Mitchells Fruit Farms Limited

Mitchells Fruit Farms Limited (PSX: MFFL) has a history that dates back to 1933. After Independence, the company’s name was changed from Indian Mildura Fruit Farms to Mitchells Fruit Farms Limited. The company went public in 1993 and was listed on the stock exchange in 1996. The principal activity of the company is manufacturing and sales of various farm and confectionary products including beverages, ketchups and sauces, preserves, read to cook and ready to eat food range etc.

Pattern of Shareholding

As of June 30, 2022, MFFL has a total of 22.875 million shares outstanding which are held by 1711 shareholders. Directors, CEO, their spouse and minor children have the highest shareholding of 61.11 percent in the company followed by local general public holding 24.6 percent shares of MFFL. NIT and ICP have a stake of 9.6 percent in the company while joint stock companies account for 4.3 percent shares. The remaining shares are held by other categories of shareholders.

Performance Trail (2018-22)

The topline of MFFL has been growing since 2018; however, the bottomline shows a net loss in all the years under consideration except 2021. It is to be noted that the net loss had been shrinking since 2018 and turned into a net profit in 2021, however, the bottomline again entered the red zone in 2022 with the highest net loss margin. The detailed performance review of each of the years under consideration is given below.

In 2019, the net revenue of MFFL surged by 22 percent year-on-year which came on the back of growth in both local and export sales volumes. Moreover, the company also raised prices to pass on the effect of rising inflation. The gross profit ascended by 72 percent year-on-year in 2019 while the GP margin climbed to 22 percent from 16 percent in 2018. Administrative expense almost stayed the same in 2019 despite inflation as the number of employees tumbled from 312 in 2018 to 279 in 2019 which pushed down the salaries expense. Marketing and distribution expense shrank by 31 percent year-on-year on account of lower salaries expense, considerably lower advertisement and promotion budget as well as distributor expense in 2019. The cost control measures resulted in MFFL posting an operating profit of Rs.11.19 million in 2019 as against the operating loss of Rs.293.65 million in 2018. OP margin stood at a skimpy 1 percent in 2019. Other income dwindled by 39 percent year-on-year in 2019 due to lower profit on the revaluation of livestock, lower exchange gain as well as no liabilities written back in 2019. Finance cost continued to enlarge and posted a 59 percent year-on-year hike on the back of higher discount rate during the year. High finance cost resulted in a net loss of Rs.80 million in 2019 which is 73 percent lower than the net loss posted by MFFL in 2018. Loss per share also plunged from Rs.37.16 in 2018 to Rs.10.16 in 2019.

In 2020, the topline could only muster a marginal 6 percent year-on-year growth. MFFL, being classified as the producer of essential items, continued its operations amidst the outbreak of COVID-19, however, tamed demand didn’t allow the company to attain robust sales volume in 2020. The increase in the prices of essential raw materials coupled with supply chain bottlenecks due to lockdowns imposed in 2020 resulted in gross profit inching up by a mere 2 percent year-on-year with GP margin shrinking to 21 percent. Administrative expenses expanded by 11 percent year-on-year in 2020 due to advisory cost incurred for undertaking an investment plan. However, distribution expense ticked down by 10 percent mainly on account of lesser salary expense as the number of human resources headcount further fell down to 253 in 2020. Moreover, there was lesser advertisement and promotion budget in 2020. Operating profit magnified by 212 percent in 2020 with a slight improvement of 100 bps in the OP margin to clock in at 2 percent. Other income nosedived by 22 percent in 2020 mainly due to lesser and lesser scrap sales as well as no profit on the sale of fixed assets during the year. Finance cost fell by 5 percent year-on-year despite the fact that discount rate was high for the most of the part of fiscal year 2020. This was the result of lower bank borrowings during 2020. MFFL posted a net loss of Rs.55.44 million in 2020 which is 31 percent lesser than the net loss registered in 2019. Loss per share ticked down to Rs.7.04 in 2020.

In 2021, MFFL’s topline expanded by 5 percent year-on-year on the back of increased sales volumes and decreased sales returns during the year. Cost economies achieved during the year enabled MFFL to pull offan 11 percent year-on-year growth in the gross profit while GP margin also slightly ticked up to 22 percent in 2021. The company was able to shrink its administrative cost by 11 percent year-on-year in 2021; however, fourfold growth in advertisement expense pushed the distribution expense up by 22 percent year-on-year during 2021. Other expense also surged by 169 percent in 2021 on the back of WWF, WPPF, and exchange loss as well as loss on disposal of biological assets in 2022. Despite tremendous growth, other expense still hovers at around 0.4 percent of sales. Operating profit tumbled by 7 percent in 2021 with an OP margin of 1 percent. What gave an incredible support to bottomline was a 65 percent year-on-year decline in finance cost in 2021. This was on the back of downward revisions in discount rate coupled with a massive reduction in borrowings as the company injected a fresh equity of Rs.750 million in 2022 through issuance of right shares which enabled it to meet its working capital requirements and pay off the outstanding debt. MFFL boasted a net profit of Rs.10.47 million in 2021 with an NP margin of 0.5 percent. EPS clocked in at Rs.0.49 in 2021. This was the first time after 2015 that MFFL posted net profit.

In 2022, the sales revenue of MFFL grew by 12.6 percent, however, global increase in the prices of commodities, Pak Rupee depreciation, higher energy cost as well as devastating floods which affected the timely procurement of raw materials inflated the cost of sales by 33 percent in 2022.Gross profit went down by 60 percent in 2022 while GP margin drastically fell to 8 percent. Massive increase in salaries and wages, advertisement and selling expense, freight expense etc resulted in a 66 percent and 76 percent rise in administrative expense and marketing expense respectively. This resulted in an operating loss of Rs.597.19 million in 2022. To make things worse, finance cost shored up by 44 percent in 2022 due to multiple raises in discount rate during the year. This resulted in a net loss of Rs.621.97 million in 2022 with a loss per share of Rs.27.19.

Recent Performance (9MFY23)

During 9MFY23, the topline of MFFL grew by 5 percent year-on-year. The cost of sales plummeted by 3 percent due to significant reduction in raw and packaging materials cost, boiler expenses and dairy expenses. Gross profit ascended by 34 percent year-on-year in 9MFY23 while GP margin climbed to 26 percent from 20 percent in 9MFY22. Significant reduction in freight and advertising expense pushed the distribution expense down by 22 percent year-on-year in 9MFY23. Admin expense also went down by 6 percent during the period under review. Provisions against doubtful debts and inventory adjustments drove the other expense to Rs.81.81 million in 9MFY23 from Rs.0.06 million in 9MFY22. Operating loss shrank by 82 percent in 9MFY23 to clock in at Rs.32.84 million. Other income grew by 100 percent on the back of excess accrued liabilities written back and profit on the disposal of fixed assets. High cost of borrowing resulted in a 117 percent rise in finance cost. The net loss shrank by 87 percent in 9MFY23 to clock in at Rs.25.16 million with a loss per share of Rs.1.10 as against a loss per share of Rs.8.44 during the same period last year.

Future Outlook

High cost of sales due to commodity super cycle as well as Pak Rupee depreciation coupled with MFFL’s inability to pass on the cost to the consumers due to declining purchasing power of consumers will keep the margins under severe pressure in the coming times. High cost of borrowing is another area of concern which will keep the bottomline strained. Product diversification, export emphasis and cost saving measures as well as tweaking the capital structure to include more equity could be the possible solutions to the problems faced by MFFL.