United Brands Limited (PSX: UBDL) was incorporated in Pakistan in 1965 as Batlay Match Industries Limited. The company rebranded itself as UDL Industries Limited in 1987 and consequently as United Brands Limited in 2006. UBDL is the subsidiary of International Brands Limited. The company is engaged in the trading and distribution of consumer goods and allied products. Its portfolio includes baby products, beverages, cereals, deodorants, dairy products, confectionaries etc.
Pattern of Shareholding
As of June 30, 2023, UBDL has a total of 91.8 million shares outstanding which are held by 1070 shareholders. International Brands Limited, the parent company of UBDL has the highest stake of 96.08 percent in the company followed by local general public holding 3.23 percent shares. The remaining ownership is distributed among other categories of shareholders.
Financial Performance (2018-23)
Except for a marginal rise in 2019, UBDL’s net sales have been ticking down during the period under consideration. The company posted net profit only in 2021. Its gross margin which was hovering slightly above 25 percent until 2020, fell below 15 percent for the next three years. UBDL’s operating margin slumped to negative in 2019, recovered in 2020 and 2021 only to fall again in the negative territory in the subsequent two years (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.
In 2019, UBDL’s topline grew by 7 percent year-on-year which was primarily the result of service income generated from warehousing and transportation services provided by the company. During the year, UBDL discontinued the brands Mars, Wrigley, Haleeb Foods, Heinz, IFFCO and Johnson & Johnson from its portfolio. Cost of sales hiked by 8 percent year-on-year which was the effect of Pak Rupee depreciation, higher utility cost, fuel price hike as well as increase in the global commodity prices. Gross profit grew by 5 percent year-on-year in 2019; however, GP margin tumbled from 26 percent in 2018 to 25.4 percent in 2019. Operating expense spiked by 22 percent year-on-year in 2019 on account of higher bond charges, advertisement & promotion expense, freight and vehicle running expense. Payroll expense also hiked in 2019 although UBDL reduced its workforce from 520 in 2018 to 206 in 2019. Other expense registered an overwhelming increase of 943 percent in 2019 on account of loss incurred on discontinuation of business arrangement particularly with Johnson & Johnson. This resulted in operating loss of Rs.47.10 million in 2019 versus operating profit of Rs.253 million in 2018. Finance cost escalated by 156 percent in 2019 on account of increased borrowings and higher discount rate. Larger debt as well as reduced equity due to higher accumulated losses culminated into a gearing ratio of 80 percent in 2019 versus 42 percent in 2018. UBDL incurred 18 times higher net loss of Rs.549.91 million in 2019 which translated into loss per share of Rs.5.99 versus loss per share of Rs.0.56 in 2018.
In 2020, UBDL’s net revenue slid by 19 percent year-on-year. UBDL discontinued some more imported business lines and transfer of transportation and warehousing business to IBL Logistics (Private) Limited, a subsidiary company. The impact of COVID-19 also came into effect and took its toll on the demand of company’s products. Cost of sales also plunged by 19 percent year-on-year due to decline in company’s goods business as well as complete discontinuation of services business. Gross profit also shrank by 19 percent year-on-year while GP margin stayed afloat. Operating expense declined by 17 percent year-on-year primarily due to advertisement & promotion expense, freight charges and no demurrages incurred during the year. Payroll expense also declined as the number of employee fell to 160 in 2020. During the year, the company booked loss allowance worth Rs.27.13 million on trade receivables, up 53 times year-on-year on account of deteriorating economic backdrop due to COVID-19. During the year, UBDL booked provision worth Rs.138 million on damaged and expired items of Johnson & Johnson and Kellogg’s, however, unlike last year, as there was no loss incurred on the discontinuation of business arrangements, other expense nosedived by 36 percent in 2020. Other income rose by over 24 times in 2020 on account of scrap sales and group relief under which UBDL surrendered its taxable loss worth Rs.53.25 million to its associated company, The Searle Company limited. As a consequence, the company was able to report operating profit of Rs.9.87 million in 2020 with OP margin of 0.3 percent. Finance cost tumbled by 58 percent on account of lesser borrowings as well as exchange gain earned during the year. Although the company’s outstanding debt contracted in 2020, thinner equity due to escalating accumulated loss translated into a gearing ratio of 93 percent in 2020. UBDL sustained a net loss of Rs.255.68 million in 2020, down 54 percent year-on-year with loss per share of Rs.2.79.
