Merit Packaging Limited (PSX: MERIT) is a prominent name in the printing and packaging industry of Pakistan. The company has over 25 years of experience in providing quality products to its customers. Merit Packaging was incorporated in 1980 and its production facility is located in Orangi Industrial area of Karachi.
Merit Packaging is part of the highly recognised Lakson Group, which was founded in 1954. Lakson Group has presence in various industries of Pakistan and employs over 3,000 people. Some of the other companies operating under the Lakson Group umbrella include Colgate-Palmolive, Century Paper and Board, Lakson Investments, Century Insurance and Cybernet.
Historical Performance
Over the last five years, financial performance of the company has been erratic, to say the least. Sales have been up and down, while margins have also fluctuated. From FY11 to FY16, Merit Packaging had posted loss in FY12, FY13 and FY14.
In FY13, the management of the company announced a 750 percent rights issue at Rs 10. (par-value). The purpose of this rights issue as per the notification to the exchange was to have liquidity for working capital. Previously the capital base of the company was small and the management had to borrow additional loans. Apart from that the funds were to be used for enhancing production capacity and capital expenditure.
After the rights issue and much needed liquidity injection, the performance of the company started improving. In FY14, the top line of the company grew by over 35 percent and gross margins almost doubled as compared to FY13. There was improvement across all segments of the company.
In FY15, Merit Packaging returned to profitability. Sales grew by 7 percent and for the first time in its history, the company crossed Rs 2 billion in annual turnovers. The capital expenditure during the previous year brought significant improvement in production capacity and efficiency across the board. The FMCG sector, which is the main target sector of Merit Packaging, demand was picking up which meant that company could maintain its margins.
However, energy cost prevented the company from achieving its desired profitability targets. The whole packaging sector has been marred by energy costs over the years.
Later in FY15, there was a fire incident which affected the Gravure unit of the company. The production in that unit had to be suspended and outsourced to other factories.
The fire incident took toll on the company's performance in FY16 as well. Significant expenditure had to be done to get suspended production back online in the Gravure unit. Also, some ageing machines had to be replaced. All this meant that financials of the company suffered from top to bottom. Sales declined by almost 20 percent and net profit went down by 78 percent.
Q1FY17 Snapshot
During the first quarter of FY17, the sales declined by 5 percent as compared to previous year. The management in its report cited that adverse effect of the fire incident affected the first quarter. However, gross margins and net margin both improved significantly which enabled the company to close the quarter on a high.
On a positive note, the management informed its shareholders that the Gravure division production has been restored completely.
The management also mentioned that it expects the sales to grow because of restored production and that it would open new business avenues for the company.
Shareholding Pattern
More than 50 percent of the outstanding shares of the company are held by associates. Same pattern can be seen in other Lakson Group companies as well. NIT also has a significant holding in the company from the IPO days. NIT nominated person also sits on Merit Packaging board. The general public holds around 28 percent of the shares in the company.
Stock Performance
The stock price performance of Merit Packaging, which was severely lagging behind the benchmark KSE-100 index for most part of the year, has made a recent surge. In fact, it was outperforming the index during September before the first quarter result came in.
There is a general sense of expectancy among the shareholders of the company. Also, market participants are of the view that the worst is over for the company and good days are ahead.
Future Outlook
Looking forward, Merit Packaging is expected to do well. The company has had some forgetful years in the past, but now the situation seems to be much better. Some of the company's customers are top companies in the FMCG sector which are growing rapidly. If the production gets back to previous level, the company would be able to serve the FMCG sector easily and regain its lost market share and profitability.