Century Paper & Board Mills Limited

Century Paper & Board Mills Limited (CEBP) was incorporated in Pakistan as a public limited company in 1984 and began its commercial operations in 1990. The principal activity of the company is the manufacturing of paper, board, and related products. The company is a part of Lakson Group of Companies. The company also entered into the corrugated cartons manufacturing business in 2003.

Pattern of Shareholding

As of June 30, 2024, CEPB has a total of 401.713 million shares outstanding which are held by 4337 shareholders. Associated companies, undertakings, and related parties have the majority stake of 68.66 percent in the company followed by the local general public holding 13.65 percent shares of CEPB. Around 4.59 percent of the company’s shares are held by Modarabas and Mutual Funds while Banks, DFIs, and NBFIs account for 2.87 percent of the outstanding shares of CEPB. NIT & ICP hold 2.41 percent shares of the company while insurance companies have a 2.37 percent stake. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-24)

CEPB’s topline posted steady year-on-year growth until 2023 followed by a decline in 2024. Conversely, its bottom line posted growth only in 2020 and 2021. CEPB’s margins inched down in 2019 followed by significant growth in 2020 and 2021. The margins took a downward course for the next two years. In 2024, gross margin slightly picked up while operating and net margins continued to descend. The detailed performance overview of the period under consideration is given below:

In 2019, CEPB’s topline grew by 17.27 percent year-on-year to clock in at Rs. 22,240.62 million. This came on the back of improved prices, a better sales mix coupled with an increase in sales volume from 214,347 MT in 2018 to 216,771 MT in 2019. The company’s capacity utilization stood at 95 percent in 2019. The cost of sales grew by 18.95 percent year-on-year in 2019 on the back of the Pak Rupee depreciation and fuel price hike. Gross profit ticked up by 6.25 percent year-on-year in 2019; however, GP margin dropped from 13.21 percent in 2018 to 11.97 percent in 2019. Administrative expenses grew by 11.43 percent year-on-year in 2019 due to an increase in payroll expense on account of inflation as well as an increase in employee headcount during the year. Higher freight charges pushed up the selling and distribution expense by 18.76 percent year-on-year in 2019. Lower provisioning done for WPPF and curtailed legal and professional charges resulted in a 6.63 percent year-on-year drop in other expenses in 2019. Other income grew by 22.53 percent year-on-year in 2019 on account of higher proceeds from scrap sales. Operating profit grew by 5.79 percent year-on-year in 2019; however, OP margin slid from 9.97 percent in 2018 to 9 percent in 2019. The greatest dent to the bottom line came on the back of a 65.56 percent year-on-year spike in finance costs. During the year, the company redeemed its preferred stock worth Rs. 901 million and replaced it with loans from sponsors. This drove up the debt-to-equity ratio from 38 percent in 2018 to 40 percent in 2019. Higher debt coupled with monetary tightening culminated in higher financial costs for the year and pushed down the bottom line by 10.86 percent year-on-year to clock in at Rs.884.154 million in 2019. NP margin shrank from 5.23 percent in 2018 to 3.98 percent in 2019. EPS also dropped from Rs. 6.25 in 2018 to Rs.5.80 in 2019.

In 2020, CEPB’s topline mustered a marginal 9.46 percent year-on-year growth to clock in at Rs.24,344.96 million. Sales volume tapered off to 215,648 MT, down 0.5 percent year-on-year. The outbreak of COVID-19 in the last quarter of 2020 suppressed the consumer demand which posted improvement in the initial quarters of 2020. During 2020, the company tapped export markets of Afghanistan and the Middle East which gave much-needed support to its topline. Cost of sales grew by 4.24 percent year-on-year in 2020 while gross profit posted an encouraging growth of 47.86 percent year-on-year on the back of an improved sales mix and better prices. GP margin rose to 16.17 percent in 2020. Administrative and distribution expenses escalated by 13.30 percent and 11.59 percent respectively in 2020. The major growth drivers were higher payroll expenses and higher outward freight charges incurred in 2020. The payroll expense grew despite the fact that the number of employees dropped from 1652 in 2019 to 1640 in 2020. Higher provisioning done for WWF and WPPF translated into a 49.68 percent year-on-year rise in other expenses. Other income also multiplied by 11.76 percent year-on-year in 2020 on the back of higher scrap sales. Operating profit magnified by 57 percent year-on-year in 2020 with OP margin jumping up to 12.91 percent. The company tried to rationalize its borrowing cost during 2020 by using FE-25 and offshore borrowings at low rates along with streamlining its short-term borrowings. As a consequence, its debt-to-equity ratio dropped to 28 percent in 2020. However, high interest rates for most of the year pushed the finance cost up by 29.50 percent year-on-year in 2020. The bottom line grew by 72.12 percent year-on-year in 2020 to clock in at Rs.1521.772 million with an NP margin of 6.25 percent. EPS also grew to Rs.10.35 in 2020.

