Dadex Eternit Limited (PSX: DADX) was incorporated in Pakistan as public limited company in 1959. The company is engaged in the manufacturing and sale of construction material including piping system and other allied products manufactured from chrysotile cement, rubber and plastic. DADX also undertakes the merchandising of imported pipe fittings, accessories and other building products. The company’s products are used in construction and housing, architecture, telecommunication and infrastructure segments catering to the needs of public, industrial, commercial, consumer and private segments in local and export markets.
Pattern of Shareholding
As of June 30, 2022, DADX has a total of 10.763 million shares outstanding which are held by 3638 shareholders. Sikander (Private) limited which is the associated company of DADX holds 63.18 percent shares to classify as the largest shareholder of DADX. This is followed by Directors, sponsors, CEO and family members accounting for 30.14 percent shares of DADX. General Public has a stake of 5.85 percent in the company. The remaining shares are held by other categories of shareholders, each having holding less than 1 percent shares of DADX.
Performance Trail (2018-22)
In all the years under consideration, the topline of DADX has been experiencing a downfall except for a marginal uptick in 2021. The bottomline also shows a sorry picture. After showing a positive figure in 2018, DADX’s bottomline has been witnessing net losses until 2022. The bottomline touched its lowest ebb in 2022 where net loss maxed out. The magnitude of net loss lessened in 2021 to bounce back in the subsequent year.
In 2019, the topline dipped by 4 percent year-on-year which was the result of reduced government spending on infrastructure projects and the restriction imposed by the Supreme Court on construction activities in Bahria Town and other high-rise projects. This took a toll on the overall sales volume of the company despite growth in export sales. The continuous rise of energy and petroleum products coupled with Pak Rupee devaluation didn’t allow the cost of sales to plunge resulting in a 30 percent year-on-year dip in gross profit with GP margin clocking in at 11.4 percent in 2019 versus 15.7 percent in 2018. While admin expense remained in check during the year, distribution expense grew by 18 percent year-on-year mainly on the back of transportation and other charges against export sales. Other expense posted a drastic jump of over 100 percent year-on-year in 2019 on account of provision booked against doubtful trade debts and exchange loss. While rental income and write-back of liabilities no longer payable pushed the other income up by 29 percent year-on-year which almost counterbalanced the other expense, DADX couldn’t help but report an operating loss of Rs.16.82 million in 2019 as against an operating profit of Rs.180.12 million in the previous year. Finance cost also gave a major blow to the bottomline as discount rate soared during the year and also because of increased short-term borrowings. This culminated into a net loss of Rs.195.53 million in 2019 as against a net profit of Rs.5.28 million in 2018. DADX posted a loss per share of Rs. 18.16 in 2019 as compared to an EPS of Rs.0.49 in 2018.
In 2020, the topline shrank by 16 percent year-on-year due to sudden outbreak of COVID-19 which put brakes on the business activities within the country and in the export destinations of DADX due to lockdown imposed by the governments. The gross profit of the company further thinned down by 27 percent year-on-year in 2020 with GP margin ticking down to 10 percent. Operating expenses also posted a slump, however, other expense didn’t show any respite and magnified by 69 percent year-on-year on account of provisions booked by the company in respect of GIDC and expected credit losses. Other income couldn’t offer any support either as it narrowed down by 33 percent year-on-year due to high-base effect as DADX had written off some liabilities in 2019. This drove up the operating losses by 844 percent year-on-year to Rs.158.74 million in 2020. Finance cost also grew as the discount rates were increasing in the first three quarters of 2020. Moreover, DADX also availed the refinance scheme initiated by the SBP for the payment of salaries and wages. The net loss escalated by 85 percent year-on-year to clock in at Rs.361.52 million in 2020 with a loss per share of Rs.33.59.
