Merit Packaging Limited (PSX: MERIT) was incorporated in Pakistan as a public limited company in 1980. The principal activity of the company is the manufacturing and sale of printing and packaging material. The company caters to a wide range of sectors including food & beverages, surgical instruments, consumer goods, textile etc. The company belongs to The Lakson Group of companies.
Pattern of Shareholding
As of June 30, 2023, MERIT has a total of 199.96 million shares outstanding which are held by 1660 shareholders. Associated companies, undertaking and related parties have the largest stake of 81.54 percent in the company followed by local general public holding 13.01 percent shares. NIT & ICP have 2.31 percent stake in MERIT. The remaining ownership is distributed among other categories of shareholders.
Financial Performance (2019-24)
Barring year-on-year decline in 2020, MERIT’s topline has been riding an upward trajectory since 2019. However, the company never posted net profit during the period under consideration. Its net loss magnified until 2020 after which it declined until 2022 followed by an uptick in 2023. In 2024, MERIT’s net loss slightly lowered. The company’s gross margin dived into negative zone in 2020 and 2021 and then recovered thereafter. Its operating margin which stayed in the negative territory until 2021 also rebounded thereafter (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
In 2019, MERIT’s net sales registered year-on-year growth of 16.75 percent which was the result of increased market share and sales volume. Cost of sales mounted by 28.37 percent year-on-year in 2019 primarily on account of higher fixed overhead cost to cater increased sales volume. Insufficient supply of electricity compelled the company to switch to diesel generator during the year. High cost of raw materials, Pak Rupee depreciation, higher import tariff and regulatory duties on the import of raw materials also took toll on the company’s gross margin which drastically dropped from 9.22 percent in 2018 to 0.19 percent in 2019. In absolute terms, gross profit also shrank by 97.65 percent in 2019. Administrative expense remained intact during the year in the face of inflation as the company streamlined its workforce from 304 employees in 2018 to 257 employees in 2019. Distribution expense inched up by 1.7 percent on account of higher travelling & conveyance and outward carriage charges due to higher sales volume and escalated prices of POL products. MERIT registered operating loss of Rs.126.53 million in 2019 versus operating profit of Rs.95.40 million in 2018. Finance cost surged by 65.55 percent year-on-year in 2019 on account of high discount rate and steep rise in short-term and long-term borrowings to finance working capital requirements and CAPEX respectively. MERIT posted net loss of Rs.310.54 million in 2019, up 3657.24 from 2018. Loss per share also surged from Rs.0.14 in 2018 to Rs.3.85 in 2019.
In 2020, MERIT’s net sales plunged by 24.53 percent year-on-year as the eruption of COVID-19 resulted in lockdown of businesses resulting in low orders from customers. Moreover, shifting of Lahore factory to a new site during the year, low performance of old machines at Karachi factory and slow development of value products on new machine also hampered company’s production during the year. MERIT recorded 17.44 percent lesser costs of sales in 2020. Cost of sales slid by lesser magnitude compared to sales due substantial hike in cost of raw materials, Pak Rupee depreciation and lesser absorption of fixed overhead cost. All these factors culminated into gross loss of Rs.198.39 million in 2020. MERIT was able to cut down its administrative expense by 0.55 percent in 2020 mainly on account of curtailed rent, rates & taxes, software license fee and service fee paid to an associated company. Distribution expense rose by 7.28 percent year-on-year in 2020 mainly on account of mounted outward carriage charges due to restriction on the movement of people and goods on the back of COVID-19. Impairment loss and loss on the disposal of property, plant & equipment during the year drove other expense up by 865 percent in 2020. Operating loss multiplied by 229.11 percent in 2020 to clock in at Rs.416.43 million. Finance cost hiked by 57.65 percent in 2020 due to higher discount rate for the first three quarters of 2020 coupled with increased borrowing requirements. Net loss amplified by 123 percent year-on-year in 2020 to clock in at Rs.692.68 million with loss per share of Rs.8.59.
After a dip in 2020, MERIT’s topline resumed its uphill journey in 2021 with 34.48 percent year-on-year rise in net sales. As economic activities began to recommenceafter the lockdown period, MERIT started receiving new orders resulting in a healthier topline. However, topline growth couldn’t trickle down to produce a healthier bottomline amid high cost of raw materials, Pak Rupee depreciation, hike in energy prices and lesser productivity and efficiency of company’s old printing machines. While MERIT couldn’t register gross profit in 2021, it was able to significantly curtail its gross loss by 78.63 percent year-on-year in 2021 which clocked in at Rs.42.40 million. Administrative expense ticked down by 2.93 percent year-on-year in 2021 as the company trimmed down its workforce from 264 employees in 2020 to 206 employees in 2021. Conversely, distribution expense spiked by 14.54 percent on account of higher outward carriage charges incurred due to recovery of sales volume. Other income greatly propelled the operating performance of MERIT in 2021 as it grew by 387.30 percent on the back of insurance claim, capital grant income, exchange gain, impairment reversal and scrap sales. The company’s operating loss narrowed down by 47.71 percent year-on-year in 2021 to clock in at Rs.217.75 million. Lower discount rate helped MERIT to cut down its finance cost by 7.38 percent in 2021. This translated into 18.44 percent lower net loss in 2021 to clock in at Rs.564.98 million. Loss per share also plummeted to Rs.6.84 in 2021.
