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Ados Pakistan Limited (PSX: ADOS) was incorporated in Pakistan as a private limited company in 1986 and was converted into a public limited company in 1989. The company deals in the supply of equipments, fabrication and refurbishment of equipment and spare parts used in oil and gas industry. It also does fabrication of vehicles for bullet proofing protection.

Pattern of Shareholding

As of June 30, 2022, ADOS has a total of 6.58 million shares outstanding which are held by 849 shareholders. Around 99.19 percent of the company’s shares are held by individuals followed by financial institutions and joint stock companies holding 0.77 percent and 0.04 percent shares respectively.

Financial Performance (2019-22)

During the period under consideration, ADOS’s topline has portrayed upward movement twice i.e. in 2020 and 2022. Its bottomline which stayed in the negative zone until 2021 posted net profit in 2022. ADOS’s gross margin drastically fell in 2019 only to bounce back in the subsequent year. However, in 2021 and 2022, gross margin registered negative figures. The company’s operating and net margin which lingered in the negative territory until 2021, posted a staggering turnaround in 2022 (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, ADOS’s topline slid by 64.74 percent year-on-year. This was on account of the fact that the local oil & gas industry was passing through a recessionary phase during the year. Moreover, some foreign companies also intervened in the local market and engaged in dumping activities, gobbling up supply contracts of state owned companies.Many E&P companies didn’t honor their payments due to their financial conditions, resulting in liquidity crunch for ADOS. The company’s gross profit shrank by 97.72 percent in 2019 with GP margin registering a freefall from 12.79 percent in 2018 to 0.83 percent in 2019. In response to slow business, the company cut down its operating expense by 25 percent year-on-year in 2019, particularly by booking lesser provision for doubtful debts. Conversely, it couldn’t curb its other expense which surged by 37.43 percent in 2019 mainly on account of exchange loss due to Pak Rupee depreciation and increased commodity prices in the global market. ADOS’s operating loss escalated by 4.58 percent in 2019 to clock in at 63.32 percent. Finance cost inched up by 4.5 percent in 2019 on account of higher discount rate and also due to increased short-term borrowings made during the year. The company was able to cut down its net loss by 25.46 percent in 2019 to bring it down to Rs.68.56 million. Loss per share also marched down from Rs.13.97 in 2018 to Rs.10.42 in 2019.

Due to lackluster performance of the local oil & gas industry, ADOS began to receive fresh inquiries from new customers as well as enhanced its focus on refurbishment and remanufacturing jobs. It also planned to achieve sales growth from its specialized fabrication division which retrofits armored vehicles. All these efforts bore fruit as ADOS’s topline boasted 94.11 percent year-on-year rise in 2020 despite COVID-19 which halted economic activity during the year. On the back of cost optimization efforts undertaken by the company, it was able to improve its gross profit by 3131 percent in 2020 with GP margin climbing up to its optimum level of 13.75 percent. Administrative expense slid by 6.5 percent year-on-year in 2020 mainly on the back of curtailed travelling & conveyance expense, rent, rates & taxes as well as repair & maintenance charges. Other expense also nosedived by 95.99 percent in 2020 due to lower exchange loss. Significant proceeds from the sale of scrap and disposal of vehicles along with the gain realized on the settlement of vendor’s liability magnified ADOS’s other income by 1000 percent in 2020. All these upbeat factors helped the company reduce its operating loss by 77.33 percent in 2020 to bring it down to Rs.14.35 million. Finance cost surged by 34.31 percent in 2020 due to higher discount rate for most part of the year coupled with the lease liability of Rs.12.246 million recorded by the company during the year as an impact of initial application of IFRS 16. ADOS posted net loss of Rs.28.22 million in 2020, down 58.84 percent year-on-year. Loss per share also slid to Rs.4.29 in 2020.

