Shezan International Limited

Shezan International Limited (PSX: SHEZ) is a public limited company incorporated in Pakistan. SHEZ started its operations in 1964. The principal activity of the company is the manufacturing, trade and sale of juices, jams, pickles, ketchups etc. which are based upon or derived from fruits and vegetables.

Pattern of Shareholding

As of June 30, 2023, SHEZ has a total of 9.663 million shares outstanding which are held by 824 shareholders. Local general public has the highest stake of 41.86 percent in the company. This category is followed by the company’s directors, CEO, their spouse and minor children collectively holding 24.25 percent shares. Around 19.93 percent shares of the company are held by NIT & ICP while Modarabas & Mutual funds account for 7.4 percent shares. Pension funds and joint stock companies own 3.07 percent and 2.16 percent shares respectively. The remaining ownership of SHEZ is divided among other categories of shareholders.

Financial Performance (2018-23)

Since 2018, SHEZ’s topline plunged twice i.e. in 2020 and 2021. Conversely, its bottomline has demonstrated positive growth only once i.e. in 2021. SHEZ’s margins rode a downhill journey until 2020, then rebounded in 2021. In 2022, while gross margin posted a marginal uptick, operating and net margins marched down. In 2023, gross and operating margins showed improvement while net margin continued to tumble (see the graph of profitability ratios). The detailed performance review highlighting the underlying reasons for the ups and downs in each of the years under consideration is given below.

In 2019, SHEZ’s topline grew by a marginal 3 percent year-on-year. During the year, food and beverages sector posted a year-on-year decline of 4.7 percent on account of escalating macroeconomic imbalances such as hike in global commodity prices particularly POL products, elevated energy tariffs, Pak Rupee depreciation and high discount rate. Moreover, as a huge chunk of demand was met through imports, local players couldn’t rise. In 2019, SHEZ rebranded its juices segment with a new brand name of “Happy Farms”. The company also introduced new packing line for its 1000 ml juice segment. Among all the categories SHEZ deals in, jams and ketchups posted the highest fall in its capacity utilization which stood at 43 percent in 2019 versus 57 percent in 2018. Cost of sales spiked by 14 percent year-on-year in 2019 mainly on account of higher prices of sugar, pulp, raw and packaging materials and utilities. Gross profit shrank by 27 percent year-on-year in 2019 culminating into a GP margin of 20 percent versus 28 percent in 2018. Administrative expense inched up by 2 percent year-on-year in 2019, however, curtailed advertising and promotion budget allocated for the year and streamlined freight charges on account of low sales volume pushed the distribution expense down by 11 percent year-on-year in 2019. Net other expense slid by 84 percent year-on-year in 2019 due to lesser product spoilage, lesser provisioning as well as sale of scrap. Despite a check on expenses, operating expense slumped by 58 percent year-on-year in 2019, translating into an OP margin of 2.9 percent versus 7 percent in 2018. Finance cost magnified by 74 percent year-on-year in 2019. This was on account of higher discount rate coupled with long-term loan obtained during the year. This drove SHEZ’s gearing ratio from 15 percent in 2018 to 23 percent n 2019. Net profit slumped by 71 percent year-on-year in 2019 to clock in at Rs.113.07 million with an EPS of Rs.12.87 versus Rs.44.94 in 2018. NP margin also ticked down from 5.3 percent in 2018 to 1.5 percent in 2019.

Followed by the skimpy sales growth of 2019, came the two years of topline slide. In 2020, SHEZ’s topline nosedived by 5 percent year-on-year. The primary reason was the country-wide lockdown on account of COVID-19 which halted the economic activity in the 4QFY20. The shutdown of HORECA industry coupled with the closure of offices, educational institutions, recreational places malls etc put a severe dent on the demand of the company’s products. Moreover, the imposition of 5 percent FED on juices, syrups and squashes in the federal budget of 2019-20 further watered down SHEZ’s net sales in 2019. Despite lower sales volume and thinner net sales, cost of sales inched up by 1 percent year-on-year due to high inflation, elevated prices of raw and packaging materials as well as spiked utility charges. Gross profit further weakened by 28 percent year-on-year, translating into a GP margin of 15.5 percent in 2020. Distribution and administrative expense measured down by 15 percent and 3 percent respectively. This was due to a drop in the HR count from 303 in 2019 to 289 in 2020 coupled with rationalized advertising and promotion outlay as well as lower freight cost due to abridged volumes. Net other expense magnified by 112 percent in 2020 as SHEZ did high provisioning for ECL and made lower scrap sales during the year. The company made an operating loss of Rs.95.68 million in 2020. The performance was further smashed by a steep 204 percent hike in finance cost as the company obtained greater amount of short-term loans to meet working capital requirements in 2020. SHEZ’s gearing ratio further surged to 35 percent in 2020. The company posted a net loss of Rs.235.78 million in 2020 with a loss per share of Rs.26.84.

