Matco Foods Limited (PSX: MFL) was established as Matco Rice Processing Private Limited in 1964. The company was incorporated in Pakistan as a private limited company in 1990. The company is principally engaged in the processing and exports of rice, rice protein, rice glucose, pink salt, condiments and spices, dessert mixes etc. MFL boasts itself as the largest rice exporter of the country with exports of its flagship brand “Falak” in over 65 countries across the globe.

Pattern of Shareholding

As of June 30, 2022, MFL has 122.4 million shares outstanding which are held by 1816 shareholders. Local general public, with an ownership of 40.6 percent shares, forms the largest category of MFL’s shareholders. This is followed by Directors and their spouse and minor children holding 40.2 percent shares. Associated companies, undertakings and related parties own 15 percent shares of the company. The remaining shares are held by other categories of shareholders with ownership under 1 percent.

Historical Performance (2018-22)

Except for a marginal dip in 2021, the topline of MFL, by and large, has ridden an impressive uphill journey. However, the margins show a contrary picture as they continue to plunge until 2021 and rebounded in 2022. Unlike other industries which experienced lackluster performance in 2020 owing to global pandemic and the associated restrictions and lockdowns, MFL, being a producer of essential goods, recorded the highest 44 percent year-on-year growth in its sales revenue in 2020. However, in 2021, topline plunged by 6 percent year-on-year which resulted into a negative bottomline of Rs53 million.

Let’s probe into what happened differently in 2020 and 2021. In 2020, while MFL’s sales to commercial industry such as hotels, tourism, restaurants etc came to a halt due to restriction on the movement of people and goods. Moreover, curtailed Hajj season also badly affected the sales of the company in that region. On the flipside, home-based consumption took a huge flight as people started stockpiling food and grocery items globally. Striking sales in the home-based industry bypassed the sluggish demand in the commercial industry, culminating into a 44 percent year-on-year topline growth for MFL. However, supply chain disruptions resulted in an increase in the cost of production which shrank the GP margin from 12.94 percent in 2019 to 11.7 percent in 2020. Then restrictions on the movement of goods also magnified export charges and commissions which pumped up the distribution cost by 33 percent year-on-year, squeezing the OP margin to 4.7 percent in 2020 as against 6.5 percent in the previous year. Then finance cost also grew as discount rates were high in the first three quarters of 2020 coupled with increased working capital requirements of the company. Other income couldn’t lend the helping hand either and lost its ground by 47 percent year-on-year. MFL also took a massive hit on the exchange gain front which dropped by 91 percent year-on-years due to extreme volatility of exchange rates. Hence, an impressive topline couldn’t trickle down to produce a similar bottomline which dipped by 66 percent year-on-years with an NP margin of 1.2 percent in 2020 as against 5.2 percent in the previous year.

Then came 2021 which was even gloomier as not only did the topline plummet, the bottomline recorded a net loss. While the global economy started showing signs of recovery post COVID-19, MFL faced a hard time mustering export sales as freight charges grew by as high as 5 times in most of the export destinations of the company. This severely affected the export sales of the company which dropped by 21 percent year-on-years in terms of volume. This resulted in the thin GP margin of 6.3 percent in 2021. Low export sales reduced the distribution cost on account of lower travelling, sales promotion and export charges, yet OP margin dropped to as low as 1.6 percent in 2021. Finance cost took a nosedive as low export orders meant lower working capital requirements and lesser short-term borrowings coupled with low discount rate during the year. Other income and exchange gain performed really well during the year but couldn’t sustain MFL’s bottomline in 2021.

However, the dismal bottomline proved to be a short-lived fate for MFL as the very next year, the company achieved a massive growth in the bottomline. The margins which had been shrinking since 2019 gained back their momentum in 2022. The topline also registered a 17 percent year-on-year growth on the back of improved export sales volume, inventory gains and increase in average prices of rice glucose products. GP margin was recorded at 10.8 percent in 2022. Exchange gain, with a growth of over 200 percent proved to be a major bottomline propeller. Some of the gains were offset by higher finance cost on the back of high discount rate and increased short-term borrowings and higher taxation due to the imposition of super tax, yet MFL posted a fat bottomline worth Rs448.79 million in 2022 with an NP margin of 3.6 percent as against the net loss margin of 0.5 percent in the previous year.

Recent Performance (1HFY23)

The growth trajectory that MFL started riding in 2022 continued in 1HFY23. MFL got benefit from improved volume – both domestic and exports, inventory gains and higher prices. Moreover, freight charges also began to settle down which proved to be a good omen for the export industry. Rice glucose exports also significantly improved during the period which fetched hefty margins for the company. GP margin for 1HFY23 stood at 14.85 percent as against 11.34 percent in the similar period last year. The company also made massive exchange gain on its export proceeds; however, it was adjusted against high financial charges owing to increased discount rate coupled with excess borrowings. The bottomline registered a year-on-year growth of 375 percent during the period which translated into an NP margin of 3.8 percent in 1HFY23 as against 1.2 percent in the same period last year.

Future Outlook

MFL remained unaffected by the recent floods in the country as it mostly purchases its Basmati rice from Punjab region which remained safe from flood inundation. The prices are hiking owing to supply shortage; however, given the depreciation in Pak Rupee, MFL’s products will remain competitive in the export market. This not only will keep the topline strong but will also result in fat margins on the back of huge exchange gains. Finance cost will continue to be the Achilles heel for the company amidst high discount rate and high borrowing requirement, yet healthy topline and exchange gain will suck it up resulting in stellar bottomline growth.