Packages Limited

Packages Limited (PSX: PKGS) came into existence in 1957 as a result of a joint venture between Ali group of Pakistan and Akerlund and Rausing of Sweden, converting paper and paperboard into packaging for its customers. Since then, it has constantly been expanding, acquiring and merging, and adding plants to its capacity to cater to a wide range of both, consumers and businesses. Over the years, Packages Limited is also investing heavily to stay abreast of the advancing technology.

It's most recent investment has been of Rs540 million in 2017 to upgrade the existing flexible line packaging consisting of wide-web Flexo printing press and latest 7-layer blown film Extruder, which became fully operational by 2018. Another important investment among others in 2018 in the flexible packaging line is of Rs230 million for bringing Extrusion Lamination machine, the first ever in Pakistan, giving it an edge over its competitors.

Packages Limited mostly operates in the B2B segment whereby majority of its clients are other prominent businesses. Major operating business units of Packages Limited are folding cartons and flexible packaging under the packaging business. It also produces consumer products such as tissue paper and related products, for instance, facial tissues, kitchen towels, table napkins, paper plates and cups. Widely known brands here are Rose Petal and Tulip among others.

Given their long history of acquisitions and mergers, majority of their shareholding, nearly 39 percent is under associated companies, undertakings and related parties, with IGI Investments Private Limited holding majority of the shares. Another major shareholder is the local general public and 'others', each holding approximately 15 percent, followed by 10 percent held in modarabas and mutual funds, with National Investment (Unit) Trust owning most of the shares in the said category. The remaining are distributed between directors, CEO, their spouses and minor children, insurance companies, banks DFIs, NBFIs and foreign public.

Operational and historical performance

Top-line of Packages Limited has seen continued growth, although of varying rates, with the exception of CY12 in which fire erupted in the consumer products division. This led to an adverse impact on operations. Despite the challenge, the company was able to bounce back, and resume operations in the consumer segment within six months, recording an increase in net sales of nearly 27 percent the following year. In addition, the double digit inflation rate in CY12 caused volumes in the consumer industry to remain more or less flat.

Although an upward trend is seen in net revenue over the years, the gross profit margin has remained more or less similar. In CY16, the company saw a significant jump in NP margins due to significant contribution was by income generated from investments, and despite high finance costs and taxation, with the latter being recorded highest in the said year. The high finance costs were due to premium paid on redemption of shares.

In CY17, taxation and finance costs normalised. In addition, a considerable dividend income was earned from investment in its subsidiaries and related parties such as DIC Pakistan Limited, Packages Lanka Private Limited, Tri-Pack Films Limited and others.

The increase in sales of CY18 was accompanied by an even greater increase in cost of sales, hence squeezing the gross profit margin; increase in advertising expense of consumer products, coupled with the devaluation of rupee causing an increase in cost of raw materials are to be blamed here. In addition, a major decline was also seen in investment income, which had been a prominent reason for profitability in the previous two years. This was due to a decline in dividend income from Nestle and Tetra Pak. Since the company is continuously adding to its capacity, it will take some time for it to utilize it at its maximum; hence the declining figures in the recent years.

Quarterly performance

In the first 9 months of CY19, the company's export as well as local sales saw a positive trend hence an improvement in gross profit. However, in order to maintain market share in the face of increased competition, it focused on advertising and marketing causing operating expenses to increase, thereby reducing bottom-line by almost half, year-on-year. In addition, finance costs also experienced a significant increment in 9MCY19.

Future outlook

The dent in profits, the declining return on equity, a significant fall in earnings per share hold testament to the fact that the business has faced immense challenges. Their focus has thus remained on cost efficiency and increasing marketing and distribution to acquire and maintain market share. They have also made investments to enhance capacity and increase volumes of sales as it is difficult to increase value of the end product in a competitive environment. Although figures at the moment seem bleak but with the recent plastic ban the economy's focus and hence demand would be on paper products, increasing probability of better profitability, as can be seen in the sudden out performance of the stock against the market index.

========================================================
PKGS: Pattern of shareholding as at December 31, 2018
========================================================
Categories of shareholders                             %
========================================================
Directors, CEO, their spouses and minor childre     2.83
Associated companies, undertakings and related     38.67
Banks, DFIs and NBFIs                               3.72
Insurance companies                                 6.25
Modarabas and mutual funds                         10.01
General public:
Local                                              15.84
Foreign                                             7.49
Others                                             15.19
Total                                                100
========================================================

Source: Company accounts

===================================================================
Packages Limited
===================================================================
Rs (mn)                              9MCY19      9MCY18     YoY (%)
===================================================================
Net revenue                          17,044      15,719       8.43%
Cost of sales                      (13,649)    (12,763)       6.94%
Gross profit                          3,395       2,956      14.85%
Administrative expenses               (799)       (753)       6.11%
Distribution and marketing costs    (1,052)     (1,048)       0.38%
Other operating expenses              (708)       (246)     187.80%
Other operating income                  198         197       0.51%
Profit/(loss) from operations         1,034       1,106      -6.51%
Finance costs                         (741)       (350)     111.71%
Investment income                     1,812       2,715     -33.26%
Profit/(loss) before tax              2,105       3,471     -39.35%
Taxation                              (686)       (669)       2.54%
Profit/(loss) for the year            1,419       2,802     -49.36%
===================================================================

Source: Company accounts