financial charges.
In 2017, SSOM reached its peak sales mainly due to new plant operations which allowed the company to enhance production and increase market share. Washed oil production increased by nearly 80 percent from 7,012 tons to 12,395 tons. Meal and soaps' increase in production was limited to 3 percent from about 25,423 tons to 26,197 tons.
9MFY18
Continuing last year's trend, SSOM's top-line increase was significant and translated into a higher gross profit. Better control of selling and distribution expenses and lower administrative costs as percentage of gross profit gave operating profit a boost. This trickled down to a significant increase in net profit though margins did not improve.
During the period, SSOM acquired 53,383 tons of rape, sunflower and soybean seeds. This was nearly double the amount acquired in the same period last year when the company bought 28,000 tons of rape and soybean seeds. The increase in production has been led by commercial operations of the new plant.
Despite the increase in production, economies of scale remain elusive as SSOM's margins remain under pressure at 5 percent for gross profit margin and less than 1 percent for net profit margin.
These numbers are significantly lower than Punjab Oil Mill's margins, on average, for 16 percent for gross profit and 4-5 percent for net profit. Unity Foods, in its first few months of operations, clocked in at 17 percent for gross profit margin and 13 percent for net profit margin - thus, SSOM's profitability is lagging behind peers.
Future outlook
On one hand, the budget FY19 imposed tariffs on imported soybean oil to protect the domestic edible oil market. On the other hand, the trade war has resulted in excess inventory of US's soybean seeds because China was amongst the top markets. As a result, prices of soybean imports into Pakistan may come down because of international glut, despite higher tariffs.
Although international soybean seed prices may come down, devaluation of rupee makes raw material for SSOM more expensive. As crude oil prices have increased as well, SSOM's margins may be squeezed further. This is especially worrisome for SSOM than its competitors because it has amongst the lowest margins with net profit margin stagnating at 1 percent for the last couple of years.
As far as the general market conditions are concerned, demand for edible oil is high and rising as health awareness grows. PEOC predicts that edible oil consumption to rise between 3 to 5 percent on a yearly basis. However, without an increase in efficiency and curtailing of costs, SSOM may find it difficult to continue competing in this sector.

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SS Oil Mills Limited

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Rs. Mn                            9MFY18   9MFY17     YoY

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Sales                              2,626    1,953     26%

Cost of sales                      2,482    1,851     25%

Gross Profit                         143      102     29%

Administrative expenses               20       17     15%

Selling & distribution costs           4       12   -200%

Operating profit                     120       73     39%

Other income                         381      350      8%

Financial charges                     64       38     41%

Profit before tax                     56       35     38%

Tax                                   35       19     46%

Profit after tax                      21       16     24%

Gross profit margin                   5%       5%      4%

Net profit margin                   0.8%     0.8%     -2%

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Source: Company Accounts

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Pattern of shareholding (as at June 30, 2017)

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Category                                                   No     %

                                                    Of shares

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Associated companies, undertaking, and related        785,000    14

Mutual funds                                          336,600     6

Directors, their spouses, and minor children        2,424,700    43

Banks, DFIs, NBFIs, Insurance Co                       27,900   0.5

Shareholders holding 5% or more voting interest

Nawabzada Shazad Ali Khan                           1,182,700    21

Nawabzada Shahayar Ali Khan                         1,150,000    20

Sikander Commodities (Pvt) Limited                    785,000    14

Nawabzada Shafaquat Ali Khan                          549,300    10

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