The Organic Meat Company Limited

The Organic Meat Company Limited (PSX: TOMCL) was incorporated in Pakistan as a private limited company in 2010. The company is engaged in the processing and sale of halal meat and allied products. It is also one of the leading exporters of red meat and meat by-products. Middle Eastern countries are the major export market of TOMCL. However, the company has recently added pet food raw material to its portfolio which enabled it to tap the USA and Europe markets. Besides, the company also has significant business from Far East, CIS and South Asian markets.

Pattern of Shareholding

As of June 30, 2023, TOMCL has a total of 134.992 million shares outstanding held by diverse categories of shareholders. Directors, CEO, their spouse and minor children have the majority stake of 55.49 percent in the company followed by general public holding 28.09 percent shares. Modarabas and Mutual Funds account for 8.85 percent shares of the company while other local companies hold 4.39 percent shares. Around 2.35 percent of TOMCL’s shares are held by Insurance companies and the remaining 0.83 percent by Banks, DFIs and NBFIs.

Financial Performance (2019-23)

TOMCL’s topline has been growing staggeringly over the period under consideration with its bottomline following the similar trajectory. Its margins have been oscillating since 2019 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, TOMCL’s topline grew by 26 percent year-on-year which came on the back of a considerable improvement in both export and local sales. Cost of sales grew by 28 percent year-on-year which culminated into GP margin of 15.8 percent in 2019 versus 17.2 percent in the previous year. What hit the company hard during 2019 was a massive year-on-year rise of 120 percent in the distribution expense coupled with allowance for doubtful debt which took a heavy toll on the operating profit which slid by 46 percent year-on-year with OP margin clocking in at 5.2 percent in 2019 versus 12.1 percent in 2018. The main culprits behind the humungous distribution expense were clearing and forwarding charges, export duties as well advertisement and promotion expense. Administrative expense also hiked by 21 percent year-on-year in 2019 on the back of elevated payroll expense as number of employees grew from 83 in 2018 to 133 in 2019. Finance cost grew by 24 percent year-on-year on the back of high discount rate coupled with increased short-term borrowings during the year to meet the working capital requirements. In 2019, TOMCL recorded other income of Rs. 203 million versus other expense of Rs.33.71 million in the previous year. The stunning growth in other income came on the back of exchange gain and reversal of provision against trade debt. This resulted in a 52 percent year-on-year increase in the net profit to clock in at Rs.217.97 million. NP margin also rose up to 8.5 percent in 2019 versus 7 percent in the previous year. EPS plunged from Rs.7.09 in 2018 to Rs.4.46 in 2019 due to additional shares issued during the year taking the tally to 71.818 million shares versus 10 million shares outstanding in 2018.

In 2020, TOMCL registered topline growth of 31 percent year-on-year. The main growth propeller during the year was the export of fresh chilled meat products; however, the export of fresh chilled boneless vacuum products witnessed a complete halt due to COVID-19. To cater to the increased demand of fresh chilled meat products, TOMCL enhanced its capacity by 300 tons a month. Offal exports to far eastern countries also showed an exciting growth during the year. To meet the rising demand, TOMCL achieved 50 percent capacity utilization in 2020 versus 35 percent in 2019 (see the graph of actual versus utilized capacity). High sales volume coupled with better pricing and cost management resulted in GP margin rising up to 18.6 percent in 2020. Administrative expense escalated by 25 percent year-on-year in 2020 mainly on account of higher payroll expense despite the fact that TOMCL’s workforce shrank to 123 employees in 2020. The company kept a check on its distribution expense which dropped by 12 percent year-on-year in 2020 on the back of lower clearing & forwarding charges and export duties. Allowance for doubtful debt also ticked down by 18 percent year-on-year in 2020. All these factors resulted in year-on-year growth of 179 percent in TOMCL’s operating profit in 2020 with OP margin clocking in at 11 percent. Finance cost increased by 27 percent year-on-year in 2020 as discount rate was high for the first three quarters of the year. Other income slid by 99 percent year-on-year in 2020 due to thin exchange gain on account of stability in the value of local currency. Net profit grew by 22 percent year-on-year to clock in at Rs. 266.36 million in 2020 with NP margin standing at 7.9 percent. EPS clocked in at Rs.3.71 in 2020.

During 2021, the net export volume of meat dropped by 10 percent year-on-year. While frozen meat and frozen offal exports grew by 78 percent and 1016 percent respectively in 2021, the export of fresh chilled meat dropped by 36 percent year-on-year due to lackluster sale in the CIS market. Export of fresh chilled meat constituted 49 percent of TOMCL’s business. Poor performance in this category nullified the volumetric growth in other segments. However, due to favorable pricing and currency dynamics as well as impressive offal sales, the company was able to post a 16 percent year-on-year topline growth in 2021. Cost of sales increased from Rs. 437 per kg to Rs. 498 per kg in 2021 on the back of high procurement cost and depreciation charges due to increase in fixed assets. This pushed the GP margin down to 16.5 percent in 2021 with a marginal 4 percent rise in gross profit. While the company put a check on its advertisement and promotion charges in 2021, higher clearing and forwarding charges pushed the distribution expense up by 34 percent year-on-year in 2021. This could’ve put a dent on its OP margin, allowance for doubtful debt which gave some respite and dropped by 82 percent year-on-year in 2021. As a consequence, operating profit improved by 12 percent year-on-year in 2021, however, OP margin slightly inched down to 10.6 percent. Finance cost dipped by 1 percent year-on-year on the back of low discount rate during the year although short-term borrowings slightly increased during the year. Other income also buttressed the bottomline as it grew by 1217 percent year-on-year in 2021 on the back of exchange gain, profit on saving accounts as well as gain on biological assets. Net profit multiplied by 14 percent year-on-year in 2021 to clock in at Rs.303.48 million with NP margin of 7.7 percent and EPS of Rs.2.47.

