Foods: UNILEVER PAKISTAN FOODS LIMITED - Analysis of Financial Statements Financial Year 2005 - Financial Year 2007
Unilever Pakistan Foods Limited, formerly Rafhan Best Foods Limited (RBL) is one of the leading producers of consumer food products in the country. The spectrum of its product range contains some leading brands like Rafhan, Knorr, Energile, Glaxose-D, Bestfoods etc.
The majority of its shares are held by the Bestfoods, USA, which is engaged in producing a vast range of food products in 63 countries across the world. It was incorporated in Pakistan 1997 under the name 'Rafhan Best Foods Limited'. It is listed on Karachi and Lahore stock exchanges.
On 24 April 2007, the company was renamed Unilever Pakistan Foods Limited, after Unilever acquired the Bestfoods. In Pakistan, Unilever made its debut in 1948, and now it is one of the most prominent multinationals in the country operating through two affiliated companies viz. Unilever Pakistan and Unilever Pakistan Foods.
The two public listed limited companies have 5 wholly-owned and 7 third party manufacturing sites in the country and around 1,500 employees on their payroll and many thousands indirectly. Currently, Unilever Foods Pakistan has 5 major brands: Knorr, Rafhan, Energile, Glaxose-D and Unilever Food Solutions.
FINANCIAL PERFORMANCE (DEC '03-DEC'07) Overall, the company's sales grew by 22.53% in 2007 as it continued to build the growth momentum starting in 2004 after incurring a loss in 2003. Since 2004, the company grew at a rate of 24.97% CAGR. Good marketing strategies and the company's bold venture into new products like Knorr meal maker, Rafhan Magic Jelly and Energile ready to drink yielded positive results. Significant investment made in Pakistani factory to overcome the capacity constraints.
The impressive growth in sales was however mitigated by rising COGS, due to the rising food inflation and the competitive pricing, thereby eroding the gross margins. Operating profit growth was 20.5% compared to last year. Gross profit margin showed more of a steady performance since FY05. The company incurred a loss in 2003, but was able to recover till recent times with a CAGR of 89.75%. The net margin growth in 2007 was 19.42% (2006: 91.09%). ROA showed an incline as the growth in profits was much higher than the growth in assets. In FY07 equity shows a big drop as the company paid dividends of Rs 75 and Rs 25 per share, causing a big drop in its reserves, and spiking the FY07 ROE.
The liquidity ratios have started to show a decline since FY05, due to massive amount of short term borrowings taken by the company in 2006 and 2007. The markup rates changed during the year from 9.62% to 10.14% per annum (2006: 9.40% to 11.78% per annum). These short term borrowings are causing the company's current liabilities to surge and the laggard growth in current assets have caused a decline in company's ability to pay off its short-term obligations, as shown in the accounts of 2007. The quick ratio, a better measure of liquidity showed a steady trend from FY03 to FY06 and then plunged downward, depicting that like the current assets, quick assets growth also lagged behind that of current liabilities.
Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. Unilever's inventory turnover was slightly lowered in 2005 but since then has been on the rise. This shows that Unilever's efficiency in turning its inventory to sales is on the decline, but still it is in reasonable trend. The prime reason is due to the growth in sales being more than the growth in inventories.
Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. DSO has been on the decline since 2003. It has shown a reduction from 36 days to 12 days in 2007.
This shows that Unilever has a firm policy for debtors, but it should also be considered that the policy has not yet affected the sales of the company. The operating cycle of the company is seen following a similar trend to that of the inventory turnover days, as the declining DSO is offset by increasing to inventory turnover days.
TATO of Unilever Foods have been on a steady inclining trend over the years, reflecting that the assets and sales are growing at a steady rate and the growth of sales is higher than the growth of assets. This shows that the company is responding well with the sales in terms of asset management.
Sales/equity has declined during 2004 due to lower sales, but since then have been on a steady rise and managed accordingly. The sharp incline in FY07 has been due to low equity caused by the distribution of dividends in 2007.
Regarding debt management, both debt to equity and debt to assets ratios are following similar trend. From 2003 to 2005 they were showing a declining trend, where as since 2005 to 2007, they are showing more of a rising trend, with D/E showing a more pronounced increase in FY07 due to a decrease in equity. The company managed to keep the liabilities down till 2005. The increase in liabilities, particularly in short term borrowings, has been the cause for the upward march in D/E and D/A ratios from 2005 onwards.
The long term debt/equity ratio has been almost near bottom at a very steady rate in the years. The TIE ratio for Unilever Foods that showed a rising trend from 2003 with a spike in 2006, nose-dived in 2007. This was due to the increase in markup costs on short term borrowings, resulting in a big increase in financial costs (2006: Rs 4345 vis-a-vis 2007: Rs 8710).
More than 100% increase in the short-term liabilities led to this increase in financial charges. Also, the increase in EBIT was less for FY07 than for previous years (2006: 76.31% compared to 2007: 20.49%).
The EPS has been on an upward march since 2003. After the loss faced by the company in 2003, it has not lowered its EPS yet. Any change in EPS is caused by the profits earned by the company as number of shares has been the same for 5 years. The increase in FY07 was less than the previous years because the increase in profits was less comparatively.
The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). The P/E for Unilever Foods have been on the downslide from 2004 to 2006 as the growth in EPS has been much higher than the share price.
