Dynea Pakistan Limited

Dynea Pakistan Limited (PSX: DYNO) was established in 1982 as a public limited company under the Companies Act, 1913 (now Companies Act 2017). It has two production plants; one located in Hub, Balochistan and the other in Gadoon, Khyber Pakhtunkhwa.

Dynea Pakistan principally manufactures and sells formaldehyde, urea/melamine formaldehyde, aminoplast compound and melamine glazing powder.

Shareholding pattern

AICA ASIA PACIFIC PTE LTD, and associated company of DYNO owns almost 25 percent of the company’s shares. It is the regional leader in developing and delivering high performance adhesives and surfacing solutions for the wood working, other industrial and retail applications, headquartered in Singapore. A little over 29 percent of DYNO’s shares are held by individuals whereas foreign investors hold close to 26 percent. Mutual funds and joint stock companies each hold about 11 and 7 percent, respectively. The directors, CEO, their spouses and minor children hold a mere 0.03 percent.

Historical operational performance

Dynea Pakistan’s topline has been growing at differing rates over the years, except for FY15 when it registered a negative growth rate of close to 12 percent. Profit margins have been growing since FY14; they peaked between FY17 and FY18 after which it experienced a decline in FY19.

The rationale for a negative growth period in topline during FY15 is attributed to reduction in sales price. In FY15, the cost of sales, in absolute numbers, was lower than FY14; the benefit was passed on to the consumer resulting in lower revenue. However, as a percentage of topline, the cost of manufacturing has rather increased between the periods. Yet, the company was able to improve gross and operating margins due to operational efficiency evident from lower distribution costs. Finance cost nearly doubled due to a substantial increase in mark-up on long term financing resulting in marginally lower net margin.

In FY16, the industry was marked by intense competition and overcapacity. The company’s topline managed to grow by a little over 1 percent. The resin division in particular experienced a decline in sales due to excessive competition while aminoplast division showed an improvement of 3.57 percent in revenue as a result of production efficiency and better volumes. The costs of sales as a percentage of topline as well as in absolute terms reduced, causing gross margins to improve notably. A significant reduction was seen in ‘other income’ and finance costs. ‘Other income’ declined as a result of net exchange loss while finance costs reduced due to a reduction in mark-up on both, long-term financing and short-term running finance.

During FY17 the company saw a slight improvement in its topline growth rate of 3.3 percent. It was previously recorded at 1 percent. Of this, a major contribution was made by the Resin division which registered a growth of almost 14 percent in its revenue as a result of better volumes. Margins for the period improved due to continued efforts to enhance production efficiency. The share of cost of sales in revenue further declined year on year from consuming 83 percent of sales in FY16 to 81 percent in FY17. A restoration of other income to previous levels and further decline in finance costs also provided some support to net profit margins. ‘Other income’ increased due to interest earned on PLS account while lesser interest paid on long and short term financing was responsible for lower finance costs.

A whopping 55 percent growth in topline was seen in FY18 - highest thus far. Both, the Resin division and Aminoplast division recorded 74 and 35 percent growth in revenue, respectively. Apart from the consistent efforts to operate efficiently, the company also expanded its production capacity at Gadoon plant. Moreover, it added ‘glazing compound’, a new product to their portfolio. A marginal incline in cost of sales’ share in revenue was observed, which reduced gross margins slightly. Although finance cost made less than 1 percent of net revenue, in absolute terms it increased significantly as a result of mark-up on short and long term financing.

Although topline grew at a decent rate of 33 percent, cost of manufacturing increased significantly, consuming more than 86 percent of revenue compared to last year’s 82 percent. Of this, salaries, wages and other benefits, ‘indirect material’ and fuel and power exhibited the greatest incline. Finance costs also jumped from Rs 29 million in FY18 to Rs 76 million in FY19 as a result of long and short term financing. Thus margins declined overall.

Half yearly results and future outlook

The six months ended of FY20 saw a year on year decline in topline of almost 5 percent. Resin division specifically experienced lower revenue. This was a consequence of a general slowdown in the economy marked by dampened business activity and high inflation and interest rates. In addition, a lot of the resin users were making their own resins. The GDP growth rate also experienced a sharp decline from nearly 6 percent in FY18 to 3.3 percent in FY19. Moreover, the instability in the political environment and high energy prices also made business activity difficult.

In such challenging times, the company plans to focus on expanding its customer base, despite its expectations of more testing times in the future. It expects resin division to face pressure due to excess capacity and a slowdown in the construction sector.