Last week saw Pakistan Aluminium Beverages Cans (PABC), the only aluminium can-maker in the country, raise Rs4.6 billion through an initial public offering at a price of Rs49 per share, 40 percent above the floor price of Rs35 per share, establishing the bragging rights for reaching the price cap imposed by the regulator. The company sold 26 percent stake to individual and institutional investors at the PSX making the listing the second largest in the country (after Interloop) in terms of funds raised. Surely, the drinks are on Ashmore, the UK-based private equity fund that sponsored the company’s incorporation in 2017, as it exits PABC with suitable fanfare. The plan was to raise Rs3.3 billion.
The rest of Ashmore’s holdings—which stood at 51 percent—will be sold to other investors (5% at Rs30.8 to Hamida Salim of Liberty Group and 20% at Rs31.85 to Soorty Enterprises) through a private placement agreement. The send-off via IPO is a different approach and had there not been a cap on price by the SECP, Ashmore could have left with more money, going by market sentiments.
With Ashmore’s exit west, the company is expanding production capacity of cans from 700 to 950 million cans annually having already secured SBP’s generous long-term financing facility at a reduced 3 percent. The success of the IPO and Ashmore’s successful divestment is certainly a positive signal for others eyeing Pakistan as a market for rewarding investment.
But is it just excess liquidity that had investors hungry for the company’s IPO or is the horizon for the can manufacturer really that bright?
Unquestionably, the company is in a very sweet-spot at the moment—characterised by growing demand in domestic and exporting markets, long-term contracts with huge bottlers, decade-long tax holiday, protectionary import regime and no domestic competition—with few risks endangering its ongoing triumph.
The demand expectations are strongly driven by the growth in soft drinks consumption in the country as population and urbanization statistics surge. There is nothing to celebrate about a country that intends to consume substantially more sugary drinks each year compared to the last, but nevertheless, estimates suggest, the 5-year CAGR for the country compared to global average is an astonishing 7 percent compared to 2-3 percent for the latter.
Of the total carbonated drinks consumed in the country, the penetration of aluminium cans is around 3.6 percent, much lower than the global average of 19 percent and expected by the Euromonitor International to reach 5-6 percent by 2025. In an interview with BR Research, the company’s CEO Azam Sakrani (read more here, June 21, 2021) claimed that their forecasted financials are based on the assumption that the penetration would remain at 3.6 percent which dates back to the time when bottlers in Pakistan were importing cans. By virtue of this, the company’s projections may even be conservative. These underestimations predict revenue to grow at a 5-year CAGR of 18.7 percent between 2020-25, and by that measure, net profit to grow by 43 percent.
One could question why the company would choose to be conservative in its projections when it should be show-boating; after all, if not during an IPO, then when? It is a decent proposal for investors regardless.
The company has no direct competition. Compared to peers in the packaging industry, it can certainly hold its own with higher gross profit and net profit margins, given especially that the company started operations barely 3 years ago (see table). Though aluminium is more expensive than PET, compared to EcoPak, PABC’s margins are miles ahead while the cost per can sold for the company has also been declining. However, a fair comparison cannot be made here since peer companies such as Ecopak and Ghani Glass operate in multiple business segments with different demand-supply dynamics.
Prior to PABC, major bottlers used to import aluminium cans from neighbouring countries which was marred by several supply-related snags. As the CEO tells: “importing cans was a tiresome problem for beverage companies that faced numerous supply and logistic bottlenecks such as attaining bank LCs to place orders, high lead times (orders had to be made 3-4 months in advance), high freight costs, shortages during peak demand months such as summers, and having to maintain large inventory volumes (thus, incurring inventory costs) to combat supply fluctuations. These import conditions created significant challenges for bottlers to promote cans in the market”.
Once domestic manufacturing came in, bottlers such as Coca Cola and Pepsi diverted nearly all of their demand toward PABC. As it stands, PABC supplies 83 percent of its can volumes to the two giants. Meanwhile, the competition from imports is dodged with the help of government’s multi-level protections consisting of customs duties, regulatory duties, additional customs duties and additional sales tax (cumulatively about 40 percent) that make the landed cost of the imported can hike up by $40-45 per 1000 cans, originally costing $60-65.