The year end market prices have been on the increase over the five year period, with 2007 showing major increases. In 2007 we observe that the year-end market price of the company's share has been much higher than previous years (2006: Rs 414 to 2007: Rs 921), causing the increase in P/E multiple to 36.5x.
Since 2003 to 2006 the company's book value has been almost steady, declining slightly in 2004 and then rising till 2006. The changes in book value are caused by the changes in equity of the company as the no. of shares outstanding is the same throughout. The nose-dive in 2007 is caused by the decrease in equity on the back of decrease in reserves of the company.
The DPS has also shown a steady rising trend from 2004 to 2006 (dividend were not given in 2003 due to losses), followed by an extremely healthy dividend of Rs 95/share in 2007, the major beneficiary of which would be its associated companies and undertakings followed by the individual shareholders of the company.
FUTURE OUTLOOK Pakistan's economy and its current growth have the potential to attract business from both local and international levels. This is especially true for FMCGs, with rising incomes of the population and changing lifestyles of the people. This is both lucrative for the existing companies as well a threatening as this will increase competition in form of new businesses.
However the current food inflation in the country will force the consumers to choose carefully among products and will make them spend on products that deliver quality as well as reasonable prices. This would put more pressure on the company's margins and add competition to deliver better quality at cheaper prices.
Another major concern to Unilever Foods is of increasing markup rates that it is currently facing for past two years as they are causing some troubles in managing. The company needs to effectively manage its short term borrowings at its earliest. Keeping in view, Unilever's strong competitive edge of continuous innovation, delivering cost advantages and deep local roots, one hopes that it will be able to reflect positively on this recently acquired company.
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Unilever Pakistan Foods Limited - Financial
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Balance Sheet (PKR mn) 2003 2004 2005 2006 2007
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Property, plant and equipment 152,516 117,971 103,0 102,3 196,3
Other non-current assets 204,809 216,737 212,8 187,1 197,7
Inventories 279,8 378,0
Trade debts 64, 88,
Cash and cash equivalents
Current assets 641,991 400,560 426,2 597,0 552,4
Total assets 999,316 735,268 742,2 886,4 946,5
Ordinary share capital 61,57 61,57 61, 61, 61,
Preference share capital
Reserves 442,470 433,213 463,8 497,8 137,4
Total equity 504,046 494,789 525,4 559,4 198,9
Surplus on revaluation of fixed asset
Non-current liabilities 14,98 8,1 8 12, 13,
Current liabilities 480,286 232,355 208,5 314,3 733,6
Total liabilities 495,270 240,479 216,7 326,9 747,5
Total equity and liabilities 999,316 735,268 742,2 886,4 946,5
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Income Statement (PKR mn) 2003 2004 2005 2006 2007
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Net sales 1,556,623 1,217,507 1,489,952 1,939,515 2,376,408
COGS 1,127,273 874,068 964,296 1,208,264 1,488,073
Gross profit 429,350 343,439 525,656 731,251 888,335
Operating profit / EBIT -5,290 42,540 167,017 294,461 354,784
Finance Cost 16,278 5,794 6,111 4,345 8,710
Profit before tax -21,568 36,746 160,906 290,116 346,074
Taxation -4,250 15,215 62,536 102,137 121,582
Profit after tax -17,318 21,531 98,370 187,979 224,492
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PROFITABILITY RATIOS 2003 2004 2005 2006 2007
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Profit Margin -1.11% 1.77% 6.60% 9.69% 9.45%
Gross profit margin 27.58% 28.21% 35.28% 37.70% 37.38%
Return on Assets -2.16% 5.00% 21.68% 32.73% 36.56%
Return on Equity -3.44% 4.35% 18.72% 33.60% 112.82%
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LIQUIDITY RATIOS 2003 2004 2005 2006 2007
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Quick Ratio 1.00 1.00 1.00 1.01 0.24
Current Ratio 1.34 1.72 2.04 1.90 0.75
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ASSET MANAGEMENT RATIOS 2003 2004 2005 2006 2007
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Inventory Turnover(Days) 67.00 86.00 60.00 65.00 81.00
Day Sales Outstanding (Days) 36.00 27.00 17.00 13.00 12.00
Operating cycle (Days) 103.00 113.00 77.00 78.00 93.00
Total Asset Turnover 1.56 1.66 2.01 2.19 2.51
Sales/Equity 3.09 2.46 2.84 3.47 11.94
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DEBT MANAGEMENT RATIOS 2003 2004 2005 2006 2007
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Debt to Asset 0.50 0.33 0.29 0.37 0.79
Debt to Equity Ratio 0.98 0.49 0.41 0.58 3.76
Long Term Debt to Equity(%) 0.03 0.02 0.02 0.02 0.07
Times Interest Earned -0.32 7.34 27.33 67.77 40.73
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MARKET RATIOS 2003 2004 2005 2006 2007
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Earning per share -2.81 3.50 15.97 30.53 36.46
Price/Earnings Ratio -87.12 82.94 21.91 16.18 36.35
Dividend per share 0.00 10.00 11.00 25.00 94.99
Book value per share 81.85 80.35 85.32 90.85 32.31
No of Shares issued 6158000 6158000 6158000 6158000 6158000
Market prices(Year End) 245.00 290.00 350.00 494.00 1325.00
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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