INTRODUCTION: JDW Sugar Mills Limited is one of the biggest sugar-producing companies in Pakistan, contributing around 15-17 percent to the country's total sugar production. The company is owned by the industrial group JDW, which is considered one of the progressive industrial houses of the country.
The sugar mill was initially incorporated as a private limited company on May 31, 1990 under the Companies Ordinance. It then went on to become a public limited company on August 24, 1991. The company has a registered office in Lahore. It is also listed on the Pakistan Stock Exchange under the moniker, JDWS.
The company's shareholding composes of 1,127 shareholders in the company as of September 30, 2016. Around 52 percent of the shares belong to the directors, CEO, their spouses and children. The general public holds around 40 percent of the company shares. The remaining shares are held by foreign companies. The company's current shareholding pattern can be observed from the table below:
The company has three main investments. It has two subsidiaries: Deharki Sugar Mills (Private) Limited (DSML) and Faruki Pulp Mills Limited (FPML) with 100 percent and 57.7 percent shareholding respectively, besides one associate, JDW Power (Private) Limited, of which it holds 47.4 percent shares.
Operations There are four principal activities of the company: production and sale of sugar, electricity generation, management of corporate farms, and production of molasses and bagasse (by-products of sugar). The sugar production activity is spread over three units located in the districts of Rahim Yar Khan, Sadiqabad and Ghotki.
Electricity generation takes place in two production units in Sadiqabad and Ghotki, with production capacities of 26.6 and 26.8 MWs, respectively. The co-generation function of the company uses bagasse for electricity generation hence providing a renewable source of energy. The corporate farming enterprise spans an area of over 24,000 acres in both Punjab and Sindh. The use of advanced farming technologies and techniques allows the company to raise the capacity and efficiency of farmers, thereby also ensuring a steady supply of sugarcane to the mills.
Financial analysis The financial analysis that follows is based on unconsolidated financial statements that also account for investments in subsidiaries and associate on the basis of direct equity interest. (The financial year, here referred to as 'marketing year' (MY), ends in September.)
The sugar sector in Pakistan is marred with challenges of seasonal fluctuations in crop yields, fixed cane prices, and lack of export subsidies for sugar. However, JDWS has historically fared well in the recent past. Profits have been on the rise, driven by increasing sugar production, except for the MY15. Net sales exhibit a similar trend as do the earnings per share.
A constant success factor for JDWS is its performance in sucrose recovery. The mill's sucrose recovery, both for its individual units and as a whole, has consistently been the highest across Pakistan.
The last marketing year ended September 30, 2016 was a good year for JDWS. Both sales and profits showed shown double-digit growth year-on-year. The company's gross profit went up 33 percent over previous year. The pre-tax profit for MY16 stood at Rs 2.31 billion, compared to Rs 1.21 billion the previous year - an increase of 91 percent.
According to the director's report, those profits were led by better sugar prices, increase in sugar production, receipt of subsidies for exports, and revenues from co-generation plants. The profits were also reflected in the company's basic earnings per share, which rose from Rs 25.38 to Rs 34.03. The company's improved performance could also be attributed to the savings in cost of oil consumption and lubricants, chemicals and packing material.
While the top line has grown in double digits in recent years, JDWS has done well to maintain its costs. It brought down its cost of sales from 84 percent of gross sales in MY13 to 77 percent in MY16. The administrative and selling expenses continue to remain under 3 percent of gross sales. However, the 'other expenses' exhausted an abnormal 4.2 percent of gross sales, on account of a Rs 1.52 billion impairment the company booked against its investment in FPML.
Sugar production remains at the core of JDWS operations, contributing around 80 percent of gross sales. The sugarcane crushed for the year ended September 2016 was 7.68 percent higher than the previous season. However, this was not matched by an equal increase in sugar production. This could be attributed to a reduction in sucrose recovery.
While the climatic conditions were favourable to growers as better yields per acre were observed, they did not fare so well for sucrose recoveries. The average overall sucrose recovery was 10.94 percent as compared 11.02 percent the previous year. Despite the overall reduction, all sugar-mill units of JDWS topped sucrose recoveries in their respective provinces, keeping up with the past records of highest recoveries in Pakistan.
