Matco Foods Limited

Matco Foods Limited (PSX: MFL) was incorporated as a private limited company under the repealed Companies Ordinance, 1984 (now Companies Act, 2017), on April 14, 1990. It was converted into a public limited company in July 2017, finally applying for listing on Pakistan Stock Exchange on February 13, 2018. It was one of the three listings for 2018, and the only food grains company to be listed on PSX since Rafhan Maize.
Principal activity of the company as per its Memorandum and Articles of Association includes processing and export of rice, rice glucose, rice protein; and to engage in trade of biscuits, pink salt, bran oil, masala and kheer. Registered offices of the company are located in Federal B Area, Karachi; whereas processing units of the company are located in Karachi as well as Gujranwala. Factories located in Karachi include two rice processing units at Super Highway, and a rice glucose plant; whereas, another rice processing facility is located in Kamoke in the heart of Punjab's basmati bowl.
Structure Apart from Matco Foods, the rice processing facility, the company has also formed two fully owned subsidiaries for the purposes of marketing of its products. These include JKT General Trading, incorporated in FZE zone Dubai, and Matco Marketing (Pvt.) Limited, which was incorporated in Pakistan in 2016. In addition, the company has 49 percent share in a joint-venture known as Barentz Pakistan (Private) Limited, which will be engaged in trading of ingredients used in pharmaceutical, personal care, food & nutrition, and animal nutrition - for life science and food nutrition sector. Both Barentz Pakistan (Pvt.) Limited and Matco Marketing are yet to commence operations.
Ownership, history and brand Matco brand has over 55 years of history in Pakistan's agribusiness. Matco Rice, which was formed by Syed Sarfaraz Ali Ghori in 1964, set up its first rice processing plant in rice belt of Larkana by 1967. As Japanese technology transfer was part of setting up this venture, the Ghori family soon also diversified into supplying Satake, Japan brand rice processing plants to other rice processors in the country, include the government of Pakistan, serving as Satake Corporation's agent in the country into late 1990s.
Its exposure with the international market allowed it to establish its flagship "Falak" basmati brand, with first export-oriented container shipped in 1990. Soon the company set up another rice processing plant in Karachi, while also pivoting Falak brand toward local consumers to capture the domestic market potential. In 2010, the company set up its first processing plant in Punjab, with further additions to capacity along the way.
Matco's pinnacle moment came in 2012, when International Finance Corporation purchased 15 percent share in Matco Foods, a testament to company's potential. Since then, the company has launched and exported organic brown rice, rice bran oil, and Himalayan Pink Salt, all under the 'Falak' flagship brand.
In 2017, Matco became the first food grain in rice processing segment to list itself on the stock exchange, by divestment of 25 percent shareholding previously held with the sponsors. According to the management, the company has used the IPO proceeds of Rs 760 million to setup rice glucose and rice protein plants bringing capacity of both to up to 30,000 tons, and 3,000 tons respectively. The expansion project was completed as of June end, 2019.
The company boasts a global portfolio of over 150 corporate customers in over 40 countries, and claims to be the largest basmati rice exporter in the country. Independent verification of this claim could not be made.
Close to three-fifths of outstanding shares continue to be held by members of sponsor families who are also represented on the board of directors. Additional 15 percent shareholding is held by International Finance Corporation. Of the 25 percent floated in the equities market, largest percentage is held by retail investors at over 15 percent (both local and foreign), with shareholding by banks and NBFIs limited to just three percent of total.
Business strategy According to market checks and disclosures in the financials, rice-exports constitute over two-thirds of annual sales on average, with share of total exports in net revenue exceeding seventy percent as of FY18. Share of local rice sales is only marginal, at less than ten percent of top line, with revenue from by-products accounting for remainder sales made to domestic market.
While the rice exports under the 'Falak' brand continue to be company's cash cow, the company has made fans in the equity market due to its expansion into the rice glucose and protein business. Rice glucose serves as a liquid sweetener and its target markets include bakery, confectionary and pharmaceuticals. While currently a small market of no more than 1million tons globally, it is set to upstage corn glucose after recent EU led initiatives to encourage substitute corn-based glucose due to heightened health concerns.
Similarly, rice protein is also currently a very small market, but it is expected to grow exponentially in coming period due to its use in animal feed, dietary supplements, and nutraceuticals. According to reports in international media, demand for rice protein is expected to grow at a CAGR of 8 percent over the next 10 years.
Financial performance During the period under review - company's first full-year financial performance announced on the exchange - double-digit top line growth came on the back of stable increase in rice exports. Although volumes have not been disclosed by the management, it would appear that export sales alone grew by over 22 percent in value terms, with contraction seen in off take in the domestic market.
However, growth in gross profit remained incremental as cost of sales led by higher cost of paddy procurement. As a result, gross margin actually recorded a decline of 107bps, although remaining in line with long term trends of just under 15 percent. To an extent, higher cost of sales could partly also be attributed to increased depreciation charge, led by import of plant and machinery for expansion projects.
Overheads increased along the way, ensuring that the hit taken on margins at the gross level barely recovers. Some recovery was seen at EBIT-level, mostly a result of windfall exchange gain that came as a result of massive devaluation of Pak rupee in the period under review.
These gains were partly eroded due to higher debt servicing cost on the back of increased debt stock as well as higher interest rates. As a result, PBT margin closed in at 66bps lower than last year, but within the comfortable range of 4.92 percent.
Outlook Company mid-year report cards indicate that the expansion projects are on full throttle, as new range of products such as masala and kheer variants were launched in the local market. While interim revenue and profitability has also grown at an impressive phase, some insiders raise fears that the company may be expanding too aggressively given its primarily short-term debt financed balance sheet, despite the rebalancing through IPO. Current short-term debt stands at Rs 4.5 billion out of Rs 10 billion total asset base. As an export-oriented company, the management could have used SBP-led subsidised facilities such as LTFF to import plant and machinery for the rice glucose and rice protein plants, but the company seems to have preferred the higher cost equity route.
It is expected that once the policy rate changes gears, the company will reprofile its debt, as long term debt currently stands at less than Rs 0.3 billion. Till then, bottom-line will continue to take a hit on account of higher short-term debt servicing cost.

