Matco Foods Limited

Matco Foods Limited (PSX: MFL) was established as Matco Rice Processing Private Limited in 1964. The company was incorporated in Pakistan as a private limited company in 1990. The company is principally engaged in the processing and export of rice, rice protein, rice glucose, pink salt, condiments and spices, dessert mixes etc. MFL is one of the largest rice exporters of the country with exports of its flagship brand “Falak” in over 65 countries across the globe.

Pattern of Shareholding

As of June 30, 2023, MFL has 122.4 million shares outstanding which are held by 1768 shareholders. Directors, their spouse and minor children have the majority stake of around 41.6 percent in MFL followed by Local general public holding 40.22 percent shares of the company. Associated companies, undertakings and related parties own 15 percent shares of the company. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a marginal dip in 2021, the topline of MFL has been riding an uphill journey since 2019. MFL’s bottomline registered a growth in 2019, slumped in 2020 and 2021 and recovered thereafter. Conversely, its margins have been tumbling until 2021 except for an uptick in its net margin in 2019. In the subsequent two years, gross and operating margins significantly recovered while net margin rebounded in 2022 only to slump in 2023. The detailed performance review of each of the years under consideration is given below.

In 2019, MFL posted 17 percent year-on-year rise in its topline. The growth mainly came on the back of export sales on account of higher commodity prices in the international market coupled with Pak Rupee depreciation. Besides, export sales volume also inched up by 2.45 percent in 2019. High cost of sales on the back of inflation, elevated energy prices and high commodity prices contracted GP margin from 12.94 percent in 2018 to 11.71 percent in 2019 despite 6 percent year-on-year improvement in gross profit. Distribution expense grew by a marginal 4 percent year-on-year in 2019 as lower payroll expense, allowance for ECL and shop rent diluted the hike in the sales promotion and export charges during the year. Administrative expense spiked by 20 percent year-on-year in 2019 on account of higher payroll expense as the company increased its workforce from 673 employees in 2018 to 729 employees in 2019 on account of installation of rice glucose plant (phase 2). Operating profit ticked up by just 1 percent in 2019 with OP margin sliding down from 7.56 percent in 2018 to 6.51 percent in 2019. Finance cost escalated by 15 percent year-on-year in 2019 on the back of higher discount rate and increased borrowings. Higher finance cost was, to a great extent, counterbalanced by superior other income as MFL earned gain on sale of property, plant and equipment in 2019 which drove other income up by 498 percent. Moreover, the company earned 110 percent higher exchange gain in 2019 due to relentlessly declining value of local currency. The company also received tax benefit on account of installation of rice glucose plant and listing of the company. As a consequence, net profit picked up by 34 percent year-on-year in 2019 to clock in at Rs.412.62 million. EPS grew from Rs.2.95 in 2018 to Rs.3.37 in 2019. NP margin also improved from 4.6 percent in 2018 to 5,24 percent in 2019.

In 2020, MFL’s sales to commercial industry such as hotels, tourism, restaurants etc came to a halt due to restriction on the movement of people and goods on account of COVID-19. Moreover, curtailed Hajj season also badly affected export sales of the company in that region. On the flipside, home-based consumption took a huge flight as people started stockpiling food and grocery items globally. Striking sales in the home-based industry bypassed the sluggish demand in the commercial industry, culminating into a 44 percent year-on-year topline growth for MFL. However, supply chain disruptions, high freight rates, Pak Rupee depreciation and increase in the prices of imported raw materials resulted in an increase in the cost of sales which shrank the GP margin from 12.94 percent in 2019 to 11.7 percent in 2020. Then restrictions on the movement of goods, containers shortage and spiraling ocean freight rates magnified export charges and commissions which pumped up the distribution cost by 33 percent year-on-year. Administrative expense inched up by 12 percent year-on-year on account of higher payroll expense as number of employees grew to 809 in 2020. This squeezed OP margin to 4.7 percent in 2020. Finance cost also grew as discount rates were high in the first three quarters of 2020 coupled with increased working capital requirements of the company. Other income couldn’t lend the helping hand either and lost its ground by 47 percent year-on-year due to high-base effect. MFL also took a massive hit on the exchange gain front which dropped by 91 percent year-on-year due to extreme volatility of exchange rates. Hence, an impressive topline growth couldn’t trickle down to produce a healthy bottomline which dipped by 66 percent year-on-year to clock in at Rs.139.44 million with NP margin of 1.2 percent in 2020. EPS also dwindled to Rs.1.14 in 2020.

2021 proved to be even gloomier for MFL than the previous year as not only did its topline plummet, the bottomline recorded a net loss. While the global economy started showing signs of recovery post COVID-19, MFL faced a hard time mustering export sales as freight charges grew by as high as 5 times in most of the export destinations of the company. This severely affected the export sales of the company which dropped by 21 percent year-on-year in terms of volume to clock in at 41,066 MT in 2021. This resulted in the thin GP margin of 6.3 percent in 2021. Low export sales reduced the distribution costby 14 percent year-on-year on account of lower travelling, sales promotion and export charges. Administrative expense registered 14 percent year-on-year growth on account of higher payroll expense, provision for GIDC as well as elevated fee and subscription charges. Operating profit nosedived by 69 percent year-on-year in 2021 with OP margin eroding to 1.6 percent. Finance cost contracted by 22 percent in 2021 as low export orders meant lower working capital requirements and lesser short-term borrowings coupled with low discount rate during the year. Other income and exchange gain performed really well during the year but couldn’t sustain MFL’s bottomline in 2021. The company registered net loss of Rs.53.05 million in 2021 with loss per share of Rs.0.43.