In 2021, SHEZ’s topline posted another 10 percent drop. While export sales demonstrated encouraging growth on account of 45 percent year-on-year in 2020 on account of robust international sales of cooked food range. Juice packs, bottled juices, squashes and ketchups mainly to the Middle East and Europe markets. However, it was offset by lackluster performance in the local market on account of lockdown. Gross profit grew by 17 percent year-on-year in 2021 due to price rationalization and cost control measures implemented during the year. GP margin was recorded at 21.2 percent in 2021. Distribution and administrative expense plummeted by 4 percent and 15 percent respectively. During 2021, the company further cut down its employee count to 270 which drove down the payroll expense. Moreover, lower travelling and conveyance charges as well as advertising and promotion expense overshadowed the growth of freight charges due to increased international sales. Net other expense slipped by 35 percent year-on-year in 2021 due to lower royalty fee paid to Shezan Services (Private) Limited. SHEZ was able to boast an operating profit of Rs.305.23 million in 2021, translating into an OP margin of 4.6 percent. Finance cost diluted by 40 percent year-on-year in 2021 due to low discount rate. Gearing ratio climbed up to 37 percent in 2021. The company recorded a net profit of Rs.122.98 million in 2021, culminating into an EPS of Rs.12.73 and NP margin of 1.9 percent.

SHEZ’s topline noticeably recovered in 2022, posting a rebound of 24 percent year-on-year. The growth was largely led by the juice category which posted encouraging rise in its turnover. During 2022, SHEZ’s tetrapak segment produced 29.869 million dozen products, up 18 percent year-on-year.. During the year, Russa-Ukraine crisis inflated the global commodity prices. This coupled with Pak Rupee depreciation proved to be a double whammy for the company in 2022. Hike in the prices of tetrapak paper, POL products as well as energy tariff also took its toll on the cost of the company. However, change in sales mix, higher volume and price revisions slightly pushed the GP margin up to 21.7 percent in 2022 with 27 percent rise in gross profit. Distribution and administrative expense spiked by 43 percent and 18 percent respectively in 2022 due to high payroll expense, freight charges as well as petrol, oil and lubricant charges. Net other expense inched down by 18 percent year-on-year in 2022 on account of foreign exchange gain, gain on disposal of fixed assets as well as higher scrap sales. High operating expense impeded the growth of operating profit which ticked up by a negligible 0.1 percent in 2022 with OP margin sinking to 3.7 percent. Finance cost plunged by 4 percent year-on-year in 2022 despite high discount rate as the company reduced its external borrowings during the year. This pushed the gearing ratio down to 33 percent in 2022. Unfortunately, the topline growth couldn’t trickle down to produce a healthy bottomline in 2022. SHEZ’s net profit reduced by 35 percent year-on-year in 2022 to clock in at Rs.79.92 million with an EPS of Rs.8.27 and NP margin of 1 percent.

Recent Performance (2023)

SHEZ’s topline posted a year-on-year growth in 2023, however, with a lower momentum of 7 percent when compared to previous year. Initially the juices segment continued to perform better, however, after the imposition of 20 percent FED on sugary fruit juices, the volume went significantly down. Overall, the demand remained stressed due to drastic rise in inflation and shrinkage in the purchasing power of consumers. The company also increased the prices of its products to pass on the impact of cost hike which further dented the demand. Gross profit enlarged by 17 percent year-on-year in 2023 with GP margin further rising to 23.8 percent. Both, distribution and administrative expense multiplied by 13 percent in 2023 due to higher payroll expense and POL prices. Net other expense shrank by 73 percent year-on-year in 2023 due to higher realized and unrealized exchange gain and scrap sales. Operating profit picked up by 48 percent year-on-year in 2023 with OP margin climbing up to 5.2 percent. Finance cost gave a severe hit to SHEZ’s bottomline as it grew by 135 percent year-on-year in 2023 due to unprecedented level of discount rate and elevated external borrowings. SHEZ’s gearing ratio jumped up to 39 percent in 2023. High finance cost squeezed the bottomline by 51 percent year-on-year in 2023 to clock in at Rs.38.77 million with an EPS of Rs.4.01 and NP margin of 0.4 percent.

Future Outlook

The company’s keen interest to boost its export sales amid Pak Rupee depreciation will prove to be a good omen for the company in the coming times. However, indigenous macroeconomic conditions don’t look promising and will continue to pose grave challenges to the company. Shrunken pockets of the consumers in the local market coupled with the imposition of heavy FED of 20 percent will continue to take their toll on the local sales volume of SHEZ. Will export sales, which contributed only 8.3 percent to the gross sales of the company in 2023, be able to offset the shocks in the local market? Let’s wait and watch.