In 2021, CEPB’s net sales grew by 17.72 percent year-on-year to clock in at Rs.28,659.91 million. This came on the back of a 7.6 percent year-on-year rise in sales volume. CEPB’s sales volume stood at 232,051 MT in 2021 as consumers started focusing on packaged products and online shopping after COVID-19 which increased the demand for packaging products in 2021. However, the demand for writing/printing papers significantly dropped in 2021 due to recurring lockdowns. CEPB’s export sales also almost doubled in 2021. Gross profit grew by 44.69 percent year-on-year in 2021 due to increased sales volume, operational efficiency, optimal sourcing of raw materials, and low fuel cost in 2021. GP margin also tremendously grew to attain its highest level of 19.87 percent in 2021. Administrative and distribution expenses rose by 11 percent and 22.91 percent respectively in 2021. The main drivers were elevated payroll expense and freight outward. Other expenses staggeringly grew by 122.29 percent year-on-year in 2021 on account of higher provisioning done for WWF, and WPPF and also because of provision booked for expected credit losses in 2021. Other income also posted a handsome 76.58 percent year-on-year growth from scrap sales proceeds and also because of gain on extinguishment of GIDC liability, gain on insurance claims, government grants as well as gain on sale of operating fixed assets in 2021. Operating profit grew by 48 percent year-on-year in 2021 with OP margin climbing up to 16.23 percent. Finance cost shrank by 58.87 percent year-on-year in 2021 on the back of low discount rates and lesser working capital-related borrowings. CEPB’s bottom line posted a stunning 94.49 percent year-on-year growth in 2021 to clock in at Rs.2959.66 million with an NP margin of 10.33 percent. EPS grew to Rs.14.59 in 2021.

CEPB registered 4.4 percent year-on-year growth in its sales volume in 2022 due to impressive growth posted by LSM which created demand for paper and paperboard products. This culminated in topline growth of 36 percent year-on-year in 2022. CEPB’s net sales were recorded at Rs.39,000.25 million in 2022. While the local market performed exceptionally well in terms of sales, export sales dropped by 71 percent year-on-year in 2022 to clock in at just Rs. 41 million which included sales to Afghanistan. Commodity super cycle in the international market on the back of the Russia-Ukraine crisis coupled with Pak Rupee depreciation and high indigenous inflation jacked the cost of sales up by 48.17 percent year-on-year in 2022. This trimmed down gross profit by 12.68 percent year-on-year in 2022 with GP margin sliding down to 12.75 percent in 2022. Administrative and distribution expenses posted 18.42 percent and 14.16 percent year-on-year growth respectively on the back of high inflation, induction of human resources to cater to high demand, and also because of higher outward freight. Other expenses slipped by 32.96 percent year-on-year while other income posted a marginal 3 percent year-on-year growth in 2022. This trimmed down the operating profit by 15.46 percent year-on-year while the OP margin ticked down to 10.1 percent in 2022. Finance cost posted a significant growth of 66.59 percent in 2022 due to a high discount rate coupled with increased working capital requirements which drove up the short-term borrowings. Due to supply chain shocks on the back of the Russia-Ukraine crisis, the company maintained excess stock of imported inventory which required excess funds. Moreover, the company also borrowed under the TERF facility to finance its Balancing, Modernization & Replacement (BMR) projects. Net profit dropped by 25.26 percent year-on-year in 2022 to clock in at Rs.2211.921 million with an NP margin of 5.67 percent. EPS also nosedived to Rs.10.9 in 2022.

In 2023, CEPB’s topline posted 22.21 percent year-on-year growth to clock in at Rs.47,66125 million. Sales volume dropped by 14.4 percent year-on-year to clock in at 207,413 MT. To cope with the supply side constraints on the back of import restrictions and also due to the shutdown of machines to facilitate BMR projects, CEPB rationalized its sales mix to include the products with competitive prices to cope with the constant increase in the cost of raw materials and fuel. Despite rigorous efforts, the high cost of sales on the back of elevated raw material prices, Pak Rupee depreciation, high inflation, and energy charges didn’t allow CEPB to sustain its gross profit which declined by 10.69 percent year-on-year in 2023. CEPB’s GP margin moved down to its lowest level of 9.32 percent in 2023. Administrative and distribution expenses posted year-on-year growth of 22 percent and 16.81 percent respectively in 2023. This was on account of higher payroll expenses and freight outward. Due to lower profitability, the company booked fewer provisions for WWF and WPPF. This drove down other expenses by 51.47 percent year-on-year in 2023. Other income grew by 46.75 percent in 2023 primarily on account of scrap sales and amortization of government grants. Operating profit shriveled by 12.61 percent year-on-year in 2023 with OP margin diving down to 7.21 percent. Finance cost multiplied by a massive 198 percent in 2023 due to the combined effect of higher discount rate, high working capital requirements, and high long-term borrowings to finance BMR projects. The result was a bottom-line slide of 59 percent year-on-year in 2023. CEPB’s net profit clocked in at Rs.904.989 million in 2023 with an NP margin of 1.90 percent and EPS of Rs.2.25.

