Cement: PIONEER CEMENT LIMITED - Analysis of Financial Statements - Financial Year 2004 - 1H Financial Year 2011

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 was incorporated on 9th February 1986 as a public limited company. Its shares are quoted on all the three stock exchanges of the country. It is part of the Noon group which holds 60% share of the company, followed by a leading brokerage house, First National Equity Limited (FNE) with 9% shareholding. Remaining shares 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 ISO14001: 2004 certified. It meets local as well as international quality standards.
PIOC produces and sells clinker and cement domestically and internationally.

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KEY FACTS

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COMPANY NAME      PIONEER CEMENT LIMITED

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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

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Recent results (1H11)
In first half of FY11 the cement industry tried to cover up last year's costs and losses. Despite the decline in volume demand in the local and international markets, the gain in prices gave a boost to the profitability of the sector. The domestic sales decreased by 8% while the export volume fell down by 17%. The total industry volume in numbers stood at 14.7 million tonnes compared to 16.6 million tonnes during the same period last year. This shows a total decline of about 11%.
Sales declined during this period mostly due to the destructive floods as well as due to the low construction activity during the winter season. The demand is expected to bounce back with the start of the reconstruction phase in the flood affected areas as well as with the onset of the spring season. Also during the same period world economies are starting to bounce back from the financial slump which resulted in high prices for most of the commodity market. This in turn was reflected with higher raw material costs for the cement industry, which resulted in small profit margins.
Major portion of the rising costs was within the electricity, raw material, transportation and packaging costs. The earthquake in China and the Australian floods led to the rise in international coal prices. Spot price went from US $96/ton in Sep 2010 to US $135/ton in January 2011. Local coal prices are also showing similar trend, going from Rs 8000 per tonne in Sep 2010 to Rs 10,000 per tonne in January 2011. Rise in competition was reflected in heavy sales discount to retailers that further decreased the profitability.
Company performance
Company's clinkers and cement production went up in the first half of FY11 due to the rise in export volumes. Clinker production stood at 577,951 tonnes compared to 518,988 tonnes during the same period last year showing an increase of about 11%. Cement production also went up from 585,498 tonnes last year to 634,691 tonnes, with an increase of about 8%.
Domestic sales declined by about 4% due to the season fluctuations and flood disaster. However on the positive side, exports volume have picked up by 90%. This was due to the rise in construction activity worldwide with the global economies bouncing back from the financial slump. Despite 11% decline in industrial sales volume, the company's sales went up by 11%, going from 585,932 tonnes last year to 628,808 tonnes for first half of FY11. Domestic sales for first half of FY11 came to 492,729 tonnes compared to 514,325 tonnes during the same period last year. Export volume went up to 136,079 tonnes compared to 71,478 tonnes last year.

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                          1H'FY11        1H'FY10

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                               (in million Rs)

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Net Sales Revenue        2393.756       1778.536

Cost of Goods sold       2154.695       1780.539

Gross Profit/(Loss)       239.061        (2.003)

Operating Profit/(Loss)   149.843      (102.133)

Net Loss Before Tax      (136.508)     (388.177)

Net Loss After Tax       (173.907)     (238.617)

