The Premier Sugar Mills & Distillery Company Limited

Premier Sugar Mills & Distillery Company Limited (PSX: PMRS) was incorporated as a public company is the second sugar mill to be incorporated in the region that came to be known as West Pakistan. The sugar factory and registered offices are located in district Mardan, whereas head offices of the Premier Sugar Milling group are located in capital territory, Islamabad.
Principal activities of the company include manufacture and sale of sugar manufactured from crushing of sugarcane and slicing of sugar beet; and, processing of by-product molasses into ethanol. Sugarcane crushing plant has a rated capacity of 3,810 tons per day and is one of the smallest plants in the country; whereas sugar beet slicing plant, which has the rated capacity of 2,500 TCD and is one of sugar-beet plants in the country, has been defunct since 2014 on account of lack of availability of raw material.
Due to shortage of molasses in the mill home region Mardan, the industrial ethanol manufacturing distillery has also been out of operations since 2015, and the company is in the process of shifting the distillery plant from Mardan to Dera Ismail Khan, where raw material molasses availability is adequate. The distillery unit has an installed capacity of ten thousand gallons per day.
Premier Sugar is also the holding company for Chashma Sugar Mills, Dera Ismail Khan (established 1988), the largest sugar mill in KP and among tops five in the country, with shareholding of 48 percent. It is also the holding company of Frontier Sugar Mills, Mardan - with a shareholding of 82.5 percent. The latter being the first sugar mill in all of West Pakistan (established 1938). Whole Foods (Pvt.) Limited is hundred percent subsidiary of Chashma Sugar Mills and is in the business of providing storage facilities for agriculture produce.
The company also has cross-investments in associated undertakings such as Arpak International Investments Limited at 5.75 percent which in turn has an investment of 10.67 in PMRS; and, National Computers Pvt. Limited of 48.17 percent; and Azlas Enterprises (Pvt.) Limited of 40 percent. Other investments include Premier Board Mills, which manufactures bagasse-waste based particle boards. The company is listed on the Pakistan Stock Exchange and was the first sugar mill to be listed on the then Karachi Stock Exchange.
Pattern of shareholding Premier Sugar Mills is owned by Premier Group of Abbas Sarfaraz group. Sponsors hold majority control of the board through substantial shareholding in the name of sponsor directors Aziz Sarfaraz Khan who holds 28.62 percent, and Abbas Sarfaraz Khan who holds 20.41 percent. Additional shareholding is held with group concern Arpak International Investments at 10.67 percent. Aggregate explicit/declared sponsor shareholding through directors and associated undertakings stands at 70.3 percent.
Nominal shareholding is held with public sector corporations and commercial banks at a total of 2.8 percent. Although individual shareholding currently stands at 27.1 percent; however, free-float is only 13.6 percent. This indicates that sponsors may hold additional shareholding as individuals below the threshold of mandatory disclosure of five percent or above.
Business analysis As both sugar-beet plant and ethanol distillery were shut down during the period under review, manufacturing and sale of white crystalline sugar produced from sugarcane crushing constituted primary source of revenue for the company. In fact, sale of sugar represented over 93 percent of gross sales for the company during 2017-18.
Due to its minimal size, company's share in provincial production of sugar from sugarcane crushing remained minimal at 5.5 percent. Company's remains on the lower side as district Mardan has limited production of sugarcane, with a share of less than one-fourth in total provincial sugarcane production. As a result, the company has not undertaken expansion of capacity over the years.
Moreover, capacity utilisation has remained well-under fifty percent of 3,810 tons per day for over more than a decade, with utilisation for MY18 at just one-third. Capacity utilisation remains low in the province generally as mills in the region compete with gurr manufacturers in informal sector for procurement of raw material sugarcane. The informal players do not pay income, sales, withholding taxes or other regulatory fees such as cane cess or road cess, and as a result, are able to pay a higher price for sugarcane.
Sugarcane growers in turn prefer to sell their produce to these gurr producers. Moreover, as province is out of traditional agro-climatic zone for sugarcane - primarily concentrated in Indus basin irrigated regions of Punjab and Sindh, crop grown in the area is generally of poor quality and is lower in sucrose content. By paying higher premium over indicative rate, gurr producers are able to procure sugarcane of better quality, leaving formal sector-based sugar mills with poor quality sugarcane.
These in turn find it difficult to compete with crushing mills located in Punjab, who enjoy higher sucrose content containing sugarcane, and also produce white sugar in excess. Sugar millers from Punjab then dump their excess stock into KP, rendering KP-based mills uncompetitive, resulting not only in lower capacity utilisation but also subsequent periods of financial losses.
Financial analysis Due to improved input application, sugarcane crop in the mill home region of Mardan enjoyed a better year compared to past. Sucrose recovery level came in at 11.12 percent, substantially up from last year at 11.12 percent.
Despite poor fundamentals, Premier Sugar Mills has managed to keep its head above water in the past decade because most of its sale is to a single-customer, with up to 98 percent revenue derived from the same party. This ensures that almost all of its produce is offloaded, even if at below-market or market competitive rates. Thus, despite poor margins, the company has managed to maintain a semblance of sanity on cash flow front.
Gross loss declined from negative 13.6 percent last year to just 5.3 percent, as a result of improved selling price, even as volume of white sugar produced remained on the lower side, a little under twenty-three thousand tons.
In addition, improved sucrose recovery made sure that the company was required to crush lower quantities of sugarcane to produce incremental quantities of white sugar, lower cost of production per unit.
Additional support was received from export of sugar and subsidy of Rs 10.3 per kilo received from federal government on the same, to the tunes of Rs 87 million. Due to lower average debt levels, debt servicing cost was also lower, ensuring net loss margin was on the lower side by almost one percentage point, although still in the negative territory by a wide margin.
Conclusion It is hoped that distillery unit of the company will become operational from second-half 2019 after relocation to Dera Ismail Khan. With adequate availability of molasses in the DI Khan region, and generally higher contribution margins in the export-oriented ethanol business, it is hoped that profitability will finally be restored to company's financials, after a decade of tough times.

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Pattern of Shareholding (as on September 30, 2018)

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Categories of Shareholders                                %

Directors and their dependants                        59.6%

Associate undertakings                                10.7%

NIT & ICP                                              0.0%

Banks, DFIs, Insurance Co., Modarabas & Mutual Funds   1.8%

Public Sector Corporations                             1.0%

Individuals                                           27.1%

Total                                                  100%

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Premier Sugar Mills & Distillery Company Limited

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Rs (mn)                          MY18      MY17         YoY

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Sales                           1,263       892         42%

Cost of Sales                 (1,330)   (1,014)         31%

Gross Loss                       (67)     (122)        -45%

Administrative expenses          (61)      (62)         -2%

Distribution Costs               (13)       (5)        145%

Loss from core operations       (141)     (188)        -25%

Other income                       64        98        -35%

Other expenses                    (4)       (3)         35%

Loss before interest & taxes     (81)      (94)        -14%

Finance income/(cost)            (86)      (78)          9%

Loss before tax                 (167)     (172)         -3%

Taxation Reversal/(liability)    (29)        25

Net loss for the period         (196)     (147)         33%

Loss per share (Rs)           (52.20)   (39.25)

GP margin                      -5.34%   -13.63%   + 8.29 pp

Operating margin              -11.14%   -21.11%   + 9.98 pp

EBIT margin                    -6.41%   -10.50%   + 4.08 pp

PBT margin                    -13.19%   -19.27%   + 6.08 pp

NPT margin                    -15.50%   -16.50%   + 0.99 pp

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