The dismal bottomline recorded in 2021 proved to be a transitory as the MFL achieved a massive growth in its bottomline in 2021. This came on the back of 17 percent year-on-year rise in its net sales in 2022. The margins which had been shrinking since 2019 gained back their momentum in 2022. This was on the back of improved export sales volume (42,114 MT), inventory gains and increase in average prices of rice glucose products. GP margin was recorded at 10.8 percent in 2022 with 102 percent rise in gross profit. Distribution expense mounted by 22 percent year-on-year in 2022 on account of increased sales promotion as well as higher export charges and commission. Administrative expense enlarged by 15 percent year-on-year in 2022 on account of higher payroll expense as the number of employees grew from 708 in 2021 to 750 in 2022 and also because of higher taxes, duty and fee paid during the year. Operating profit magnified by 358 percent in 2022 with OP margin jumping up to 6.1 percent. Exchange gain posted year-on-year growth of over 200 percent in 2022. However, it was offset by 42 percent higher finance cost on the back of high discount rate and increased short-term borrowings and higher taxation due to the imposition of super tax. MFL posted net profit worth Rs448.79 million in 2022 with NP margin of 3.6 percent and EPS of Rs.3.67.

With 61 percent year-on-year rise in net sales, 2023 proved to be the year of financial brilliance for MFL. While the company export off-take slid to 32,829 MT in 2023, down 22 percent year-on-year, Pak Rupee depreciation and increase in export prices of rice from USD 981 in 2022 to USD 1220 per ton in 2023 greatly improved the net sales of the company. This, coupled with gain in inventory value resulted in 84 percent year-on-year growth in MFL’s gross profit with GP margin touching its 5-year highest value of 12.38 percent in 2023. Distribution and administrative expense mounted by 55 percent and 60 percent respectively in 2023. Elevated distribution expense was on the back of higher travelling expense, sales promotion, and export commission incurred during the year. Higher administrative expense was the consequence of escalated payroll expense as MFL hired 219 new employees during the year which took the total HR tally to 969 in 2023. Operating profit posted by the company in 2023 was 105 percent bigger than that in 2022, translating into an improved OP margin of 7.74 percent. Finance cost surged by 205 percent in 2023 on account of record high discount rate coupled with increased external borrowings during the year. MFL performed quite well in terms of other income and exchange gain which grew by 171 percent and 104 percent respectively in 2023, however, couldn’t offset the impact of high finance cost incurred during the year. This coupled with additional super tax imposed during the year somewhat diluted the bottomline growth. MFL’s net profit burgeoned by 25 percent year-on-year in 2023 to clock in at Rs.559.94 million with EPS of Rs.4.57. NP margin eroded to 2.8 percent in 2023.

Recent Performance (1QFY24)

The growth trajectory continued in FY24 with 128 percent year-on-year growth in MFL’s topline in 1QFY24. This was on the back of higher export volume during the period, clocking in at 9473 MT, up 39 percent year-on-year. Rice export prices also significantly improved from USD 1115 in 1QFY23 to USD.1330 per ton in 1QFY24. The company also benefited from inventory gains as well as stronger US Dollar during the period. MFL’s corn starch division, Falak food division and by-products division also considerably buttressed its sales in 1QFY24. Massive topline growth, however, couldn’t trickle down to drive up MFL’s bottomline in 1QFY24. 143 percent higher cost of sales on the back of mounting fuel, power and electricity charges took its toll on MFL’s GP margin which shrank from 17.07 percent in 1QFY23 to 11.83 percent in 1QFY24. Distribution expense magnified by 131 percent due to rising export volume and higher ocean freight charges. Administrative expense also mounted by 47 percent on the back of inflation and increased operations to meet high demand. Higher operating expenses greatly trimmed MFL’s OP margin to 7.88 percent in 1QFY24 from 12 percent in 1QFY23. Finance cost continued to hike during the period under consideration, registering 134 percent spike due to higher discount rate and elevated working capital related borrowings. This resulted in 68 percent thinner net profit in 1QFY24 to clock in at Rs.75.81 million. MFL recorded EPS of Rs.0.62 in 1QFY24 versus Rs.1.95 during the same period last year. NP margin also eroded from 8 percent in 1QFY23 to 1.11 percent in 1QFY24.

Future Outlook

MFL’s products will remain competitive in the export market as import ban on Pakistani rice by Russia and Mexico has been lifted. Furthermore, India’s introduction of minimum floor price of USD 1200 per ton on its Basmati rice exports will create further avenues of growth for Pakistani rice exporters. This will likely keep MFL’s topline strong in the coming times. However, higher cost of sales, freight charges and finance cost will continue to be the Achilles heel for the company, thinning down its margins and profitability.