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Net sales revenue for the first half of the FY11 were Rs 2.39 billion compared to Rs 1.78 billion from the same period last year. The increase in sales is mainly attributed to the increase in retention prices and partly due to volumetric increase in sales. The increase in retention prices is a combination of market phenomenon and concerted market efforts to increase sales in high retention areas closer to the plant. The advantage of improved retention prices was diminished by a 21% rise in manufacturing costs. This 21% rise is divided into 2 parts, with a 14% rise due to factors such as electricity costs, coal prices, transportation prices and other raw material prices, while the other 7% was due to the rise in production. Improved retention prices helped the company in achieving a gross profit of around 10% compared to a negative margin during the same time last year.
The company registered a loss before tax of Rs 136.5 million as compared to a loss before tax of Rs 388.2 million sustained during the comparative period last year. The net loss after the tax is Rs 173.9 million after accounting for a tax charge of Rs 37.4 million in contrast to comparative period after tax loss of Rs 238.6 million after accounting for a net tax credit of Rs 149.6 million. The company incurred an exchange loss of Rs 96 on account of devaluation of the Pakistan rupee as compared to Rs 83.4 incurred during the same period last year. Financial cost has slightly declined to Rs 190.3 million mainly on account of better fund management despite tight liquidity position due to losses. The ongoing cost control efforts and austerity drive helped in overall reduction in expenses whereby admin expenses have significantly reduced by 40%, manufacturing expenses like stores and spares reduced by 24%, repairs and maintenance by 43% and other manufacturing expenses by 12% when compared with same period last year.
Profitability
The sales figures for first of FY11 had shown improvement compared to those in the same period last year, however the higher operating costs lead to net losses at the end. Net Sales Revenue for the period stood at Rs 2393 million compared to Rs 1778 million last year, showing an improvement of 34.6%. Costs of good sold came up to Rs 2154 million compared to Rs 1780 million last year with a rise of about 21%.
Fuel and power represent around 65% of the operating costs, increased by 37.6% on account of rising energy and electricity costs. The other two major costs were packing material and raw materials. The packing material cost increased by 22% and the raw material increased by 26.3%. The company's gross profit stood at Rs 239 million compared to gross loss of Rs 2 million last year. The gross profit margin stood at 10% compared to the gross loss margin of 0.11% last year. Operating profit was Rs 149 million compared to the operating loss of Rs 102 million. Finance cost decreased by 5% on account of better financial management. In the first half of FY11, finance costs were 190 million compared to Rs 202 million during the same period last year. Loss after taxation stood at Rs 173 million compared to 238 million last year, showing a decrease of about 28%. Net Loss margin for this period stood at 7.27% compared to the 13.34% during the same period last year. The return on common equity was in a negative figure, portraying the poor profitability of the company. ROCE for this period was -4.11% compared to -5.4% last year. This shows poor return on the shareholders behalf, which was reflected in the falling volumes for the company in this period. Return on asset has shown huge improvement, going from -1.02% last year to 1.53% this year. However this was still way below the industry averages.
Liquidity
The company has displayed poor liquidity performance in the 6 months since FY10. Although total current liabilities decreased by 8.5%, current assets fell down by 26%. This huge fall has highly affected the liquidity position of the company. The major decrease in the current asset was in the store, spares parts and loose tools section which, went down by nearly 45%. Loans and advances went up by 30%, although it did not have much visible impact on the total current assets figure. The 8.5% decrease in current liabilities was backed by an 18% decrease in trade and other payables.
The current ratio for the company in December 2010 was 0.22 compared to the 0.27 last year. The liquidity position of the company has worsened for the last year and can be a real problem in the coming years. It is way below the industry average of .79. The company should take some concrete measures to deal with this issue, such as using more long-term borrowing/financing.
Asset management
Asset management of the company, similar to the other ratios analysed, saw a decline during the 6 months after FY10. Inventory turnover fell down to 21 days from 99 days in FY10. This was due to the rising sales as well as the low inventory levels. Day sales outstanding stood at 8 days compared to 3 days last year. This was due to the rise in sales revenues as well the 60% increase in trade debts. It was a little below the industry average of 10 days. Thus the company has an operating cycle of 29 days compared to 102 days in FY10.
Total asset turnover fell down from 0.38 in FY10 to 0.25 this year. This represents poor utilisation of assets in terms of sales revenue. While the sales to equity ratio went up to 1.12 from 0.90 last year.
Debt management
The debt management figures of the company have shown varied performance. The Debt to Asset ratio fell down to 0.56 from 0.58 in FY10. This was due to the fact that total liabilities fell down by a greater percentage than total assets. They fell down by 7% to Rs 5.56 billion (5.98 in FY10). While the assets fell down by 5% to Rs 9.79 billion (Rs 10.32 billion in FY10). Debt to equity ratio fell down to 2.6 from 2.7 in FY10. This represent highly leveraged financing by the company, which can be risky. Long-term to equity ratio did not see much changes, going from 0.49 in FY10 to 0.50 this year. This marginal rise in was attributed to the small rise in long-term liabilities.
The company was also able to successfully negotiate a financial restructuring package, at improved pricing and repayment terms, with major local lender including National Bank of Pakistan and Bank of Punjab. Certain formalities are due before this revised agreement comes through. In addition efforts are in place to restructure foreign currency debt which shall help reduce financial cost and eliminate exchange loss on depreciation of Pak rupee.
Future prospects
The local cement demand is likely to pick up in the next two quarters on account of expected reconstruction and renovation in the flood-affected areas. The provincial governments might also start pushing up infrastructure projects in these areas from next year. We predict Rs 200 to Rs 300 billion spending in the coming 5 years, which may provide a huge relief to the cement industry.
FY10 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 neighbouring countries the local cement industry was unable to capitalise 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 (FY09: 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 (FY09: 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 (FY'09: 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 POIC 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 analysed, 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 that 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 macroeconomic indicators and the law and order situation. According to the Federal Budget 2010-11, Rs 663 billion had been allocated to Public Sector Development Programme (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 impetus 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 utilisation 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].