Al Shaheer: taking the road less travelled?

Economic stabilization of last year dealt a setback to profitability of firms across all sectors; the meat processing industry was no exception. FY20 was supposed to be a year of recovery but going by 9MFY20 financial performance of Al Shaheer Foods (PSX: ASC), that may not happen anytime soon.

During the quarter ending March, the meat export and retailing giant completed 40.7% rights share issue that saw 95% subscription and raised Rs 578 million. Disclosures show that proceeds will be utilized towards working capital requirements of existing red meat business line.

Recall that cashflow of the company has been under considerable financial stress, ever since the company’s bet on setting up a poultry unit went awry. Since then, ASC has been cash-strapped to finance raw material purchases – livestock – which it claims to procure largely on cash basis. As a result, it was forced to go into contraction mode, closing loss-making outlets and streamlining overheads. Efforts to restore profitability extracted more than its pound of flesh from topline, which declined by over 22 percent last year.

9MFY20 has been no different, as both gross & operating margins improved by over 5pp on the back of similar double-digit decline in topline. But it is the topline performance during Q3 that merits special attention: marching ahead by 6 percent over same period last year.

According to management, ASC was finally been able to mark an inflection in its hitherto downward trajectory. Just ended quarter contributed over 40 percent of YTD topline, and nearly 80 percent of period net earnings. It claims that exports – historically three-fourths of revenue – were resurgent on the back of weakened rupee. The explanation receives traction as other income – which records gain on FX realization – for Q3 stand at 1.4x of nine-month figure, bulking up pre-tax profitability.

On the cost side, distribution expense – much of which is cargo - continued the bleeding, standing firm at almost one-quarter of the topline. As ASC exports fresh & chilled category meat, short product expiry warrants dependence on aerial shipments. This leaves thin operating margins behind, which excluding other income would be barely sufficient to service interest expense under normal course of business.

Which is where the balance sheet position provides much needed relief. Although debt to equity was already acceptable at 0.53x prior to rights issue, principal repayments were all set to trigger a crisis as borrowing for the shelved poultry unit became due. Given adequate cushion from right issue proceeds, operating cashflow has now been freed up to finance working capital needs, reflecting in increased credit sales during Feb-Mar. It remains to be seen whether the company will also use the opportunity to reprofile its ST debt, which until recently was at the risk of turning hardcore given the oblique cash conversion cycle.

Unfortunately, it may be long before the dry spell for ASC is over. Limited air traffic due to Covid-19 means exports using air cargo facility are under jeopardy as cargo charges may witness a steep rise. But that should be a global phenomenon. If the company makes the right strides, it could turn adversity into opportunity and cement its footing in export market by outdoing competition. On the other hand, a stable rupee may also mean little other income to fall back on, weakening incentive to bet on exports amid rising costs.  Will the company take the road less traveled? Only time can tell.