The CEO of the company however argues that not only was the local can cheaper by 5 percent compared to the price of a fresh-off-the-boat imported can (not including duties/taxes), it is not feasible for bottlers to rely on imported cans anyway. Aside from the logistical issues, having a can manufacturer close by means bottlers can work intimately with their packaging partner on product design and functionality. Aluminium cans are superior in terms of their adaptability to changing designs and artwork and the proximity of PABC to bottlers only helps sweeten the deal.
The heavy protection from imports and the fact that importing cans may be difficult for beverage companies should pose as low barriers to entry for new investments. But PABC certainly has a leg-up. The company’s factory is located in a Special Economic Zone in Faisalabad where it enjoys a 10-year tax holiday which includes exemption from duties and taxes for the one-time import of capital goods as well as a 10-year waiver on corporate income tax. If PABC were paying the income tax levied on other companies, its current profit margin of 12 percent would come down to 9.6 percent; and its projected margin for 2025 of 31 percent would fall to 22 percent. The tax holiday certainly makes the bottom-line more attractive.
Ashmore also helped the company secure long-term contracts with Pepsi and Coca Cola for which PABC also fulfils quality standard pre-qualifications that they maintain for suppliers. In addition, PABC has a long-term contract with Novelis, a global provider of Aluminium coils to ensure steady supply of its key raw material.
To diversify its markets, the company has set roots in Afghanistan by signing on with Pepsi and Coca Cola in that country, now catering to 50 percent of the Afghan market’s can volumes. The pre-qualification with the two soft-drink makers will help PABC to explore more markets abroad, particularly regional markets in Central Asian and Bangladesh. The company has also secured a contract with a bottler in the US.
On the consumer side, the management believes that aluminium cans are increasingly chosen by beverage drinkers as they provide a singular experience by maintaining a longer shelf life, with greater ability for the aluminium material to preserve carbonation, and higher chilling factor compared to PET bottles. These are considered to be major drivers of demand in the domestic market. However, while PET bottles are resealable thereby making them very convenient for the consumer; cans are single-use.
Across the world, Aluminium is heralded as a green packaging material. The company’s prospectus to the PSX details at length a) the fact that bottlers around the world, specially Pepsi and Coca Cola, are responding to the global environmental challenges posed by increased plastics use by making commitments to use aluminium which is an infinitely recyclable material b) that the use of recycled aluminium is less energy-intensive, requiring only 8 percent of the energy needed to produce a new can; but there is suspicious silence on whether the environmental gains are actually achievable in Pakistan.
It is counterintuitive for the company to mention the high recyclability of aluminium when it has no plans to recycle the said aluminium, or even address the elephant in the room. Currently, all the aluminium cans, like PET bottles, wind up in the landfills. There is no proper waste collection (or sorting) in Pakistan so recycling is out of question and even if waste collection was happening, it wouldn’t necessarily translate to recycling as there are no aluminium recycling plants in the country. Whereas the company’s aluminium supplier Novelis is a major recycler of the materials, PABC cans are not recycled and/re-used.
When it comes to growth, therefore, the company is banking on the superior customer experience of a single-use can rather the green-ness of aluminium. And therein lies the rub. PET bottles are cheaper to make for manufacturers, and cheaper to buy for bottlers and in turn, cheaper for consumers while aluminium cans are pricier to make—currently pegged to global aluminium prices—and more expensive on the consumer side too. PET bottles—that cost less—can be re-used and re-sealed which is a major tick in consumers’ books.
If the aluminium cans were being recycled though, they would cost less. Making cans from recycled scrap compared to mined aluminium not only saves cost and energy but also reduces carbon emissions. The cans are recycled again and again without diminishing value. This creates a closed-loop business cycle. But in Pakistan, that cycle ends in the waste.
Perhaps, this is a major reason why the company intentionally wants to be conservative in its projections. There are several factors that work in the favor for traditional packaging for the Pakistani market. Pepsi and Coca Cola may have a global strategy to use more aluminium cans motivated by the material’s sustainable and circular life cycle quality but these are not relevant motivators for them in Pakistan.
As a company going public, selling a product that is held to such high regards in terms of its environmental friendliness, PABC should at least have a future outlook on recycling, which it does not. So while there will be growth in cans due to higher beverage consumption, one can’t be too sure about a PET-to-can transition.
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