Brief introduction & timeline Adam Sugar Mills Limited (PSX: ADAMS) has been in operation since 1695, when it was first incorporated as Bahawalnagar Sugar Mills Limited. In 1985, the company changed its name to Adam Sugar Mills, and applied for listing on the then Karachi and Lahore stock exchanges.
The company is engaged in the principal activities of manufacturing and sale of white sugar. Adam Sugar Mills has not diversified its revenue streams over the years to include allied businesses such as ethanol, fibreboard, and biofuel production, and thus remains a medium-scale player despite its significant crushing capacity.
Sugar crushing and processing unit of the company is located in tehsil Chistian of district Bahawalnagar in South Punjab. The company currently operates at installed capacity of 5,500 tons of cane per day, which brings annual installed capacity to 826,000 based on industry standard of 150 days of crushing season. However, reported capacity varies based on actual number of days operated. Therefore, utilization levels estimated below are not standardized.
Unlike most medium to large-scale sugarcane processing units in the country, Adam Sugars does not have the capacity to process byproduct molasses into industrial grade ethanol which has become an important revenue source for the industry in the recent years. As a result, the firm is significantly exposed to business risk of fixed input prices of sugarcane and sticky demand for output, white sugar.
Sponsor group and pattern of shareholding
The sponsors were on of the families to enter sugar milling sector during the industrialization wave of 1960s. The registered offices of the company are situated in an iconic building called "Haji Adam Chambers" situated in the heart of old city area of New Challi.
However, over the last few decades, the group has lost its footprint to new entrants. Based on the pattern of shareholding disclosures in latest company accounts, it appears that the shareholding is largely controlled by sponsors.
The company has followed best practices in its disclosure of shareholding: 48.6 percent shareholding in the business is held by a single individual shareholder, Ghulam Ahmed Adam, who is also an executive director of the company. Similarly, 20.2 percent shareholding is held by a joint-stock company, Adam Pakistan Limited. It is difficult to estimate the extent of shareholding held by general public by the Pattern disclosed in company accounts.
Business analysis
As per disclosures in Operating Segments, sale of sugar constitutes the primary revenue source for the firm. On average, sugar division contributes above 90 percent to the top-line, with contribution in MY18 clocking in at 88 percent. Remainder share is contributed by sale of byproducts of sugarcane crushing process, molasses and bagasse. Moreover, 20 percent of the revenue of the company stemmed from exports (30 percent for MY17).
Performance of sugar division recorded a significant decline of almost 42 percent in value terms during the year. This was on the back of highest crushing ever recorded by the firm, recorded at 710,053 tons during marketing year 2017. High production level was achieved under expectation of improvement in retail prices of sugar and anticipation of timely permission to export by the government due to bumper crop.
As a result, number of plant operation days increased substantially compared to the previous year, from 113 days to 168 days. In line with days operated, capacity utilization in absolute terms increased substantially, taking a significant leap of 30 percentage points, closing at 86 percent.
Sugarcane crushing increased by about 53 percent over last year, along with year-on-year increase in white sugar production of 48 percent. YoY change in white sugar production is on the lower side of YoY increase in crushing due to decline in sucrose recovery rate by 31bps.
As domestic demand of sugar did not record significant increase, company recorded significantly lower volumetric off-take, which explains the overall decline in top-line.
This resulted in steep climb in ending inventory for the year, which increased by a whopping 22x times during the period under review. From ending inventory of a little over Rs82 million as at September, 2016, inventory increased to more than Rs1,830 million. Moreover, due to a supply glut in global market, the company was not able to make substantial exports of white sugar export, as a result, contribution of exports to top-line declined on a year-on-year basis as well. In value terms, exports declined by 58 percent on year-on-year basis, from Rs982 million to a little under Rs412 million.
Note that as the country has been producing surplus sugar for past couple of years, as per PSMA sources the country had a carryover stock of 2.5 million metric tons as it entered crushing season in Jan 2018. Despite a glut of sugar in global commodity market, price of end product is left on the mercy of market forces whereas price of raw material is dictated by the government through indicative pricing, and strongly favours the supplier (farmers) due to underlying political considerations. However, despite total allowed export of 925,000 tons during MY17, Pakistan has an excess supply of close to 2 million metric tons of sugar.
It should be noted in the latest Annual State of the Economy 2017-18 release by the State Bank, the central bank has highlighted the distortion caused by indicative pricing and urged the government to review the mechanism for the same.
Financial analysis
Due to excess supply which has resulted in depressed domestic prices of end product, companies' revenue declined considerably at 8 percent. As per conversations with PSMA officials, per kg price of white sugar sold during the year comes out at Rs51 (net of sales tax), whereas per unit cost of white sugar sold comes out at Rs54 per kg (using cost of sales of sugar division as a proxy). Thus, on segment analysis basis, the company posted a gross loss for the sugar division.
The slump in top-line caused due to depressed sugar demand cascaded downwards, however, control on overhead costs ensured that incremental decline in operating margin was not significantly greater than decline in gross margin. However, both gross margin and operating margin from core operations declined by 620bps and 817bps over the previous year, respectively.
Financing costs increased during the period as lack of resolution on pending subsidy payments led the company to increase reliance on bank borrowing to finance operating cashflow needs.
Outlook
Sugar milling sector has recorded a highly uncertain period of performance over the last 9-month MY18. On one hand sugarcane plantation and area under cultivation in company's home province remains stable as support price makes the crop highly lucrative for farmers. On the other hand, industry association officials claim that subsidy payments against exports for past several periods remain pending with the government, increasing company's reliance on borrowed cash for operations.
Interim financials of the sector report that huge carryover stock of sugar from last two seasons has significantly depressed the retail price, which as per news reports has declined to Rs45 per kg. While this appears to be counterfactual compared to retail prices as reported by industry association, it is true that most firms in the sector have reported dismal performance due to the floor price imposed on raw material.
For crushing season MY18-19, the country expects surplus stock of 1 - 2 million tons. Export permitted by federal government during MY18 came with a strict criterion; moreover, export quota announced in March was not accompanied by a subsidy announcement. Since global sugar prices have plummeted, review of interim accounts of major sugar players indicate that the industry is expected to perform poorly in the financial year ended September 30, 2018.
Sources say if the support price is not revised down substantially for crushing season beginning November 2018, millers could outright refuse purchase during the next marketing year.
=========================================================
Pattern of Shareholding (as on September 30, 2017)
=========================================================
Categories of Shareholders Number shares held %
=========================================================
Individuals 2,558 13,645,384 78.9%
Investment Companies 1 117 0.0%
Insurance Companies 1 190 0.0%
Joint Stock Companies 19 3,644,262 21.1%
Financial Institutions 2 401 0.0%
Others 3 608 0.0%
Total 2,584 17,290,962 100%
=========================================================
Source: Company accounts
======================================================
Adam Sugar Mills Limited
======================================================
Rs (mn) MY17 MY16 YoY
======================================================
Sales 1,850 3,261 -43%
Cost of Sales (1,787) (2,949) -39%
Gross Profit 63 312 -80%
Administrative expenses (67) (63) 6%
Distribution Costs (7) (4) 97%
Profit from core operations (12) 246 -105%
Other operating income 122 13 877%
Other operating charges - (12) -100%
Finance cost (116) (77) 51%
Profit before tax (6) 169 -103%
Taxation 3 (44)
Net profit for the period (3) 124 -102%
EPS (Rs) (0.17) 7.20
GP margin 3.38% 9.58% -620bps
Operating margin -0.64% 7.53% -817bps
PBT margin -0.31% 5.17% -548bps
======================================================