In 2021, the company’s activities rebounded and the sales began to boost, however, it is not eminent in the topline growth of 3 percent year-on-year. During the last quarter of 2021, the company divested some of its units and laid off some employees to manage its cost, however, the strategy backfired as the employees went on strike and closed down the complete factory. This nullified the sales growth attained by the company in the first three quarters. However, gross profit improved by 32 percent year-on-year with a GP margin of 12.7 percent in 2021. Operating expenses ticked down during the year. Other expense posted a major plunge as the company didn’t book provision for GIDC and expected credit losses in 2021 as it did in the previous year. These two elements which shrank the other expense drove the other income up by 162 percent year-on-year as the company reversed the allowance for expected credit losses and realized gain on the extinguishment of GIDC. After two years of reporting operating losses, DADX was able to post an operating profit of Rs.152.01 million in 2021 with an OP margin of 6.2 percent, almost same as that of 2018. The cost of borrowing reduced during the year due to monetary easing which also narrowed down the finance cost of DADX by 27 percent year-on-year. However, the finance cost was still huge enough to suck up the profitability of the company and translated into a net loss of Rs.39.01 million in 2021 with a loss per share of Rs.3.62.
In 2022, the topline dropped by an enormous magnitude of 31 percent year-on-year. Lack of funds for public sector development projects coupled with cautious infrastructure spending in private sector on the back of economic and political uncertainty wreaked havoc on the sales volume of the company. Lesser volume pushed the cost of sales down by 32 percent year-on-year and improved the GP margin to 14.6 percent in 2022. Operating expenses dropped during the year, however, other expenses magnified by 250 percent year-on-year on the back of a massive exchange loss due to Pak Rupee devaluation and loss on disposal of fixed assets. During the year, the company disposed off its Lahore and Karachi building and land on forced sales value and incurred a loss which is reported in other expense. The disposal of these fixed assets was intended to restructure the financial obligations of the company and to reduce its bank loans. This ultimately reduced the finance cost of the company despite discount rate hikes during 2022. The bottomline posted a net loss of Rs.142.94 million which is 266 percent higher than the net loss reported by the company in 2021. The loss per share stood at Rs.13.28 in 2022.
Recent Performance (1HFY23)
During 1HFY23, DADX’s topline further slid by 11 percent year-on-year as the country is under political and economic headwinds with halted public and private infrastructure projects. High raw material and fuel prices on the back of Pak Rupee depreciation and commodities supercycle pushed the gross profit down by 50 percent year-on-year with a GP margin of 9.5 percent in 1HFY23 versus 17 percent in 1HFY22. During the period under review, distribution expense and administrative expense grew by 42 percent and 25 percent year-on-year; however, other expenses gave some breather as it nosedived by 52 percent year-on-year in 1HFY23. The detailed notes are not published by the company to comment on the key drivers of the movement in the operating and other expense. Other income grew considerably by 66 percent year-on-year on account of gain on the disposal of fixed assets. Operating loss considerably shrank during the period to stand at Rs.55.61 in 1HFY23 versus 0.04 million during the same period last year. Finance cost added further insult to injury as it escalated by 30 percent year-on-year despite a considerable drop in the outstanding loan portfolio on the back of upward movement in discount rate. The net loss enlarged by 99 percent year-on-year to clock in at Rs.145.55 million in 1HFY23. Loss per share also grew from Rs.6.79 in 1HFY22 to Rs.13.52 in 1HFY23.
Future Outlook
As of December 31, 2022, the company’s current liabilities exceed its current assets by Rs.321.143 million. After making persistent losses since 2019, the accumulated losses of the company as of December 31, 2022 have reached Rs.500.109 million. The company is receiving demand notice from its financing banks for the repayment of credit facility and is depending on the restructuring of its debt profile and support of its directors for any financial assistance amidst lackluster sales. This casts doubts on the ability of the company to continue as a going concern. The performance of the company is contingent on public and private spending on infrastructure projects which promise no improvement in the near term on the back of prevailing political and economic uncertainty, low public sector spending on construction projects and lack of appetite in the private sector due to record high inflation. The company is in the process of disposing off its assets to bring down its loan profile and reduce its finance cost. Only time will tell if the company’s strategies to steer through choppy waters bear any fruit.