Maple Leaf Cement Limited - Analysis of Financial Statements June 2003 to March 2007

Booming GDP has spurred demand for cement. Compound Annual Growth Rate (CAGR) of cement sales for the past five years has been 17%. Maple Leaf Cement Factory Limited (MLCFL) is one of the largest cement factories in Pakistan. The company has a diversified product range and is the only cement company in Pakistan capable of producing grey, white, sulphate resisting and low alkali cement.
The principal activities of Maple Leaf Cement Factory Limited are to produce and sell cement in Pakistan. The Company's main factory is located at Mianwali.
MLCFL is a part of the Kohinoor Maple Leaf Group, which is one of the leading textile manufacturers of the country. Kohinoor Textile Mills Limited holds 50.13% shareholding in MLCFL. While effectively family controlled, MLCFL is run by professional management. The main sponsor, who is also the chief executive of the company is a leading industrialist.
Maple Leaf Cement Limited (MLCF) is one of the oldest companies operating in the industry with a present production capacity of 1.5mntpa. Further expansion of 2.0mntpa is expected in the near future, which will make MLCF 3rd largest player capacity wise after Lucky Cement and D.G Khan Cement.
From 2003-2006, sales growth has been decelerating. A major set back is observed in FY'07 due to lower sales prices in the first half. However, in forthcoming years, sales are expected to recover in lieu of pricing agreement.
MLCF has been a major beneficiary of large volumes of sales, thanks to the booming GDP and subsequent rising demand for cement. Moreover, huge allocations for Public Sector Development Program (PSDP), re-construction in the earthquake stricken areas as well as large number of infrastructure development programs have also spurred growth in local sales.
MLCF is quite susceptible to changes in coal prices, capacity expansion, and interest rates as compared to other players. Being one of the most leveraged companies, MLCF has shown instability in its profitability ratios as compared to its competitors. This can be attributable to higher loans and finances, finance charges and depreciation expense consequently affecting the net income of the company.
3Q'07, in particular, witnessed a massive decline in the profitability ratios. This is due to approximately 24.8% reduction in cement retention prices (Rs 138.2 per bag). However, to retain sales position MLCF in the current fiscal year produced at 100% capacity using the costlier wet processes as well, resulting in lower profits. As a result of expansion projects, the total assets of the company also increased. This magnified effect is evident by the company's ROA. Ongoing pricing agreement will provide breathing space to company in future.
MLCF is extraordinarily sensitive to changes in cement prices. Excess capacity expansion, supply glut and unpredictable retail prices might negatively affect the company in future. Both operating and finance costs have raised the operating and financial leverage of the company.
IMCF major financing comes from long-term-loans acquired for expansion projects. Therefore, long-term-debt to equity ratio has increased tremendously over the years and hovers around the industry average. Huge finance costs coupled with lower operating profit has perturbed the debt management trend of the company.
On the basis of industry averages, it can be safely concluded that MLCF is the highest leveraged company of the industry. Slight changes in interest rates will, therefore, leave a magnified affect on the company financials as compared to that of its competitors.
Expansion has affected the company's asset management as well. Increased capacity resulted in accumulation of inventory (raw material and work-in-progress) consequently depressing the turnover ratios. The inventory turnover of IMCF is worse than the industry. The company, however, is efficient in receiving credit payments as indicated by its DSO trend.
The prolonged operating cycle can be a future threat to the company. Strategic planning to control excess supply can cushion the inventory turnover ratio. Sales/Equity has been erratic and worse than the industry averages. Lately, the ratio has been declining and can be attributed to lower sale price, depressed sales and high reserves.
In lieu of susceptibility to cement price changes, MLCF witnessed marked deviations in financial performance in 3Q'07 mainly attributable to low cement price.
The net worth of the company is better than that of the industry average owing to high reserves, which can be used for further expansions in future. P/E ratio however, is quite low and worse than other industry players.
MLCF depicted a sharp downturn in its EPS of 90.1% from 06 to 07 (Nine Months Period). This drop off can be attributed to the decrease in cement retention prices by 24.8%. Lower prices were unable to fetch high net sales consequently affecting the net income of the company. Subsequently the company paid little or no dividends to its shareholders.
MLCF is in the process of converting its wet processes to dry processes. Once the change is through, MLCF will also enjoy lower fuel and energy costs. It is only recently that MLCF has started its exports by exporting white cement to Middle East because of declining local demand for the product. MLCF will be able to maintain its market share in the future. Also, if Kalabagh Dam is commissioned, MLCF would be the major beneficiary along with Pioneer Cement.

