OVERVIEW : Maple Leaf Cement Factory is a part of Kohinoor Maple Leaf Group (KMLG). The group comprises companies, which are ranked amongst the top companies in the cement and textile sector. Maple Leaf Cement Factory Limited (MLCFL) is one of the pioneers of cement industry in Pakistan. MLCFL owns and operates three production lines of grey and three production lines of white cement. The plants are located at Daudkhel District Mianwali. Its total annual clinker capacity is recorded at 3,690,000 tons.
OVERVIEW OF THE ECONOMY
Pakistan s economy has faced a huge slump this year with the GDP growth mounting to just 5% for 2008 and it s expected to be just 2% this year. The economy witnessed surging inflation rates which touching 25% high and so as the case with the interest rates. The crash of the stock market reflected a sheer drop in the stock prices and the fall of real estate markets followed the suit. The reduction of expenditure in the real estate and construction business had adverse effects on the cement sector.
This is evident by a drop in investment as a percentage of GDP from 22.5% to mere 19.1% this year. To make matters worse, the electricity and water shortages girded the industries and caused high losses. This fiscal year s beginning saw highest oil prices ever and the subsequent of this high price was suffered by each and every industry. Law and order was again an issue that made the market opportunities uncertain.
RECENT RESULTS 1Q10
The company achieved cement sales of 840,717 metric tons during the period Jul-Sep 2009 against sale in the corresponding period of 768,256 metric tons. Production of cement was recorded at 865,201 metric tons during the quarter against 755,396 metric tons during the corresponding period last year. The overall capacity utilization was recorded at 83% during the quarter as compared to 79% for the corresponding period last year. However, reduction in net retention prices and increasing costs led to declining profitability. Company made pre-tax loss of Rs 289.343 million during the period after accounting for financial charges of Rs 573.447 million.
During the corresponding period last year, the pre-tax loss was recorded at Rs 213.179 million. Going forward the demand of cement in the domestic market may be effected due to adverse economic, financial as well as the law and order situation currently prevailing in the Country. The prices of cement in the domestic market may be under pressure due to stiff competition, which will reduce the retentions accordingly. Moreover, the energy cost which is the major cost of production has started increasing again due to increase in the oil and coal prices in the international market, this will have a negative impact on the profit margins of the industry.
The cement sector saw growth of 2% in fiscal year 2008-09. This growth was seen because of a large number of companies looking for new avenues outside the Pakistani market. Those who were very successful tried to reach the Middle East and the African markets. MPL capitalized on the growth potential of the countries that are in a process of reconstruction like Iraq and Somalia. However, Maple Leaf Cement focused on India and after Mumbai attacks, it suffered a lot as India imposed ban. Despite all the problems, Maple Leaf Cement s sales are raised considerably.
The increase in sales for Maple Leaf Cement this fiscal year was 95.13%. If we break it up further, 52.34% increment was witnessed in local sales while 175.12% rise was witnessed in export sales. The reason of increased local sales was partially because of high inflation that has been given as 20% for year 2009 by State Bank of Pakistan. MLC was exporting to India in large amounts. But after the Mumbai attacks MPL suffered significant hindrance in sales to India. In an attempt to find new markets outside Pakistan MPL looked towards India, our neighbor that is one of the most growing economies. However, the Mumbai attacks led to a significant imposition of duties and the sales to India dropped after that.
Maple Leaf Cement despite increase in sales was unable to lift its profits. If we compare it with the other companies in the industries, Maple leaf Cement has under-performed. Actually it has shown worst performance this fiscal year. All the companies that had showed losses or decreased sales have improved but Maple Leaf incurred further losses. This high increase in sales was coupled by 59% increase in cost of goods sold. The major chunks that caused such high increment in CGS for Maple Leaf Cement were 57.31% increase in packing material consumed, 90.07% increase in fuel and power expense and 71.63% increment in rents, rates and taxes.
The first reason for these increments is electricity shortage in the city. The nation witness unprecedented power outages this year. This has adversely affected the operations of the industrial sector. Even if MPL use the generators, the surging fuel prices don t help. Despite the drop in international prices of oil, there was not a drop in Pakistani market because of removal of subsidy on oil. This removal was because of conditions imposed by IMF for bestowing loan to Pakistan. The loan demands removal on subsidies and increase in price of the energy sector. These adverse effects have deteriorated the company s profitability ratios.
Maple Leaf Cement s gross profit margin has increased steadily as 274.36% increment was witnessed in gross profit due to 95.13% rise in net sales. However, we see that once again profit margin shows negative sign. Although the situation has improved from -8.65% to -6.45%, the condition is not good. The cement sector has improved a lot this year but it seems that Maple Leaf is the worst performer. One must also notice that the financial charges have increased by 87.77% because of surging interest rates. This rate is very high because of conservative approach by State Bank of Pakistan. Hence the major factor that shows lack of correspondence in profit margin and gross profit margin is Finance cost.
As shown by the following graph from state bank of Pakistan, the surging discount rates of this fiscal year were very high. Moreover, as MPL made loss last year, this year Maple Leaf Cement s credit rating would have been worsened. This is evident by Maple Leaf Cement s increased mark-ups. MPL need to diversify Maple Leaf Cement s markets or increase sales because the return to assets and to equity has gone down by 48.16% and 80.94% respectively. This is also evident by reduction in Maple Leaf Cement s equity by 19.65% this year and hence, leading to a 51% reduction in earnings per share.
