Century Paper and Board Mills

Century Paper and Board Mills (PSX: CEPB) is part of the Lakson Group of companies. Lakson Group, established in 1954, has ventured into a variety of businesses from technology to media to packaging to FMCGs among others. It is one of the largest and most diversified conglomerates of Pakistan, with its presence in more than fifty cities of Pakistan, in addition to operating in UAE and US.

Century Paper and Board Mills was established in 1984 while it began commercial production in 1990. Its two major lines of business are paper and paperboard business and corrugated carton business.

In an attempt to reduce its cost of inputs and become self-reliant for its energy sources, CEPB installed an 18MW coal based co-generation power plant in FY16. In 2018, it installed solar panels of 291KW while its most recent investment in 2019 has been the enhancement of solar panel capacity to 1.3MW after installation of 1MW solar panel.

Associated companies, undertakings and related parties hold majority of the shares in Century Paper and Board Mills with SIZA Private Limited, which is also a venture of Lakson Group, being the key shareholder in the category. General public and modarbas and mutual funds hold 11 percent and 8 percent respectively while the rest are distributed between the remaining categories as shown in the table.

Historical performance Century Paper and Board Mills incurred loss in FY15 after which it has been improving its financial performance. FY14 and FY15 have specially been testing years for CEPB. In FY14, the company's production was disturbed due to gas supply cuts, in both seasons, winters and summers, despite the demand being present for paper and paperboard products. During the winters, from December 2013 till March 2014 there was a complete halt in gas supply, whereas during the summers gas was available only twice in a week which had an adverse impact on production. Left with no option, the company had to resort to expensive alternate sources for fuel to continue operations.

The sales of FY14 in volumetric terms had declined, whereas in value terms it was only able to increase by a mere 3 percent year-on-year. This was due to an increase in selling price by 9 percent. The high cost of inputs due to alternate fuel sources along with a decline in volumetric sales caused bottom-line to reduce by 32 percent year-on-year.

Similar trend continued in FY15, with the addition of imported material being dumped in the market in response to a slump in international prices for paper products worsening the situation. The top-line witnessed a drop by 10 percent in FY15. It was unable to maintain its market share due to cheaper imported alternatives available. The latter triggered a drop in market prices, which forced the company to produce only what it could sell at the price which allowed them to absorb higher costs. This in turn led to under utilisation of available production capacity.

Pakistan's economy grew with a real GDP growth rate of 4.71 percent in FY16. This had a positive impact on paper and paperboard segment, which also saw an increase in consumption. In response to the interrupted supply of energy in the preceding years, the company had invested in 18 MW coal based co-generation power plant which began operations in FY16, allowing production plants to improve capacity utilisation; nearly 75 percent in FY16 as compared to 66 percent in FY15.

Top-line increased by only one percent in FY16, but achieved a volumetric growth of 14 percent. A decline in fuel prices however, contributed to reduction in the cost of sales and hence increase in bottom-line for the period. Finance cost also reduced due to decline in interest rates and efficient portfolio management of funds.

Profits continued its upward trend in FY18 whereby the company's reliance on its in-house power generation allowed it to stay resilient in the face of otherwise rising fuel prices. There was a 5 percent increase in volumetric terms whereas top-line experienced a 23 percent increase on a year-on-year basis. This was possible by passing on the high input price to the consumer. FY18 also saw a fall in imported material protecting the local industry.

Economic slowdown in FY19 impacted majority of the sectors alike. Paper and paperboard was no exception. The current account deficit and readjustment of the currency along with other fiscal and monetary tightening in response caused a deceleration of 3.3 percent in GDP growth rate as compared to 5 percent in 2018. Despite this, Century Paper and Board Mills managed to stay afloat due to imposition of anti-dumping regulations in addition to rupee devaluation, which made imports uncompetitive; in response, top-line increased by 17 percent year-on-year whereas volumetric sales increased marginally by 1 percent.

The incline in cost of raw materials and fuel, however, by 15 percent and 30 percent respectively caused a collective increase in cost of sales by approximately 19 percent. Another factor which reduced profitability for the period was the increase in finance costs by 65 percent due to policy rate doubling from 6.5 percent in FY18 to 13.25 percent in FY19.

The profitability trends can also be observed in return on equity and return on capital employed figures, where FY15 saw a slump after which it recovered, and slightly fell again in FY19 due to uncertainty in the business environment.

Century Paper and Board Mills capacity utilisation fell in FY15, after which it has observed an upward trend with the economy growing at around 5 percent each year, with the exception of FY19. The installation of the new power plant also helped the company to enhance its capacity utilisation. Operating at nearly 95 percent, the company decided to expand its capacity by signing a contract with Posco Daewoo Corporation of Korea to acquire a new Board machine. However, with the turn of events in FY19, it became difficult to finance the project, thus it focused on small BMR projects to improve existing facilities.

Quarterly performance The demand of paper and paperboard products is to an extent linked to demand for FMCG products. Despite the economic slowdown the company had a fair market size. The company's production increased by 6.3 percent in 1QFY20 from 1QFY19, whereas top-line increased by nearly 13 percent. Government protection against imports allowed for growth in gross profits by around 15 percent, year-on-year. However, twice the increase in finance cost pushed earnings for the period down by 31 percent year-on-year, also visible from decline in net margins.

Future outlook To mitigate against the risk looming due to the economic slowdown and the risk of falling capacity utilisation, Century Paper and Board Mills tried to explore export markets and already begun exporting in 1QFY20. The company expects continued pressure by finance costs on bottom-line due to high interest rates in addition to working capital requirements; however government's anti-dumping legislation may provide the needed cushion to keep the company profitable.

Moreover, GDP growth rate is expected to be around 2.3 percent, which is lower than the previous year. In addition, high policy rates, high electricity and gas tariffs and currency devaluation are all expected to hamper growth. In view of this, the company intends to focus on cost efficiency, improving market share and adjusting selling price depending on rise in costs of production.

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CEPB: Shareholding pattern as at June, 30, 2019
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Categories of shareholders                                %
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Directors, CEO, their spouse and minor children        0.04
Associated companies, undertakings and related part   68.13
NIT and ICP                                            3.36
Banks, DFIs and NBFIs                                  0.62
Modarabas and mutual funds                             8.04
Insurance companies                                    2.25
General public                                        11.16
Others                                                 6.38
Total                                                   100
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Source: Company accounts