MapleLeaf Cement Factory Limited

MapleLeaf Cement (PSX: MLCF) as it stands today falls in the mid-tier cement company category within the cement industry and is located in Mianwali, Punjab catering to particularly the market in the north. In 1956, the company was set up by the West Pakistan Industrial Development Corporation (WPIDC) with a start-up production capacity of 300,000 tons annually. In 1867, another company White Cement Industries Limited (WCIL) was formed with a clinker capacity of 15,000 tons per annum.
These two were merged in 1974 and transferred to the newly established State Cement Corporation of Pakistan (SCCP). Later, the SCCP established Pak Cement Company Limited (PCCL) with a capacity of 180,000 tons per annum. In 1992, during the privatization phase within the sector, these three were merged to form MapleLeaf Cement. The company went public in 1994 and today is a subsidiary of Kohinoor Textile Mills Limited (KTML) both of which a part of the larger Kohinoor MapleLeaf Group (KMLG). In 2000, Maple Leaf Electric Company Limited (MLEC), a power generation unit, was merged into the company while in 2005, the company enhanced capacity from 990,000 tons to 1.2 million tons annually by debottlenecking and up-gradation of technology.
Currently, the company has three production lines to manufacture grey and white cement with a combined capacity of 3.3 million tons per annum of clinker. That gives it about 7 percent of the share in the market as per capacity. The company has been running on more than 80 percent capacity utilization reaching nearly full capacity during FY16 and FY17. The company also has installed Waste Heat Recovery units. The company imports its coal from South Africa and has land leased for the extraction of raw materials like limestone, clay and gypsum.
Shareholdings and investments:
While being part of the Kohinoor Group, MapleLeaf is a subsidiary of KTML which holds over 55 percent of its shares for FY17. Nearly 26 percent of the shares of the company are held by unspecified foreign investors whereas individuals held 8.9 percent of the company's shares.
The company has its own power subsidiary, MapleLeaf Power Limited that has a 40MW coal-fired power plant to generate supply power for MLCF and be a source of cheap fuel in a time when oil prices are trending upward and expected to move up. The project is in the test phase and according to the company's official reports should have become operational in Oct-17.
Meanwhile, the company provides loan facilities to its holding company, KTML for the latter's working capital requirements. This would allow it to earn an income by means of the mark up at one percent above of average borrowing cost and help boost cash flow.
A major investment that MapleLeaf is making is an expansion to the tune of Rs 23billion with a brownfield facility of about 2.1 million tons of grey clinker. The project is expected to come online during FY19. By way of financing, the company offered 12.5 percent right shares to partially finance the new project.
Financial and operational performance:
There is no doubt that MapleLeaf is a growing and promising cement manufacturer in a highly competitive industry. It has consistently improved its revenues despite a pressure on retention prices lately. Having reached over 99 percent capacity utilization during FY16, the company continued this streak during FY17 as it reached overcapacity in clinker.
Margins were growing as the industry was enjoying lower prices for imported coal. However, dependence on imported raw material (coal, furnace oil etc.) is a gamble as more than 60 percent of the cost of production relies on how the global market performs. As coal prices as well as furnace oil prices rose during FY17, so did Maple leaf's costs and margins as a result suffered-falling to 40 percent against 43 percent during FY16.
Meanwhile, even as dispatches have grown and capacity utilization for MapleLeaf reached its ceiling, exports have fallen and share in total has fallen to 13 percent during FY17. This trend, observed across the sector is troubling. However, MapleLeaf has several projects in the works-from its investment in the new expansion to that in a power project that would to a great extend substitute its electricity needs and cushion the blow from rising costs.
The company reduced its finance costs as it repaid its entire Sukuk loan of Rs 8billion during FY16. According to the company's annual report: "Strong fundamentals-profitability and efficient cash flow management would ensure the expansion does not hit any snags from the financing point of view. The company is in a good position to seek loans". Indeed, that is always one of the concerns of stakeholders when a company embarks on a billion rupees investment.
The company has been saving on inland transportation costs through haulage via the railway network. Transportation and distribution remains one of the issues in companies situated in the north. They often suffer from higher freight as imported content has to be transported from the south where the ports are located; and the use of the railway network must offer reprieve.
Latest financials and MapleLeaf's outlook:
Much like the rest of the cement industry, during the latest quarterly financial result ending Sep-17, MapleLeaf is in a bit of a bind but not because of any lack in efficiency or a sales downturn. In fact, in 1QFY18, dispatches for the company rose by 17 percent resulting in a 5 percent increase in net revenue. Part of the reason for a smaller growth in revenues is the reduction in retention prices amongst companies in the north. Many companies are also offering price discounts and revenues have not been able to keep up with the volumetric sales growth.
Margins have suffered greatly as coal prices went up considerably during the period against this time last year. The combination of low retention prices and higher per unit cost of production reduced margins to 37 percent during 1QFY18 against 43 percent during 1QFY17.
Meanwhile, export volumes have plummeted all around-for MapleLeaf, they fell by 46 percent during 1QFY18-as Afghanistan has become a difficult market to penetrate in competing with cheaper Iranian cement that has quickly established a foothold. Border restrictions have also added to the trouble in that key market. Local demand has become a savior for the cement industry.
As expansions come online however, capacity utilization will move down and MapleLeaf as well as other manufacturers in the industry will face price competition and a significant reduction to margins. If costs for fuel and power continue to climb, bottom-line will ultimately suffer. For its part, the coal fired power plant should help bring down costs in the long run while controlled financial management and other incomes coming through investment in holding company bode well for MapleLeaf.
MapleLeaf must explore exporting destinations should exports in traditional markets such as Afghanistan and South Africa continue to fall. This would help cushion the blow if/when local demand is unable to absorb the additional capacity post FY19. Depending on MapleLeaf utilization of added capacity, it could grow its market share-at the very least, it would maintain its existing space as a mid-tier supplier of cement. Risk from higher costs, and price competition will remain to put pressure on the bottom-line over the next five years even as local demand expands, bolstered by growth in infrastructure and housing sectors.

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Unconsolidated financial results Q1-FY18

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Rs (mn)                           1QFY18    1QFY17     chg

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Sales                            5,810.1   5,556.1      5%

Cost of goods sold               3,683.1   3,175.2     16%

Gross profit                     2,127.0   2,380.8    -11%

Distribution & marketing cost      266.2     373.5    -29%

Administrative expenses            149.6     121.8     23%

Other expenses                     124.2     149.3    -17%

Other operating income              14.1       4.5    217%

Finance cost                       144.0      46.1    213%

Profit Before tax                1,457.1   1,694.7    -14%

Net tax                            407.7     471.3    -13%

Profit After tax                 1,049.4   1,223.4    -14%

Gross margin                         37%       43%

Net margin                           18%       22%

Dispatches (tons)                739,248   632,202     17%

EPS (Rs)                            1.99      2.32    -14%

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Source: PSX notice

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Maple Leaf: Shareholders Pattern (as at June 2017)       Shares             %

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Associated Companies and related parties             291,412,131       55.20%

Kohinoor Textile Mills Ltd                           291,410,425       55.20%

Mutual Funds                                          20,083,272        3.81%

General Public- individuals                           46,831,589        8.87%

General Public- foreign investors                    137,834,740       26.12%

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