In 2022, MERIT witnessed 44.1 percent year-on-year rise in its net sales backed by both upward price revision and increased sales volume. This enabled the company to register gross profit of Rs.252.92 million in 2022 after two sustained years of gross loss. GP margin clocked in at 6.05 percent in 2022. Administrative expense surged by 14.78 percent year-on-year in 2022 due to higher payroll expense on account of inflationary pressure despite drop in number of employees to 188 in 2022. Higher sales volume and increase prices of POL products also drove up the distribution expense by 44.21 percent in 2022. MERIT posted operating profit of Rs.92.77 million in 2022 with OP margin of 2.22 percent. The company was able to record positive operating result in 2022 after three unrelenting years of operating loss. Despite hiking discount rate, the company was able to reduce its finance cost by 19.51 percent year-on-year in 2022 due to lesser external borrowings obtained during the year. The company registered net loss of Rs.168.17 million, down 70.23 percent year-on-year. Loss per share also dropped to Rs.0.84 in 2022.
The company registered topline growth of 51.63 percent in 2023. Besides higher sales volume, the company was able to pass on the impact of cost hike to its customers in 2023 which improved its margins. Moreover, the company has also been undertaking massive CAPEX for the installation of new plant & machinery to increase its productivity and cut down its cost. This resulted in 94.37 percent rise in gross profit with GP margin jumping up to 7.75 percent in 2023. Administrative expense escalated by 9.98percent year-on-year in 2023 due to higher payroll expense as number of employees grew to 194 in 2023. Distribution expense hiked by 22.49 percent in 2023 on the back of higher sales volume which pushed up the freight charges. Other income strengthened by 63.29 percent in 2023 on account of hefty scrap sales made during the year. However, its impact was nullified by 389.29 percent surge in other expense in 2023 which was the result of enormous provisioning done for ECL. Operating profit magnified by 200 percent in 2023 with OP margin of 4.4 percent. Finance cost surged by 30.82percent year-on-year in 2023 due to unparalleled level of discount rate, This was despite the fact that the company paid two long-term loans in 2023. Net loss of Rs.189.91 million posted by MERIT in 2023 was 12.93 percent higher than that of 2022. Loss per share also surged to Rs.0.95 in 2023.
MERIT’s topline inched up by 4.7 percent in 2024. A glimpse of 9MFY24 report shows that the company’s net sales grew by 11.5 percent during the nine monthly periods with thorough improvement in gross margin from 7.3 percent in 9MFY23 to 8.1 percent in 9MFY24. Hence, it is evident that the company didn’t do well in the 4QFY24 which not only weakened the overall topline growth in 2024 but also resulted in curtailed gross margin of 6.9 percent. In absolute terms, gross profit tamed by 6.81 percent in 2024. Administrative expense surged by 36.36 percent in 2024 supposedly due to higher payroll expense on account of inflationary pressure. Higher administrative expense might also be the result of execution of MERIT’s plan to sell its land & building to SIZA Services (Private) Limited and then rent it back. According to a notice published by the company on the PSX on May 22, 2024, the transaction was completed. This would have resulted in rent expense which could be one of the reasons of high administrative expense. Distribution expense also inched up by 10.69 percent during the year. The transaction of sale and leaseback of land and building might also have resulted in gain on sale of fixed assets in 2024. This could be the reason of 53.37 percent higher other income recorded by MERIT in 2024. Other expense contracted by 69.11 percent in 2024 may be due to high-base effect as the company recorded massive allowance for ECL in 2023. MERIT’s operating profit declined by 10.83 percent in 2024 with OP margin diving down to 3.74 percent. Finance cost inched up by just 2.16 percent in 2024. This also appears to be the effect of sale and leaseback transaction which might have alleviated additional financial charges. MERIT’s net loss tumbled by 1.87 percent to clock in at Rs.186.361 million in 2024 with loss per share of Rs.0.93
Future Outlook
Due to consistent losses, the company’s accumulated loss stood at Rs.2.019 million as of March 30, 2024. Since 2022, the company has been able to record operating profit; however, it was offset by enormous finance cost, resulting in net losses. The company will utilize the funds received from the sale of its land and buildings to pay off its debt and get rid of a large portion of finance cost as a strategy to push its bottomline into positive zone. The company is also diligently working to enhance its customer base in order to ensure regular stream of revenues. This is evident by the company’s public notice posted on the PSX on July 11, 2024 stating that the company successfully exported a consignment of printed packaging material which not only resulted in additional orders but also paved way for MERIT in export market. These strategic moves warranty new chapter of growth and turnaround for MERIT.
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