PIONEER CEMENT LIMITED - Analysis of Financial Statements Financial Year 2004- Financial Year 2010

Pioneer Cement Limited (PIOC) project started in November 1994 when its first unit commenced production. The second unit was commissioned in January 2006. PIOC is a medium sized company in the cement sector which began its operations with an installed capacity of 2000 tons per day clinker. The company underwent many expansion plans due to which its capacity was increased to 2350 tons per day in 2005 and in 2006 a new production line of 4300 tons per day clinker capacity started production.
Pioneer Cement Limited was incorporated on 9th February 1986 as a public limited company. Presently, its shares are quoted on all the three stock exchanges of the country. It is part of the Noon Group which holds the majority stake of 60% in the company, followed by a leading brokerage house called First National Equity Limited (FNE) with 9% shareholding. The rest of the shareholding is held by financial institutions, insurance companies and general public.
PIOC is involved in the manufacturing and marketing of cement. Its products include ordinary portland cement, suitable for concrete construction and sulphate resistant cement, ideal for construction in or near sea. The company's sulphate resistant cement has less than 2.0 C3A content whereas the maximum limit of C3A content set by British and Pakistan standards is 3.5. Thus, the company's sulphate resistant cement is highly preferred in important projects such as the Thal Greater Canal project. PIOC's products are sold under the brand name of 'Pioneer Cement' and it was the winner of "Brand of the Year Awards 2006" in cement sector in the national category. The company's state of the art European (FLS) plant is equipped such that it allows stringent quality control measures. PIOC is ISO 9001:2000 QMS and ISO: 14001:2004 certified. It meets local as well as international quality standards.
PIOC produces and sells clinker and cement domestically and internationally.