Latest financials The situation post-MY16 continues to be rosy for the firm's bottom line. Net profits rose in double digits in the nine-month period ended June 30, 2017, to reach almost the same level as entire MY16. This is another year of healthy top line expansion for JDWS, brought about by higher sugar production, better sugar and molasses prices, higher power generation, and improving performance of corporate farms. The cost of sales grew by an unusual 26 percent year-on-year. However, the increase in sugar mill's cost of sales was more than offset by the double-digit sales growth in the company's other revenue streams - electricity, agriculture, and by products.
The company's relatively stable position despite the challenges in the industry could also be attributed to its diversification into other streams. The revenue contribution from electricity generation has been on the rise since its first operations in 2014. The sales from co-generation stood at 11 percent of gross revenues in MY16. Another important contributor to sales is the company's sale of the by-products, molasses and bagasse. Most of the bagasse is now consumed internally for the company's co-generation operations.
In terms of its financial ratios, the company seems to be performing well. The emphasis now is on improving its operating margin. The operating profits have been impacted by unfavourable sugar sale price as well as the massive expansion of co-generation projects and corporate farming. JDWS expects this expense hike to be tackled within three years of its operations. This can again be easily corroborated by the revenue streams both co-generation and corporate farming are already providing for the company.
Stock performance While JDWS has been a growing firm in a challenging industry, it's a different story in the stock market, where investors don't seem too kind to its stock. In the year-to-date period, the JDWS scrip has mostly underperformed the broader index. The stock has been on a downhill journey since peaking in early January. From what it looks, the firm may close MY17 with record profits. Whether the stock market pays heed remains to be seen.
Outlook In terms of sugar production, for the MY17, Pakistan is looking at a sugar surplus once again, especially with leftover sugar reserves from previous year. This is likely to have a depressing effect on sugar prices domestically. The company began the current marketing year expecting prices to remain stable, enabling it to cover for the loss in sucrose recoveries that are expected this MY due to unfavourable weather conditions.
Going forward; continued profitability growth at JDWS is contingent on domestic sugar prices, export prospects, expansion of co-generation operations, and profitable utilization of the by-products.
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JDWS: Pattern of shareholding (as of September 30, 2016) Shares % of total
held shares
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Directors, CEO, and their spouse and minor children 31,355,143 52.45%
Investment Corporation of Pakistan 19,965 0.03%
Commercial banks and non-banking financial institutions 48,639 0.08%
General public (local) 23,857,827 39.91%
Modarabas and Mutual funds 12,750 0.02%
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Others:
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Joint-stock companies 1,475,188 2.47%
Investment companies 2,085 0.00%
Foreign companies 2,998,545 5.02%
Others 6,519 0.01%
Total 59,776,661 100.00%
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Source: Company accounts.
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JDWS: Financial snapshot
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Rs (mn) MY16 MY15 MY14 MY13 MY12 MY11
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Financial position
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Share capital 598 598 598 598 598 598
Shareholders' equity 8,321 7,017 5,981 5,489 4,923 4,756
Long-term finances (secured) 9,495 7,472 8,564 4,292 3,120 4,068
Trade and other payables 7,328 5,996 4,627 2,789 2,527 1,098
Property, plant and equipment 19,542 18,669 17,136 10,073 8,227 7,713
Stock in trade 5,036 4,861 4,384 3,324 3,732 1,922
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Operating results
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Net turnover 37,287 32,663 30,535 27,183 22,750 24,729
Gross profit 6,454 4,866 3,229 3,202 2,362 4,135
Operating profit 3,979 3,453 2,859 2,429 1,883 3,599
Profit after tax 2,034 1,517 980 925 687 1,372
Earning per share-Rs 34.03 25.38 16.39 15.47 11.52 24.95
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Financial ratios (based on net turnover)
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Gross margin 17% 15% 11% 12% 10% 17%
Operating margin 11% 11% 9% 9% 8% 15%
Net margin 5% 5% 3% 3% 3% 6%
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Data source: Company accounts.
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JDWS: Latest financials
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Rs (mn) Oct-Jun Oct-Jun Yoy
2017 2016 chg
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Net sales 33,316 27,665 20%
Gross profit 4,889 5,118 -4%
Operating profit 3,934 3,607 9%
Net profit 2,017 1,700 19%
EPS 33.75 28.44 19%
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Data source: Company accounts.
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