Unity Foods Results Review

Company Overview

Unity Foods Limited was incorporated in Pakistan in 1991 as a Private Limited Company and subsequently converted into a Public Limited Company on June 16, 1991. Shares of the Company have been listed in Pakistan Stock Exchange since February 01, 1994. Previously the company operated in textile sector under the name of Taha Spinning Limited. Later due to operating losses and financial problems, that business was closed down and company was revived under the name of Unity Foods with principal business activity of the company having been shifted from yarn manufacturing to edible oil extraction, refining and related businesses.

According to 2020 Annual report, major shareholders in the company were general public holding 46.48% of shares; directors, chief executive and their families holding 28.37% of shares and Unity Wilmar Agro (Pvt.) Limited holding 11.01% of shares. Modarabas and mutual funds hold another 5.17% of shares.

The company overall appears to be in expansion phase. It acquired 69% stake in Sunridge Foods (Pvt.) Ltd. in 2020 apart from carrying out other capital expenditures. Despite this, long term financing is almost nonexistent. Paid up Capital however, has seen gradual increase ever since company started its operations as Unity Foods in 2018 indicating equity financing being utilized to support expansion.

Historical Results Review

Property plant and equipment has increased steadily as is expected from an expanding company. Most of this expansion has been financed through internal sources and issuing right shares resulting in increase in paid up capital. Paid up capital was increased further in September 2020 by almost Rs. 4.5 billion, which is reflected in quarterly results for 2021 but not in FY 2020 results.

Operating Cash flow was negative in 2018 and 2019 primarily due to investment in working capital but became positive in 2020. This was achieved primarily by regulating cash through increase in trade payables, which increased by almost 393% in FY 2020 and made up almost 68% of company’s current liabilities.

On Profit & Loss side, company’s gross profit and operating profit margins declined in 2020 despite net sales, gross profit and operating profit going up in monetary terms. This decrease in margins was primarily due to crash in product prices in COVID-19 economy.

The company’s loan structure is primarily made up of short term loans. Short term loans have increased with company’s working capital requirements. This increase in short term loans has brought with it a corresponding increase in interest cost. However, it should be noted that company is still in expansion phase after starting operations in 2018 and therefore, this increase in short term loans is to be expected as company invests in inventory levels and trade receivables to boost sales and market presence. Company life cycle theory dictates that reliance on short term loans should decrease in the future as company’s operations come into stride and company starts to rely more on cash generated from operations to finance working capital. This scenario needs to be monitored by any potential investor in coming annual results. At present, short term borrowings make up almost 30% of current liabilities while current ratio in 2020 was maintained at 1.17.

Latest Results Review

As it can be seen, the company was able to increase its net sales in 1HY of 2021 by 160% on YOY basis. Gross Profit also increased by 126%. However, GP margin declined by 13% whereas NP margin went up by 56%. This overall resulted in an increase in EPS of 197% on YOY basis despite an increase in paid up capital in 2021. A review of director’s report for 1Q 2021 indicates that company was also nearing commencement of its operations to soap and related products, which may lead to higher revenue in the future.

Overall the company seems to be financially and operationally sound. However, it needs to be seen if company can control its levels of trade receivable and trade payables as it solidifies market position and can decrease its reliance on short term loans by generating enough cash from operations to finance its working capital requirements.