UBDL’s net revenue further shrank by 22 percent in 2021. This was on account of discontinuation of certain business arrangements and change of business model from imported products to local products which have lower margins. This resulted in a considerable 56 percent decline in its gross profit with GP margin drastically falling to 14.5 percent in 2021. Operating expense dived down by 54 percent year-on-year in 2021 as the company no longer had to incur international freight charges because it switched to local accounts. Advertisement and promotion expense also massively fell during the year owing to decline in amortization of short-term prepayments of marketing for Red Bull products. Lower provisioning for expired and damaged products also squeezed other expense by 68 percent in 2021. Other income also buttressed the financial performance of UBDL as it climbed up by 88 percent in 2021 on the back of higher scrap sales as well as exchange gain. UBDL’s operating profit picked up by 802 percent in 2021 with OP margin rebounding to 3.5 percent. Finance cost plummeted by 67 percent due to monetary easing and lower external borrowings. Gearing ratio fell to 80 percent in 2021. UBDL was able to post net profit of Rs.3.73 million in 2021 with EPS of Rs.0.04 and NP margin of 0.1 percent.
In 2022, UBDL’s net revenue ticked down by 8 percent year-on-year due to discontinuation of Hayat Kimya business. Shrinkage of business operation also squeezed the cost by 8 percent resulting in 7 percent thinner gross profit in 2022. However, GP margin stayed at 14.6 percent. Operating expense inched up by 5 percent year-on-year in 2022 due to higher payroll expense, vehicle running expense, advertisement expense as well as freight charges on account of higher inflation and prices of POL products. Other expense slid by 73 percent in 2022 due to lower provisioning for expired and damaged stock. Other income also eroded by 87 percent year-on-year due to lower scrap sales, no group relief, no exchange gain and severance payment during the year. UBDL registered operating loss of Rs.8.56 million in 2022. The company was able to trim down its finance cost by 19 percent in 2022 despite monetary tightening due to reduced borrowings, however negative equity of Rs.10.56 million squeezed company’s capital and hence gearing ratio magnified to 107 percent in 2022. UBDL posted a net loss of Rs. 65.62 million in 2022 with loss per share of Rs.0.71.
Recent Performance (2023)
UBDL’s topline registered a drastic 43 percent downfall in 2023. Import restrictions imposed by the government to keep a check on the dwindling foreign exchange reserves of the country tremendously affected the imported business lines of the company particularly Ovaltine, Kellogg’s and Pringles. While service revenue increased due to addition of new brand “Mondelez” in transportation business and increase in routes to Lahore beverage business, however, it couldn’t produce much of a difference in UBDL’s topline. Gross profit shrank by 42 percent year-on-year in 2023 while GP margin slightly improved to 14.9 percent in 2023. Operating expense slumped by 35 percent year-on-year in 2023 on account of cost control initiatives to minimize the impact of high inflation and fuel charges. Other expense magnified by 103 percent in 2023 due to higher provisioning for expired and damaged stock pertaining to Johnson & Johnson, Kellogg’s and Ovaltine. Other income improved by 26 percent in 2023 on account of insurance claim. UBDL registered 367 percent higher operating loss of Rs.39.94 million in 2023. To add to ado, finance cost mounted by 45 percent in 2023 on account of higher discount rate and exchange loss. Gearing ratio surged to 321 percent in 2023. The company posted net loss of Rs.98.28 million in 2023 which translated into loss per share of Rs.1.07.
Future Outlook
While import restrictions have been eased, the shrunken pockets of consumers on account of high inflation have shifted their focus from imported to local products which don’t have greater margins. The company can add more local accounts to its portfolio and expand its services business to improve its financial performance in the coming times.