Maple Leaf Cement started operations as a private company in 1992 when it was acquired by the Kohinoor Maple Leaf Group. Based in Lahore, the Company has since positioned itself as a prominent cement manufacturer of the country with a diverse customer base.
Maple Leaf Cement Factory Limited (MLCFL) owns and operates three production lines for grey and three production lines for white cement. The plants are located at Daudkhel District Mianwali. It is the largest producer of white cement in the country with 80 percent of market share and total annual clinker capacity of the Company is recorded at 3,690,000 tons.
Profitability
Leverage issues have been plaguing the Company's profitability since long. During 1QFY12, though the Company's production at 636,270 tonnes was down by over 13 percent versus 1QFY11, net sales improved by about 15 percent, driven primarily by improved sale prices during the quarter. This was obvious in a year-on-year improvement of 9 percentage points in the gross margins of the Company for July-November FY12.
Further, the Company's selling and distribution expenses also slumped despite the rise in sales. This is plausibly attributable to a reduction in export sales, which usually warrant high distribution and transport costs. Export sales have been depressed this fiscal year as well as in FY11 because of price pressures arising out of excess capacities in regional markets rendering exports unattractive.
It is important to highlight here that Maple Leaf is a northern player in the cement sector, and is deprived of the advantage to southern players of having cheaper modes of transport via sea.
Overall, reduction in distribution and selling expenses turned around the operating profit of the Company, which was in the reds in 1QFY11, but turned to a positive Rs 390 million for the same period in FY12.
However, finance costs are the real Achilles heel of the Company, eroding on any operating gains the highly leveraged company could boast of. Since FY09, the Company's finance costs have been over 15 percent of net sales for all the fiscal years and were a whopping 18 percent of the net sales in 1QFY12.
But, thanks to the improved operating results for 1QFY12, the loss this quarter was Rs 228 million, considerably less than Rs 619 million recorded for the same period of last year.
Leverage
Maple Leaf Cement's leverage position has put it under the radar of rating agencies. The company had taken up immense debt for expanding cement production capacity, putting the financial health of the Company in jeopardy. Since FY10, the debt-to-equity ratio has been fairly high at approximately 2.0.
In 1HFY09, the company tried negotiating with lenders regarding restructuring their debt, but these did not materialise, resulting in PACRA downgrading Maple's Sukuk issue of Rs 8 billion from BBB to D.
When the Company did succeed in getting a majority of its long-term loans' restructure in FY10, with the sponsors-the Kohinoor Group-even injecting Rs 01 billion as 'quasi-equity' interest-free loan into the Company, the Company's credit rating was revised to BB.
However, rising energy costs, poor economic conditions leading to dwindling cement demand, together with interest rate spikes witnessed in most of FY11 struck to take a toll on the Company's ability to service its debt obligation. The capacity expansion for which the company took these pains was unable to see the light of the day in such grave economic conditions.
"Just when the Company completed its expansion projects, increasing production to 12,000 tons per day, demand for cement in the local market nose-dived," said an article by BR Research in July last year.
The Company was unable to honour the first mark-up payment of its restructured Sukuk, which was due on September 03, 2011, putting it back under the watchdog PACRA, to the extent that the agency in its latest report on Maple Leaf said: "The delay in meeting the financial obligations by Maple Leaf is tantamount to default."
Unsurprisingly, the Company was downgraded back to a D.
According to PACRA, Maple Leaf is in the process of negotiating further restructuring agreements with favourable lenders; and the improvement in operating margins at the back of improving sale prices of cement may help them in this end.
However, in order to turn the losses into profits, the Company's sales volumes need also be pumped up to improve, not only its profitability, but also cash flows and ability to service debt obligations.
Liquidity
With a company as cash-strapped as Maple Leaf, liquidity constraints come as no surprise. The Company's net working capital has been in the negative since FY08, standing at a negative Rs 5.3 billion by 1QFY12. The current ratio, on the other hand, has lingered around 0.5 during the last three fiscal years deteriorating from a 0.8 seen in FY08.
On the cash flow side, in 1QFY12, cash and cash equivalents saw a net decrease of Rs 176 billion, led, expectedly, by high outflows from financing activities.
Investment and valuation
Unsurprisingly, Maple Leaf Cement has not paid any dividend to its investors in the last three fiscal years and is being traded below par at the KSE at the moment.
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Maple Leaf Cement - key performance indicators
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1QFY12 FY11 FY10 FY09
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Profitability
Net Sales Rs in mn 3,356 13,073 13,631 15,251
Gross profit margin % 20 17 22 32
Operating margin % 12 4.5 -4 16
Net profit margin % -7 -14 -19 -6
Finance cost Rs in mn 610 2,166 2,059 3,400
Assets and liabilities
Current assets Rs in mn 4,865 5,414 5,003 5,215
Current liabilities Rs in mn 10,171 10,368 9,349 9,963
Net working capital Rs in mn -5,306 -4,954 -4,346 -4,748
Non-current liabilities Rs in mn 14,252 -14,640 -11,612 -8,980
Debt:equity ratio - 1.56 2.23 1.33
Current ratio 0.48 0.52 0.54 0.52
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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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