Unity Foods Limited (PSX: UNITY) was incorporated in Pakistan as a private limited company in 1991 and was subsequently converted into a public limited company. The company was initially engaged in yarn manufacturing but then changed its principal business activity to edible oil extraction, refining and related businesses. Sunridge Foods (Private) Limited is a wholly owned subsidiary of UNITY and is engaged in the processing of food items.
Pattern of shareholding
As of June 30, 2022, UNITY has a total of 1,194 million shares outstanding which are held by 11,755 shareholders. Associated companies, undertakings and related parties i.e. Wilmar Pakistan Holdings Pte. Limited and Unity Wilmar Agro (Private) Limited have the majority stake of 34.28 percent in the company. This is followed by general public accounting for 33.7 percent shares of UNITY. Directors, CEO, their spouse, minor children and other family members are holding 12.34 percent shares of the company. Joint stock companies have an ownership of 8.5 percent in UNITY while Banks, DFIs, NBFIs, Insurance Companies and Takaful are holding 7.36 percent shares. Modarba and Mutual funds account for 1.73 percent shares of the company. Remaining shares are held by other categories of shareholders such as foreign companies, foreign individuals etc, each having a stake of less than 1 percent.
Performance Trail (2018-22)
UNITY’s topline has been showing a startling growth over the years. However, its bottomline doesn’t appear to comply. UNITY’s bottomline nosedived in 2020 and 2022 despite the topline growth of 116 percent and 27 percent respectively. Among all the years under consideration, the topline posted the highest year-on-year growth of 407 percent in 2019. However, in terms of bottomline growth 2021 appears to be the clear winner where the profit after tax multiplied by more than 14 times over 2020.Let’s sneak into the financial statements to uncover the interesting details behind this growth trajectory.
In 2019, the company expanded its refining operation through acquisition of an oil refinery in Port Qasim which took the overall refining capacity of UNITY from 150 metric tons per day to 650 metric tons per day. This project was funded by a right issue of 221.83 percent which raised Rs. 3,750 million for the company. During the year, the company also introduced two new edible oil brands, Zauqeen and Ehtimam targeting the discount segment whose off-take was tremendous and contributed greatly to the overall sales of the company. The 407 percent year-on-year topline growth during the year came on the back of both local and export sales, however, local sales constitute the major chunk of 93 percent in the overall sales mix of the company. The cost of sales also grew by a staggering 406 percent year-on-year in 2019. This restricted the growth of GP margin which showed a minor uptick from 8.92 percent in 2018 to 9.02 percent in 2019. Operating expenses showed an unabated growth during the year mainly in the categories of salaries and wages, freight and forwarding expenses, fuel and power charges etc. Other expenses also magnified on the back of exchange loss as well as WWF and WPFF during the year. Operating profit grew by 276 percent over the year; however, OP margin succumbed to towering operating expenses and dropped from 5.4 percent in 2018 to 4 percent in 2019. Then finance also grew by 456 percent year-on-year in 2019 on the back of increased short-term borrowings and right issue expenses during the year. The bottomline could grow by 110 percent during the year to clock in at Rs. 255 million. NP margin dropped to 1.8 percent in 2019 from 4.4 percent in 2018. EPS dropped from Rs. 1.18 in 2018 to Rs. 1.03 percent due to addition of 375 million shares in the outstanding share volume of the company.
During the year, the company made another right issue of 82.71 percent to fund its working capital requirements. The right issue was intended to control the finance cost of the company which was soaring on the back of upward revisions in discount rate. Another noteworthy development during the year was the acquisition of 69 percent shares of Sunridge Foods (Private) limited. The topline of UNITY grew by 116 percent year-on-year in 2020. The volumetric sales showed an improvement during the year as the company being an “Essential services” provider was allowed to continue its operations while other sectors were grappling against production halt owing to global pandemic. However, GP margin squeezed as edible oil prices crashed during the year owing to the global spread of COVID-19. GP margin stood at 6.9 percent in 2020. The rebound in sales also increased the operating expenses particularly marketing and advertising expense as well as freight and forwarding expense. Exchange loss incurred during the year on the back of weakening local currency also pushed the other expenses up. While Operating profit managed to bag a 33 percent year-on-year growth, OP margin slid to 2.45 percent in 2020. Despite company’s effort to control its finance cost by issuing right shares, the finance cost grew by 90 percent year-on-year because of high discount rate during the first three quarters of FY20 coupled with increased short-term borrowings to meet working capital requirements. Not only this, UNITY also secured long-term financing facility under refinance scheme by SBP for the payment for salaries and wages during the year. The company also undertook lease liabilities during the year which further added to its finance cost. The bottomline couldn’t sustain the towering expenses and plunged by 16 percent year-on-year to clock in at Rs.214.28 million in 2020. EPS stood at Rs.0.39 while NP margin hovered around 0.7 percent in 2020.
