Macpac Films Limited (PSX: MACFL) was established in 1993 and began production two years later in 1995.

It operates in the plastic packaging industry; the company’s product portfolio constitutes plain films used for lamination, bag-making etc,; heat-sealable films used for packaging of tea, snacks, confectionery goods; metalized films which are a good light and oxygen barrier; pearlised films used for high quality packaging purposes; matte films used with reverse printing and has a low static charge; white films which is used to cut the cost of white ink during printing. The entire product portfolio is distributed into two broad categories of BOPP films and CPP films.

It has capacity of 15,000 metric tons on the BOPP plant and 7,000 metric tons on CPP plant as of June 30, 2019. Both the plants are located at Eastern Industrial Zone, Port Qasim.

Shareholding pattern

Directors, CEO, their spouses and minor children have consistently held majority of the shares of the company- nearly 63 percent as of June 30, 2019 out of which about 47 percent is owned by Mr. Maqbool Elahi, the CEO of MACFL. The local general public owns about 25 percent of the company while the Government of Pakistan, under the Employees Old Age Benefits Institution, holds almost 8 percent of the shares reduced from 12 percent in 2017.

Historical operational performance

For a large part of the decade, Macpac Films Limited has been improving its topline, with the exception of FY14 and FY16. Profitability, on the other hand has been fluctuating, taking a dip in FY14 and again in FY19. In both the years, cost of sales consumed more than 90 percent of the revenue resulting in losses for the period, with FY19 experiencing more exaggerated loss than seen in FY14.

During FY15, the company’s revenue improved by about 12 percent year on year as a consequence of an increase in direct market sales of BOPP films in addition to metalized firms. During the second quarter of FY15 the company installed and started production on its new General K-5000 Metalizer plant with a capacity of 6,000 metric tons per annum, contributing to higher sales. While most of the costs remain unchanged as a percentage of sales during FY15, cost of sales saw a notable decline from 90 percent of the net revenue in FY14 to about 81 percent allowing for some improvement in profit margins.

During FY16, MACFL experienced a 2 percent decline in its topline year on year as a result of a decrease in the prices globally. This was triggered by a fall in oil prices which in turn affected the prices of petrochemicals. In terms of volume, however, the company’s production had increased by 16 percent, achieving a capacity utilisation of 51 percent. Despite the decline in topline, MACFL’s net margins improved due to a significant fall in finance costs and taxation. Looking at the breakdown of finance costs, a fall in mark-up on diminishing musharaka and the absence of mark-up on term finance is to be held attributable for the overall decrease in finance costs.

In FY17, MACFL managed to pick up its sales by almost 16 percent year on year, while the quantity produced almost increased allowing MACFL to achieve a capacity utilisation of 58.5 percent, higher from 51 percent in FY16. An incline in cost of sales as well as administrative costs along with an increase in taxation was noticed which seem to be the driving factors of reduced margins. Various aspects contributed to the increase in cost of sales such as salaries, packing material, water charges, utilities, rent, rates and taxes while administrative expenses rose due to salaries, advertisement costs and amortisation.

During FY18, MACFL experienced the highest rate of growth in its topline- a significant 40 percent year on year. However, this was not accompanied by a corresponding improvement in profit margins. Cost of sales expended nearly 90 percent of the sales, causing gross margins to reduce considerably from almost 17 percent of sales in FY17 to 10 percent in FY18. The increase in costs was a consequence of an increase in petrochemical cost while currency fluctuations resulted in marked increase in other operating expenses.

MACFL experienced an almost 14 percent growth in topline in FY19, however, the cost of sales consumed a huge 96 percent of the topline, dipping margins to an all time low since FY11. While nearly all components of cost of manufacturing experienced an incline, the escalation in finance cost and exchange loss was the major factors driving the company towards a negative figure for the year. A change in policy rate from 8 percent in FY18 to 12.75 percent in FY19 caused finance cost to rise from Rs 23 million in FY18 to Rs 89 million in FY19. Moreover, the weakening of the currency led to a net exchange loss of Rs 112 million, up from Rs 30 million in FY18.

Quarterly results and future outlook

Comparing the first quarter of FY20 with the same period last year, the sales did improve year on year by 27 percent, however, it was mostly taken up by cost of sales contracting gross profit by half. The rest of the expenses, most importantly the hike in finance costs pushed the company towards another period of loss of Rs 43 million only slightly lower than the loss recorded in 1QFY19.

The stringent policies imposed by the government did put financial strain on almost all the industries of the economy, however, MACFL foresees a better future, given the recent stability in exchange rate and the general business environment. In addition, the company is attempting to manage its working capital more effectively and investing in R&D while also targeting new market segments all of which the company hopes will help it gear towards profitability.