=========================================

KEY FACTS

=========================================

COMPANY NAME       PIONEER CEMENT LIMITED

=========================================

TICKER                               PIOC

LOSS AFTER TAX                  590 M PKR

SHARE PRICE ( JUNE 30, 2010)     6.37 PKR

SALES (FY 10)                    5.3b PKR

TOTAL EQUITY                     2.2b PKR

=========================================

INDUSTRY OVERVIEW
The year under review has been one of the worst in the history for the local cement industry in terms of prices and profitability. The ongoing recession coupled with capacity expansions in the Pakistani cement sector have created a situation of excess supply and a free fall in prices due to a severe price war. The total cement production capacity of the industry stands at 45 million tons by end of FY10, with capacity utilization of the industry estimated at 68%. The fierce price war has drastically eroded retention prices on one hand, while on the other hand input prices have also increased in general, particularly electricity charges that have increased by 24%.
On the backdrop of declining prices, overall cement volumetric growth registered an increase of 9.3% to stand at 34.2 million tons. The increase in the domestic dispatches of the industry is 14.63 % and the decrease in exports is 0.89%. The increase is small compared to the decline in prices, which was 27.53% in the local market and a 12.90% drop internationally. While exports increased considerably during FY09, due to expanding capacity of neighboring countries the local cement industry was unable to capitalize the market and only a marginal rise was seen during FY10.
Production and sales
Cement production for the year stood at 1,266,968 tons, a rise of 23% over last year (FY'09: 1,033,587 tons), mainly on account of increase in local cement demand. Capacity utilization, was however only 58%, due to the recent increase in production capacity. Despite the increase in volume of cement produced and sold, net sales revenue declined by 22.6%, to Rs 3.87 billion (FY'09: Rs 5.00 billion). This decline is attributed to the price war in the sector which caused cement companies to slash prices and sacrifice revenue in return for higher sales volume, and is being experienced by all cement companies. In terms of volume, cement sales of POIC rose by 9%, a small rise against the decline in revenue.
During FY10, exports contributed 17% of the total cement dispatches of the company, while local sales contributed 84%. Export revenue stood at Rs 680 million, (FY09: Rs 1.04 billion), a decline of 34.8%; while revenue from local sales stood at Rs 4.65 billion (FY09: Rs 5.64 billion), a decline of 17.54%. In terms of volume, exports declined by 21.2%, largely a result of increased capacity of neighboring countries. Also, during FY09 PIOC was able to export a considerable amount of clinker which was not feasible this year due to decline in clinker prices internationally.
Profitability
The cement sector is experiencing growth in cement dispatches but at the same time companies are facing declining profitability. Sales Revenue is on a decline, with cost of production on a steady rise. Fuel costs, which form over 60% of production costs, stood at Rs 2.44 million (FY09: Rs 2.42 million), while costs of packaging material which comprise 10% of costs, rose by 21%. These costs however, have risen in a smaller proportion as compared to the increase in sales volume, as a result of cost control in production processes by the company. The decline in profitability resulted in the company experiencing a loss of Rs 590 million for the year (Profit FY09: Rs 36 million). The decline of Rs 1.12 billion in net sales resulted in production costs rising above revenue, leading to an overall loss.
Distribution costs declined by 56%, standing at Rs 158 million (FY09: Rs 360 million), while administrative expenses declined by 20%. Finance charges and other expenses similarly declined by 13% and 40% respectively. These declining costs however were not sufficient to maintain profitability and the company witnessed a loss before tax of Rs 859 million. As a result of a deferred tax credit, the final figure of loss after tax stood at Rs 590 million.
Profitability ratios of the company, like other cement companies are on a decline. Gross profit margin and net profit margin are both negative, standing at -2.1% and -15.3% respectively. Similarly ROA and ROE have witnessed sharp declines, with ROA dropping from 0.35% to -5.7%; and ROE dropping from 1.5% to -26.6%. While profitability of the sector is on a decline as a whole, PIOC's figures stand well below the industry average. The industry average gross profit margin stands at 15.2% while the profit margin stands at 1.4%.
Liquidity
The liquidity position of the company has been deteriorating over the years due to substantial rise in the current liabilities. PIOC felt a liquidity crunch, like many other companies in the cement sector due to the price war and losses caused by that in FY08 and again in FY09. The current liabilities of PIOC have increased to Rs 4.91 billion during FY10 (FY09: Rs 3.49 billion), backed mainly by increased short term borrowings by the company. Trade and other payables rose by approximately Rs 300 million, while short-term morabaha showed a rise of Rs 400 million. Additionally, current maturities of long-term loans, the largest portion of current liabilities rose by 24%, to Rs 257 billion (FY09: Rs 2.07 billion).
Current assets, being much less than the current liabilities, stood at Rs 1.33 billion at the end of FY10 (FY09: Rs 1.00 billion). The composition of current assets changed such that the most liquid asset, cash and bank balances, declined by 65%, standing at Rs 55.8 million (FY09: Rs 159 million). This is a negative sign as it shows that the ability of the company to handle day to day operations is on the decline. Stores, spares and loose tools, which make up 70% of current assets, showed a rise of 84%, standing at Rs 933 million.