ADOS’s turnover which improved in 2020 eroded again in 2021 with its topline plummeting by 70.47 percent. Considerable decline in the drilling and exploration activities in the country coupled with dumping activities by foreign suppliers who receive 18 percent tax rebate put significant dent on the company’s turnover during the year. The induction of Chinese companies have further reduced the order volumes and increased competition in the bidding process. The economies of scale available to foreign companies significantly squeezed ADOS’s margins in 2021, resulting in gross loss of Rs.5.88 million. To improve its cash flow position, the company kept on compressing its operating expense during the year which shrank by 14.92 percent in 2021. This was achieved by reducing its workforce from 43 employees in 2020 to 36 employees in 2021, resulting in lower payroll expense. Stability in local currency resulted in exchange gain during the year; hence no other expense was incurred. Exchange gain coupled with scrap sales, gain on disposal of vehicles and recovery against loss allowance also drove up other income by 51 percent in 2021. All these factors resulted in 6.93 percent reduction in ADOS’s operating loss in 2021 which clocked in at Rs.13.36 million. Finance cost also lessened by 68.96 percent in 2021 on the back of monetary easing as well as no short-term borrowings outstanding in the year. Increasingly, the company has switched to financing support from its directors. The loan from directors is largely interest free, unsecured and payable on demand, hence reducing the company’s finance cost. ADOS has also started focusing on orders with low working capital requirements and lower turnaround times. ADOS was able to cut down its net loss by 38.77 percent in 2021 to bring it down to Rs.17.28 million with loss per share of Rs.2.63.

In 2022, fortune smiled upon ADOS as not only did its topline made a staggering year-on-year growth of 570 percent, its bottomline also moved to positive territory as it recorded net profit. ADOS had been posting net losses since 2017 which significantly shrank its equity as its unappropriated loss had reached Rs.64.39 million in 2021. However, in 2022, ADOS recorded revenue reserve of Rs.43.334 million. The addition of “good” trade debts also significantly improved ADOS’s liquidity position in 2022 (see the graph of liquidity ratios). However, this doesn’t imply any improvement in the company’s value proposition. With foreign firms trying to capture the market, the company sold its products at dumping rates, resulting in gross loss of Rs.11.8 million in 2022. Change in government policies specifically SRO 678 and SRO 821 has put considerable dent on the company’s business which wouldn’t allow it to recover even it’s the E&P sector improves. The company lost its external product and quality certifications due to restricted financial and human resources, radically upsetting its scope of work. Operating expense mounted by 19.56 percent in 2022 due to higher directors’ remuneration, legal & professional charges as well as repair & maintenance expense incurred during the year. Loss on disposal of stock coupled with profit related provisioning resulted in other expense of Rs.19.42 million in 2022. What turned tables for ADOS in 2022 was gain worth Rs.193.992 million on the disposal of its land & building in KPK to generate funds for the execution of future plans of the company. This culminated into operating profit of Rs.136.24 million reported by ADOS in 2022 with OP margin of 93.19 percent. Finance cost also ticked down by 30.14 percent in 2022 due to reduction in the company’s lease liability. The company also paid off the loans obtained from its directors using the proceeds from disposal of its fixed assets. ADOS posted net profit of Rs.109.684 million in 2022 with EPS of Rs.16.66 and NP margin of 75.02 percent.The company voluntarily delisted itself from PSX in 2022 due to non-viability of its value proposition.

Recent Performance (1QFY23)

ADOS’s topline grew by 85 percent year-on-year in 1QFY23 to clock in at Rs.9.46 million. While the company’s turnover had dropped due to sluggish drilling and exploration activity in the country and also because of dumping by foreign players, topline growth might be the result of upward price revision. This is also evident in the company’s GP margin picking up from 12.76 percent in 1QFY22 to 15.36 percent in 1QFY23. Administrative expense amplified by 48 percent year-on-year during the quarter which is representative of the inflationary pressure facing the local economy. ADOS also incurred net other expense of Rs.3.83 million in 1QFY23 as against net other income of Rs.6.45 million during the similar period last year. These factors translated into operating loss of Rs.13.69 million incurred by the company in 1QFY23, up 2289 percent year-on-year. Finance cost also inched up by 18 percent year-on-year in 1QFY23 as a consequence of high prevailing discount rate. Net loss mounted by 1210 percent in 1QFY23 to clock in at Rs.14.355 million with loss per share of Rs.2.18 versus loss per share of Rs.0.17 recorded by the company during the similar period last year.

Future Outlook

The company’s external product and quality certifications have been withdrawn due to limited human & financial resources and its manufacturing activities have been halted. The conditions might not improve in the near term due to adverse market conditions, presence of foreign competitors, announcement of big clients such as ENI and Weatherford to exit the market as well as gradual obsolescence of company’s plant & machinery. The company’s sponsors also lack funds required to guarantee its survival. The directors are indecisive of the future course of action of the business and are mulling over to diversify or to manufacture engineering products.

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