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MAPLE LEAF-FINANCIALS

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Income Statement                         FY'03         FY'04         FY'05         FY'06

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Total Revenue                        2,404,807     3,375,799     4,290,734     5,709,792

Cost of Goods Sold                   2,043,257     2,227,571     2,962,802     3,561,212

Gross Profit                           361,550     1,148,228     1,327,932     2,148,580

General & Administrative Expenses       48,648        46,804        40,287        60,474

Selling & Distribution Expenses                       10,658        12,973        20,961

Operating Profit (EBIT)                334,947     1,101,899     1,292,769     2,093,816

Financial Charges                      427,863       310,839       205,677       340,978

Net Income Before Taxes                -92,916       751,507     1,087,092     1,752,838

Net Income After Taxes                 150,103       487,472       727,450     1,059,240

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Balance Sheet                            FY'03         FY'04         FY'05         FY'06

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Store, Spares & Loose Materials        565,361       941,544     1,100,967     1,847,926

Stock-in-trade                          98,223       100,145

Trade Debts                             93,227        87,104        92,597       163,459

Cash & Bank Balances                   130,945       223,271       369,802       100,938

Other Current Assets                   663,578     1,046,577     1,428,395     2,383,268

Total Current Assets                 1,551,334     1,499,266     1,940,059     2,664,462

Building                                             810,370       813,146     1,114,363

Plant & Machinery                                  8,020,714     8,063,596     9,740,589

Quarry Equipment                                     138,110       130,860       136,426

Total Assets                         7,321,428     7,087,608    10,428,973    18,793,412

Total Current Liabilities            1,156,620     1,188,435     1,595,499     2,649,519

Total Long Term Debt                               2,186,687     2,199,356     7,881,174

Total Non Current Liabilities        2,954,736     2,201,629     2,543,012     8,844,156

Total Liabilities                    4,111,356     3,390,064     4,138,511    11,493,675

Total Equity                         3,210,072     3,697,544     6,290,462     7,299,737

Total Non Current Assets             5,497,285     5,588,342     8,488,914    16,128,950

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PROFITABILITY                            FY'03         FY'04         FY'05         FY'06

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Gross profit margin                     15.03%        34.01%        30.95%        37.63%

Profit margin                            6.24%        14.44%        16.95%        18.55%

Return on Asset                          2.05%         6.88%         6.98%         5.64%

Return on Common Equity                  4.68%        13.18%        11.56%        14.51%

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LIQUIDITY RATIO                          FY'03         FY'04         FY'05         FY'06

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Current Ratio                             1.34          1.26          1.22          1.01

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ASSET MANAGEMENT                         FY'03         FY'04         FY'05         FY'06

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Inventory Turnover (Days)                99.34        111.09         92.37        116.51

Day Sales Outstanding (Days)             13.96          9.29          7.77         10.31

Operating cycle (Days)                  113.29        120.38        100.14        126.82

Total Asset turnover                      0.33          0.48          0.41          0.30

Sales/Equity                              0.75          0.91          0.68          0.78

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DEBT MANAGEMENT                          FY'03         FY'04         FY'05         FY'06

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Debt to Asset (%)                        56.16         47.83         39.68         61.16

Debt/Equity (Times)                       1.28          0.92          0.66          1.57

Times Interest Earned (Times)             0.78          3.54          6.29          6.14

Long Term Debt to Equity(%)              92.05         59.54         40.43        121.16

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PER SHARE                                FY'03         FY'04         FY'05         FY'06

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Earning per share                         0.83          2.70          3.26          3.38

Price earning ratio                       0.05          0.07          0.15          0.13

Dividend per share                        0.00          1.50          0.00          2.40

Book value                               17.79         20.49         23.23         24.51

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