Wah Noble Chemicals Limited

Wah Noble Chemicals Limited (PSX: WAHN) was incorporated in Pakistan as a public limited company in 1983. The company is engaged in the manufacturing and sale of Urea Formaldehyde Moulding Compound, Formaldehyde and Formaldehyde based liquid resins which are used as bonding agents in the chip board, plywood and flush door manufacturing industries.

Pattern of Shareholding

As of June 30, 2023, WAHN has a total of 9 million shares outstanding which are held by 804 shareholders. Associated companies account for 56.69 percent shares of WAHN followed by local general public holding 26.48 percent shares of the company. 9.58 percent of WAHN’s shares are held by insurance companies and 6.41 percent by NIT & ICP. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

Except for a decline in 2020, WAHN’s topline has been following an upward trajectory over the period under consideration. Conversely, its bottomline dipped in 2020 and 2022. WAHN’s margins plunged in 2019. In 2020, gross and operating margins recovered while NP margin fell. This was followed by a staggering rebound in all the margins in 2021. In 2022, margins slipped back only to jump back in 2023. The detailed performance review of the period under consideration is given below.

In 2019, WAHN’s net sales grew by 34.62 percent year-on-year. This was on account of improved demand across product categories. However, due to cut-throat competition in the market, the company couldn’t increase the prices proportionately. This coupled with increase in the prices of raw materials due to Pak Rupee depreciation resulted in a drop in GP margin from 18.87 percent in 2018 to 15.68 percent in 2019. Gross profit inched up by 11.89 percent in 2019. Administrative expense inched down by 3.56 percent in 2019 due to lower payroll expense as the company squeezed its workforce. Distribution expense multiplied by 28.52 percent in 2019 due to higher payroll expense, travelling & conveyance expense as well as vehicle running expense. Allowance for ECL plummeted by 18.48 percent in 2019 as the company recovered bad debt during the year which also boosted its other income. Interest on collateral placed against bank guarantee also drove other income up in 2019. WAHN recorded 16.32 percent year-on-year rise in its operating profit in 2019, however, OP margin slumped from 15.26 in 2018 to 13.18 percent in 2019. Finance cost hiked by 597.58 percent in 2019 due to elevated discount rate and increased borrowings. Net profit inched up by 1.37 percent in 2019 to clock in at Rs.176.493 million with EPS of Rs.19.61 versus EPS of Rs.19.34 in 2018. NP margin ticked down from 10.36 percent in 2018 to 7.8 percent in 2019.

In 2020, WAHN recorded 13.82 percent year-on-year slide in its net sales. This was on account of COVID-19 which halted the economic activity during the last quarter of the year. COVID-19 related lockdowns resulted in decline in production and sales volume. Consequently, cost of sales declined by 14.88 percent in 2020. Gross profit also slid by 8.14 percent during the year, however, GP margin jumped up to 16.72 percent. Administrative expense dwindled by 17.71 percent in 2020 due to lower legal & professional charges, travelling & conveyance charges and no corporate service fee paid during the year. Distribution expense slumped by 3.94 percent in 2020 due to curtailed salaries & wages, vehicle running and communication charges incurred during the year. Allowance for ECL escalated by 106.18 percent in 2020 due to delayed payments by the customers on account of sluggish business activity. WAHN was able to cut down its other expense by 27.29 percent in 2020 on account of reduced provisioning done for WWF and WPPF. Other income grew by 17.86 percent in 2020 primarily on account of gain on sale of property, plant and equipment. Operating profit contracted by 12.79 percent in 2020, however, OP margin slightly inched up to clock in at 13.34 percent. Finance cost spiked by 58.53 percent in 2020 due to higher discount rate for most part of the year and increased utilization of short-term borrowing lines. Net profit shrank by 26.17 percent to clock in at Rs.130.307 million in 2020 with EPS of Rs.14.48 and NP margin of 6.68 percent.

WAHN registered a phenomenal 39.68 percent year-on-year growth in its net sales in 2021. This was on account of demand recovery, price rationalization and better sales mix. Optimum capacity utilization resulted in lower fixed cost per unit. This pushed gross profit up by 71.42 percent in 2021 with GP margin attaining its highest value of 20.515 percent. Administrative expense surged by 8.99 percent in 2021 due to higher payroll expense as WAHN expanded its workforce from 148 employees in 2020 to 174 employees in 2021. Distribution expense escalated by 13.58 percent in 2021 primarily due to higher salaries & wages as well as vehicle running expense. The company booked 87.28 percent lower allowance for ECL in 2021 due to loan recovery as business activity resumed post COVID-19. Other expense hiked by 161.45 percent in 2021 due to increased profit related provisioning. Other income also picked up by 48.38 percent in 2021 due to bad bet recovery, sale of scrap and interest on collateral placed against bank guarantee. The company recorded a stunning 92.93 percent rebound in its operating profit in 2021 with OP margin climbing up to 18.43 percent. Finance cost dropped by 59.81 percent in 2021 due to monetary easing, improved liquidity position and lower running finance obtained during the year. Net profit strengthened by 156.63 percent to clock in at Rs.334.41 million with EPS of Rs.37.16 and NP margin of 12.28 percent.