The current ratio of PIOC presently stands at 0.27, with a decline of 7% over FY09 (FY09: 0.29). The industry average stands at 0.67, with PIOC being the only company with a current ratio below 0.5. Thus, while the overall industry's position is not ideal, it is much better than the position of PIOC.
Asset management
Asset management of the company, similar to the other ratios analyzed, saw a decline during FY10. Inventory Turnover rose from 47 days in FY09 to 99 days during FY10, largely a result of declining sales over the year. Adding to the effect of declining sales was the rise in inventory, mainly due to an accumulation of coal which is used in the production process. Days Sales Outstanding remained constant at 3 days, which is considerably lesser than the industry average which is 6 days. The companies operating cycle for FY10 thus stood at 102 days, as compared to 50 days during FY09. While this sharp increase in the Operating Cycle reflects negatively on the company's performance, it is similar to the industry average which is 97 days. This shows that PIOC was previously performing extremely well in terms of Asset Management, and its performance is now similar to the rest of the industry.
Total Asset Turnover and Sales/Equity similarly witnessed declines, albeit much smaller. Total Asset Turnover fell from 0.48 during FY09 to 0.38 during FY10. This is entirely due to the decline in sales, as total assets have remained relatively stable over the year. Sales/Equity fell from 1.1 during FY09 to 0.9 during FY10, again due to the decline in sales.
Debt management
Debt management of PIOC showed moderate deterioration, with rising short and long-term debt. Debt to Assets rose slightly, standing at 0.58 (FY09: 0.56). This is due to the small rise in liabilities, with assets remaining constant. Total liabilities rose by almost 4%, standing at Rs 5.99 billion (FY09: Rs 5.77 billion). Debt to equity rose from 2.40 at the end of FY09 to 2.70 at the end of FY10; attributed to declining equity and rising liabilities. PIOC is seen to be highly leveraged when compared with the industry, which has an industry average debt to equity ratio of 1.34, which is half of the company's figure. Long term debt to equity however showed slight improvement, dropping from 0.95 at the end of FY09 to 0.49 at the end of FY10. Long-term liabilities declined over the year by almost 53%, standing at Rs 1.01 billion (FY09: Rs 2.28 billion). Equity declined by 5.3%, at Rs 4.34 billion, in spite of an increase in the number of shares outstanding. The decline can be attributed to the sharp drop in reserves, a result of the loss faced by the company in FY10.
During the year, PIOC took steps to restructure its debt, as a result of which the long term debt to equity position has shown improvement. The company issued National Bank of Pakistan 23,222,813 ordinary shares with a face value of Rs 10 per share, at the rate of Rs 15 per share, against an outstanding loan that the company was unable to pay off during the period. This enabled the long-term liabilities to decline. The shares were given at a rate much higher than the market price which is Rs 6.37 per share. Despite this, total debt to equity deteriorated due to liquidity problems and increased short-term borrowing.
While finance costs of the company have declined over the period, due to the company's operating loss the TIE ratio has plummeted. From 2.00 at the end of FY09, the TIE ratio has fallen to -0.76; a decline of 138%. This figure is well below the industry average which stands at 4.35.
Market value
Market value of PIOC is seen to be declining steadily with time, with the share price dropping to Rs 6.37 per share by the end of FY10 (FY09: Rs 13.58). The stock has a beta of 0.35, meaning that it has provides a much smaller return in proportion to the market. This also means the stock has low risk and may provide risk-averse investors with a stable investment.
Earnings per Share stood at (Rs 2.87), reflecting the loss faced by the company (FY09: Rs 0.18). The company's EPS stands well below the industry average which is Rs 2 per share. The Price-Earnings Ratio fell to -2.22 at the end of FY10, due to both the fall in market price and the fall in EPS. Book Value experienced a reasonable decline, falling from 12.03 at the end of FY09 to 9.96 at the end of FY10. This is due to the decline in equity and the increase in number of shares outstanding. Like other cement manufacturers, PIOC was unable to provide shareholders with a dividend at the end of the year.
Future outlook
The prospects of the local cement industry are linked to improvements in the economy, especially macro-economic indicators and the law and order situation. According to the Federal Budget 2010-11, Rs 663 billion had been allocated to public sector development program (PSDP). However, this amount may be slashed by 50% in the aftermath of the floods, as resources are limited. On flip side, these funds would ultimately divert to rebuilding of houses and infrastructures that would balance out the cement demand as the damage to housing and infrastructures have been enormous. The international agencies and world community in general are also expected to provide funds for reconstruction activities. Similarly construction of small and medium size dams as well as army operations in flood affected areas will provide the required imputes to the ailing cement industry. The increased demand however will not make an impact until the second half of FY11.
Until sales increase, PIOC is looking to cut costs so as to regain its profitability. The company is taking measures to bring down fuel and electricity costs and has started using alternate fuel and is planning to install waste heat recovery project for further reduction in production cost. Additionally, the management is pursuing optimum utilization of plant with cost effective measures for sustained operations. All these measures along with financial restructuring provide a promising future for the company.
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].
Copyright Business Recorder, 2010