In 2024, CEPB registered an 11.85 percent year-on-year decline in its net sales which clocked in at Rs.42,015.48 million. Sales volume eroded by 10.85 percent to clock in at 184,908 MT. Capacity utilization stood at 68 percent in 2024 versus capacity utilization of 74 percent recorded in the previous year. This was on account of sluggish demand, stiff competition from cheaper imported products and an unorganized sector as well as outsourcing of some raw materials for corrugated boxes. BMR of paper & board machines, cogeneration machines, and related auxiliaries resulted in operational efficiency. This coupled with a reduction in energy cost due to lower coal prices, stable prices of imported raw materials, and gas procurement at concessional rates allowed the company to record a slightly higher GP margin of 9.68 percent in 2024. This was despite an 8.46 percent drop in gross profit in absolute terms. Administrative and distribution expenses grew by 13.23 percent and 3 percent respectively in 2024 on the back of adjustments in salaries & wages, higher freight charges, and also because of elevated levels of inflation. During the year, CEPB squeezed its workforce to 1605 employees. Other expenses tumbled by 12.95 percent in 2024 due to lower profit-related provisioning, no exchange loss incurred during the year and no provisioning done for ECL. Other income multiplied by 23.59 percent in 2024 due to increased profit recognized on bank deposits and mutual funds, exchange gain as well as amortization of government grants recorded during the year. CEPB’s operating profit slid by 12.10 percent in 2024 with OP margin inching down to 7.19 percent. Despite the high discount rate, CEPB was able to cut down its finance cost by 8.32 percent in 2024. This was on account of lower outstanding borrowings during the year. The company kept a strict check on its inventory level and trade receivables which resulted in improved liquidity. CEPB’s net profit slumped by 42.11 percent to clock in at Rs.523.893 million. This translated into EPS of Rs.1.3 and NP margin of 1.25 percent.

Recent Performance (1HFY25)

During the first half of FY25, CEPB recorded a 10.31 percent year-on-year dip in its net sales. This came on the back of a 6.73 percent year-on-year drop in sales volume which clocked in at 88,031 MT. Reduced sales volume was the result of lower demand and tough competition from cheaper imported products particularly coated bleached board (CBB). Not only did the volume slide in 1HFY25, CEPB also had to reduce the prices of its products to stay relevant in the market. The impact of lower prices was partially offset by lower raw materials and energy costs. This resulted ina 12.33 percent diminution in gross profit in 1HFY25 with the GP margin inching down to 9.10 percent versus the GP margin of 9.31 percent recorded in 1HFY24. Administrative and distribution expenses ticked up by 7.23 percent and 8.37 percent respectively in 1HFY25 due to inflationary pressure. Lower profit-related provisioning resulted in a 23.64 percent dip in other expenses in 1HFY25. Other income mounted by 52.61 percent in 1HFY25 probably due to exchange gain and amortization of government grants. CEPB recorded a 13.15 percent dip in its operating profit in 1HFY25 with OP margin clocking in at 6.70 percent versus OP margin of 6.92 percent recorded in 1HFY24. Finance cost inched up by 0.79 percent in 1HFY25 as the impact of the lower discount rate was offset by increased working capital requirements. Net profit slumped by 43.38 percent to clock in at Rs.200.56 million in 1HFY25. This translated into EPS of Rs.0.50 in 1HFY25 versus EPS of Rs.0.88 recorded in 1HFY24. NP margin tumbled from 1.6 percent in 1HFY24 to 1 percent in 1HFY25.

Future Outlook

A prolonged period of elevated inflation has restrained the purchasing power of consumers putting a dent in the demand for paper and paperboard products. Furthermore, the global recession has lowered the prices of similar products in the international market which is enticing the local FMCG companies to import packaging material from the international market. Some FMCG companies are even shifting to cheaper local alternatives pertaining to the unorganized sector, further suppressing the demand for CEPB products.

While local industrial activity is still slow, the company is planning to tap export markets beyond Afghanistan to attain higher sales volumes. In the near term, the company also plans to modify its sales mix and focus more on high-yielding products to improve its margins and profitability.

Moreover, a favorable energy mix due to the installation of a 3.7 MW solar power plant, stable raw materials and fuel prices, lower finance costs, and declining inflation are also providing much-needed support to the company’s margins and profitability.