In 2022, WAHN’s topline picked up by 21.51 percent on account of higher sales volume. However, spike in raw material and conversion cost due to high inflation and Pak Rupee depreciation resulted in 18.10 percent lower gross profit in 2022 with GP margin drastically falling down to 13.83 percent. 23.34 percent escalation in administrative expense due to higher payroll expense as number of employees grew to 181 in 2022. Elevated corporate service fee and legal & professional charges also drove up administrative expense in 2022. Distribution expense surged by 26.89 percent in 2022 due to higher salaries & wages as well as travelling & conveyance charges. WAHN booked 580.62 percent higher allowance for ECL in 2022 due to higher sales volume which in-turn led to higher outstanding receivables due to delayed payments. Other expense slid by 32.75 percent in 2022 due to lower profit related provisioning booked during the year. Other income enhanced by 28.35 percent in 2022 due to bad debt recovered and scrap sales. Operating profit nosedived by 23.79 percent in 2022 with OP margin falling down to 11.56 percent. Finance cost mounted by 123.73 percent in 2022 due to monetary tightening and excessive working capital related borrowings. Net profit dipped by 37.46 percent to clock in at Rs.209.12 million with EPS of 23.24 and NP margin of 6.32 percent.

In 2023, WAHN’s net sales progressed by 32.45 percent on account of increased sales volumes, better sales mix and upward price revision. This coupled with rigorous cost control measures put in place by the company resulted in 93.15 percent higher gross profit in 2023 with GP margin jumping up to 20.17 percent. Administrative expense surged by 21.91 percent in 2023 due to higher payroll expense on account of inflationary pressure. Distribution expense multiplied by 39.45 percent due to higher salaries & wages and vehicle running expense incurred during the year. Allowance for ECL escalated by 46.4 percent in 2023 due to interruption in payments. Other expense hiked by 110.45 percent in 2023 due to higher provisioning for WWF and WPPF made during the year. Other income grew by 29.79 percent in 2023 mainly on account of higher interest income earned from saving accounts. WAHN recorded 99.13 percent higher operating profit in 2023 with OP margin riding up to 17.38 percent. Finance cost soared by 33.8 percent in 2023 due to elevated discount rate although outstanding borrowings significantly shrank in 2023. Net profit improved by 114.82 percent to clock in at Rs.449.23 million with EPS of Rs.49.91 and NP margin of 10.25 percent.

Recent Performance (9MFY24)

During 9MFY24, WAHN’s net sales posted 14.53 percent year-on-year rise on the back of increased volume, price escalation and better sales mix. The company kept a check on its cost through operational efficiency. Cost of sales inched up by 6.52 percent during 9MFY24. This culminated into 52.86 percent year-on-year improvement in gross profit with GP margin clocking in at 23.1 percent in 9MFY24 versus 17.3 percent during the same period last year. Administrative and distribution expenses spiked by 34.98 percent and 48.29 percent respectively during 9MFY24. The main components of these expenses were payroll expense, vehicle running as well as conveyance expense. Other expense multiplied by 74.84 percent in 9MFY24 supposedly on account of higher profit related provisioning done during the period. Other expense was, to a large extent; offset by 320.49 percent superior other income recorded by WAHN in 9MFY24. This might be on account of higher income from financial assets as was the case in 2023. Operating profit enhanced by 54.65 percent during 9MFY24 with OP margin standing at 20.46 percent versus OP margin of 15.15 percent registered in 9MFY23. WAHN was able to cut down its finance cost by 63.57 percent during 9MFY24 despite high discount rate. This was done by entirely paying off its external short-term borrowings as well as loan from parent company. WAHN posted 60.19 percent year-on-year rise in net profit which clocked in at Rs.423.47 million in 9MFY24 with EPS of Rs.47.05 versus EPS of Rs.29.37 recorded during the same period last year. NP margin also picked up from 8.3 percent in 9MFY23 to 11.61 percent during 9MFY24.

Future Outlook

The company is well poised to enhance its sales volume and improve its profitability in the upcoming times. However, the presence of existing players and new entrants might hinder price rationalization which may result in margin contraction.