Due to immense losses accumulated by Maple leaf Cement this year, Maple Leaf Cement s liquidity is also affected. MPL are worse off at this avenue as well with current ratio going down by 35.54% because of 13.01% reduction in current assets while 34.95% increment in liabilities maturing within this year. MPL increased Maple Leaf Cement s short term borrowing by 30.05% in order to meet the liquidity requirements.
The current ratio of 0.52 is an alarm bell, as the company will not find it easy to pay off its liabilities and MPL have huge liabilities coming up this year. It is also worthwhile to mention that Maple Leaf Cement s current assets contain deferred taxes of 162 million, highlighting that MLC will have difficulties this year in paying off liabilities.
In an attempt to recover from Maple Leaf Cement s previous year s loss, MPL employed ingenious techniques. MPL is now getting accounts receivable quickly and this improvement is by about 52%. A reason for this quick conversion is export-oriented approach. The government of Pakistan has made it mandatory to do transactions in foreign countries via Letter of credit. This allows them to get money before maturity and hence Maple Leaf Cement s receivables are being collected sooner. There is a 5.43% decline in the time MPL take to sell of the inventory. This fall in time is because of export centric approach again. However, the reduction would have been significant had the Mumbai attacks not happened, MPL would have very easily improved Maple Leaf Cement s time to ell inventory. Currently MPL holds inventories worth 651 million rupees that is 49.97% higher than what was Maple Leaf Cement s situation last year. Consequently, Maple Leaf Cement s operating cycle is now 28.86 days that is 33.33% less than last year. This reduction in operating cycle shows that MPL have improved Maple Leaf Cement s operations but not to the extent that MPL get into the profit zone.
The inventory turnover rate has improved by 5.74% that means that MPL are generating more sales on the same amount of inventory. Once again this rise is due to increase prices. One must also take into notice that the cartel formation of cement manufacturers caused inflated price that went up to Rs 300 per bag. There is 142.86% rise in sales to equity ratio. This ratio being mathematical has its shortcomings and this huge increment is not just because of sales but also because of reduction in equity by 19.65%.
Maple Leaf has incurred losses this fiscal year again. This has led to reduction in shareholder s equity by 19.65% as mentioned above. Maple Leaf Cement s liquidity has also gone down. Now in order to finance Maple Leaf Cement s assets, MPL have incurred loans. These loans are of both short term and long term in nature. The company s long-term debt has increased by 242.22% this year. This huge increment is because of following reasons: First MPL entered into a financing agreement in HBL for a Waste Heat Recovery Plant worth Rs 1.16 billion.
Second, the payment of tranches of long-term loans. Maple Leaf Cement s long-term loans have now matured and MPL have to pay them back as well. Due to increased debt and reduced equity, Maple Leaf Cement Factory Limited s debt to equity ratio has rose by 32.52% while debt to asset showed just 8.5% rise. This shows that basically MPL have restructured Maple Leaf Cement s balance sheet and because the increase in debt is only being used as a means of providing a cushion for the reducing equity. Maple Leaf Cement s TIE has increased by 195.07%. However, this ratio being mathematical may be misleading.
Firstly, one must acknowledge that MPL have done robust activities for sales and increased Maple Leaf Cement s earnings before interest and taxes by 453.45%. However, due to high loans, the financial charges also surged up by 87.57%. Now one must take into consideration that all the long term loans that MPL have taken way back in 2006 and 2007 have been on KIBOR plus certain rate. For the 2006 it is KIBOR + 2% and for 2007 it is KIBOR + 1.5%. One must take into account that this year, due to decreased liquidity in the market, KIBOR surged up. As the floor was imposed in the market and there was no room to liquidate from the capital markets, interbank rate showed new heights.
This is also one of the reasons why the financial charges increased. Along with this, as discussed before in order to curb inflation, the State Bank of Pakistan kept very high discount rate taking all the interest rates to high values. This also hurt them even when the floor was removed and liquidity was available in the market because of removal of floor and injection by the State Bank.
The trend of incurring loss continued from the last year and hence the earnings per share this year revealed negative results. Since the appropriation of losses has been done, the Earnings per share have reduced dramatically. It s lower by 56.70% this year. The slump in the stock market led to the fall of stock prices. One must see that price earnings ratio has improved. This is because the price has reduced by 40% while the Earnings have reduced by 56.70%. This does not mean that the company has performed well this year. A higher PE multiple just means that the market is showing more confidence in Maple Leaf Cement Factory.
The returns of Maple Leaf Cement Factory showed just 0.3% variance in returns with a mean return of 0.574%. This means that Maple Leaf Cement is not very volatile and the investment is pretty safe, as the ups and downs do not affect the stock as such. This is also to be considered that MPL have 115.12 million shares in the free float out of 372.263 million shares. This shows that the share prices are very good reflection of the sentiments in the market.
The government of Pakistan has recently announced the largest Public Sector Development Programme this year. This plan is worth 646 billion rupees. Of this, Rs 25 billion has been allocated to the earthquake rehabilitation and Rs 67.59 billion for the construction of dams. This shows that the domestic demand would increase in Maple Leaf being the 3rd largest in terms of market share would earn fair share from the pie.
Moreover, MPL are planning to venture into African markets that are also a viable option as we saw Attock Cement venturing into Middle East and Somalia, which led to unprecedented profits this year. The electricity would be an issue for them this year as the rental generators will provide expensive electricity and IMF loan tranche asks the government to raise prices further in December and in April. Finally recovery of the global economies will slowly and gradually open the room of real estate again.
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Courtesy : Business Recorder
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