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Matco Foods Limited

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Rs (mn)                           FY18      FY17        YoY

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Sales                            6,869     6,134        12%

Cost of Sales                  (5,862)   (5,169)        13%

Gross Profit                     1,007       965         4%

Administrative expenses          (198)     (175)        13%

Distribution Costs               (300)     (292)         3%

Profit from core operations        509       498         2%

Other income                        18        37       -51%

Exchange gain-net                   73        35       108%

Provision for WWF & WPPF          (22)      (16)        40%

Profit before interest & taxes     577       554         4%

Finance cost                     (240)     (212)        13%

Profit before tax                  338       342        -1%

Taxes                             (29)      (73)       -60%

Earnings for the period            309       269        15%

Earnings per share (Rs)           3.13      2.73

GP margin                       14.66%    15.74%   -107 bps

Operating margin                 7.41%     8.12%   - 71 bps

EBIT margin                      8.41%     9.03%   - 62 bps

PBT margin                       4.92%     5.58%   - 66 bps

NPT margin                       4.49%     4.38%   + 11 bps

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Pattern of Shareholding (as on June 30, 2018)

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Categories of Shareholders                                %

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Directors and their dependants                        60.0%

International Finance Corporation (IFC)               15.0%

Free-float:

Banks, DFIs, Insurance Co., Modarabas & Mutual Funds   3.0%

Other foreign shareholders                             0.2%

General Public (Local)                                14.2%

General Public (Foreign)                               1.6%

Miscellaneous                                          6.1%

Total                                                  100%

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