If UNITY tout 2021 to be the most fortunate year, it wouldn’t be wrong. During the year, the company acquired the remaining 31 percent shares of Sunridge Foods (Private) Limited with the latter becoming the wholly owned subsidiary of UNITY. During the year, 126 percent year-on-year topline growth was the result of 75 percent year-on-year increase in sales volume and 45 percent year-on-year improvement in prices. Increase in international commodity prices posed challenge for the company, however, with the increase in selling prices, the GP margin improved to 8.2 percent in 2021 with a 169 percent year-on-year growth in Gross profit. Operating expenses grew in line with inflation; however, other expenses showed some respite as UNITY made exchange gain in 2021 as against exchange loss in the previous year. Other income did a marvelous job in 2021 as it grew by over 23 times mainly on the back of profit on TDRs. This helped the Operating profit grow by 504 percent year-on-year in 2021. OP margin elevated to 6.56 percent in 2021. Despite the downtick in discount rate, the finance cost continued to build up on the back of increased borrowings – both short-term and long-term – during the year. The bottomline could still grow by 1458 percent during the year to clock in at Rs. 3338.19 million in 2021 with NP margin standing at 4.85 percent. EPS also boasted a year-on-year growth of 856 percent to clock in at Rs. 3.73.
Just like 2020, 2022 was another such year where topline growth couldn’t trickle down to produce a positive impact on the bottomline. The topline managed to post a 27 percent year-on-year growth, bottomline slid by 35 percent year-on-year in 2022. The topline growth was mainly driver by price revisions as the off-take shrank by 32 percent year-on-year in 2022. The GP margin improved to 9.4 percent in 2022 with a 46 percent year-on-year growth in gross profit. While distribution expenses slid on the heels on low sales volume during the year, administrative expenses continued to rise owing to soaring inflation. Other income provided some breather as the company made lofty income on TDRs amidst high discount rate. Moreover, the company also earned profit on the redemption of mutual funds units during the year. A heavy blow to the bottomline came on the back of a massive exchange loss of Rs.2899.24 million during the year owing to sharp devaluation of Pak Rupee during the year. This contracted the operating profit by 13 percent year-on-year with OP margin clocking in at 4.5 percent in 2022. Finance cost also continued to rise on the back of unprecedented increase in discount rate. This took its toll on the bottomline which stood at Rs.2181.31 million during the year with an EPS of Rs.2.03. NP margin also dropped to 2.5 percent in 2022.
Recent Performance (1QFY23)
During the 1QFY23, the topline showed an increase of 18 percent year-on-year, however, a drop in the local edible oil prices driven by a slump in palm oil prices in the international market kept the GP margin under pressure which stood at 4.3 percent in 1QFY23 as against 7.8 percent during the same period last year. Gross profit also plunged by 35 percent year-on-year during the period. The operating expenses grew in line with inflation and also because of logistics disruptions owing to heavy monsoon rains in the country during the quarter. Then the company incurred a massive exchange loss of Rs. 2229.06 million on its international supplier credit line which resulted in operating loss worth Rs.1870 million during 1QFY23 as against the operating profit of Rs. 439.59 million during the same period of last year. Finance cost kept growing owing to high discount rate coupled with Pak Rupee Depreciation which is diminishing company’s ability to finance its working capital requirements. UNITY reported a loss after tax of Rs.2172.04 million in 1QFY23 as against the loss of Rs. 34.18 million during the same period last year. The loss per share for the period stood at Rs.1.82 as against the loss per share of Rs.0.04 during 1QFY22.
Future Outlook
Increasing inflation, devaluation of Pak Rupee and monetary tightening will continue to take their toll on the margins of the company in the coming times. However, with unabated demand in the food industry, continuous enhancements in the product mix of UNITY and upward revisions in price across its various product categories, the company will try to minimize the impact of macroeconomic headwinds. Let’s wait to see if UNITY can muster a positive bottomline in the 2QFY23.