In 2022, the company’s export sales grew by only 2 percent year-on-year. This time around, fresh chilled meat exports did a commendable job and grew by 55 percent year-on-year while frozen meat and frozen offal exports dipped by 78 percent and 37 percent respectively. Pricing power and Pak Rupee depreciation kept the topline buoyant which grew by 19 percent year-on-year. However, high cost of sales which stood at Rs. 646 per kg in 2022 resulted in a shrunken GP margin of 13.1 percent with gross profit plummeting by 6 percent. Administrative expense grew by 45 percent year-on-year in line with inflation and also because of induction of resources as the company initiated its animal fattening farm. TOMCL’s workforce stood at 176 employees in 2022 versus 161 employees in the previous year. Distribution charges grew by 81 percent year-on-year on the back of high freight charges as there was a global container shortage as well as Pak Rupee depreciation. Operating profit dropped by 52 percent year-on-year with a thin OP margin on 4.3 percent. Finance cost would’ve been higher by 37 percent year-on-year, but was offset by lower provisioning on export rebate receivable in line with IFRS. Other income grew by 2432 percent in 2022 on the back of tremendous exchange gain as well as gain on biological assets. Consequently, bottomline grew by 36 percent year-on-year to clock in at Rs.411.42 million in 2022 with EPS of Rs.3.05 and NP margin of 8.8 percent.

2023 appears to stand out from other years in terms of topline growth which was recorded at 37 percent year-on-year. Export volume stood at 6163 MT, down 2 percent year-on-year. This was the consequence of 6 percent decline in the volume of fresh chilled meat, 66 percent increase in frozen meat and 18 percent plunge in frozen offal exports. This year, TOMCL registered a robust 502 percent rise in the revenue proceeds from pet chews as the company tapped North & South American markets. Cost of sales climbed up to Rs.894.56 per kg due to higher procurement and depreciation charges. While average prices of the company’s products dropped by 2.78 percent in 2023, Pak Rupee depreciation saved the day for TOMCL and culminated into GP margin of 13.4 percent. Administrative expense surged by 43 percent year-on-year in 2023 as a result of a superior workforce comprising of 225 employees. Higher fee and subscription charges also contributed in driving up the administrative expense in 2023. Distribution expense also spiked by 41 percent year-on-year in 2023 primarily due to higher clearing and forwarding charges. Allowance for doubtful debt dropped by 83 percent in 2023. All these factors culminated into 57 percent bigger operating profit posted by TOMCL in 2023 with OP margin inching slightly up to stand at 4.9 percent. Finance cost magnified by 105 percent in 2023 which was on account of higher discount rate and increased short-term borrowings. It is to be noted that TOMCL’s gearing ratio has considerably dropped from 41 percent in 2018 to 16 percent in 2019 despite enlarged borrowing profile. This is because of increased equity of the company not only because of reserves and revaluation surplus but also because of increased share capital which stood at 134.992 million as of June 30, 2023. This also justified erosion in its EPS despite sound growth in its net profit over the years. 90 percent higher other income as a result of exchange gain gain on biological assets, reversals and interest income gave vigorous impetus to TOMCL’s net profit which posted a stupendous 76 percent year-on-year growth to clock in at Rs.722.19 million in 2023 with NP margin of 11.3 percent and EPS of Rs.5.35.

Recent Performance (1QFY24)

TOMCL kicked off FY24 with a significant 101 percent year-on-year rise in its topline in 1QFY24. This was on account of 442 percent rise in the volumetric sales of frozen offal and meat during the period. Cost of sales grew by 107 percent year-on-year in 1QFY24 resulting in 63 percent growth in gross profit, however, GP margin marched down from 14 percent in 1QFY23 to 12 percent in 1QFY24. Administrative expense grew by 15 percent in 1QFY24 on account of higher payroll expense, fee & subscription charges as well as vehicle running & maintenance charges. Distribution expense recorded a whopping 80 percent spike in 1QFY24 on account of higher freight charges as well as Pak Rupee depreciation. Higher operating expense resulted in OP margin of 5 percent in 1QFY24 versus 6 percent during the similar period last year despite 73 percent bigger operating profit. Finance cost magnified by 76 percent year-on-year in 1QFY24 due to higher discount rate. Other income couldn’t prove to encouraging either as it slid by 80 percent year-on-year due to significant reduction in exchange gain as Pak Rupee strengthened against the greenback during 1QFY24. All these factors translated into 54 percent thinner bottomline of Rs. 51.92 million recorded by TOMCL in 1QFY24. NP margin registered a freefall from 10 percent in 1QFY23 to 2 percent in 1QFY24. EPS also marched down from Rs.0.83 in 1QFY23 to Rs.0.38 in 1QFY24.

Future Outlook

TOMCL’s cutthroat expansion in varied geographical markets will ensure growth in the coming times. The company will soon start exporting cooked meat to China and offal to UAE market which will provide tremendous stimulus to its sales volume and revenues. TOMCL is also mulling over expanding its private labeling business in the UAE market which is making significant strides in the KSA market. The company has already started exported MAP vacuum chilled meat products to the UAE market in FY24. Furthermore, the acquisition of Mohammad Saeed Mohammad Hussain Limited (MSMHL), a licensed processer and exporter of sheep casing and offal to EU, is a step in the right direction and will further strengthen its geographical outreach besides adding depth to its product portfolio.