MLCF - Financial Statements Analysis Financial Year 2003- Financial Year 2009
OVERVIEW (November 07 2009): Maple Leaf Cement is a part of Kohinoor Maple Leaf Group (KMLG). The Group comprises of 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 for grey and three production lines for white cement. The plants are located at Daudkhel District Mianwali. Total annual clinker capacity of the Company is recorded at 3,690,000 tons.
OVERVIEW OF THE ECONOMY
The economy of Pakistan has faced a huge slump this fiscal 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 with inflation touching 25% high and so was the case with interest rates. The melt down of the stock exchange reflected a sheer drop in stock prices and the fall of real estate markets followed.
The reduction of expenditure in the real estate and construction business had adverse effects on the cement sector. This is evident by drop of 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.
PROFITABILITY The cement sector saw growth of 2% in fiscal year 2008-2009. However, exports showed encouraging increase of 47% with sales volume reaching 11.381 million tons against last year's volume of 7.716 million tons. Demand in the local market showed negative growth of 14% due to adverse economic situation in the country.
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. They 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 the suffered a lot as India imposed duties. Despite all the problems, their sales increased .
The production of grey, white and oil well cements by the Company at 3,174,512 metric tons compares favourably to 2,431,352 metric tons in the corresponding period last year. Increase in production is mainly due to addition of 6,700 tpd clinker capacity plant and oil well cement commencing commercial production.
Net sales Revenue doubled at Rs 15,251 million against the corresponding period last year of Rs 7,816 million. Sales volume was recorded at 3,165,770 metric tons for all cements as compared to 2,534,220 metric tons in the previous year in both local and export markets. The increase in sales for Maple Leaf Cement in FY'09 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.
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 underperformed. 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.
This huge increment in aforementioned expenses was because of multiple reasons. The first being 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 they 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 THEIR PROFITABILITY RATIOS AS SHOWN BELOW:
Their 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. As shown by the following graph from state bank of Pakistan, the surging discount rates of this fiscal year were very high:
Moreover, as they made loss last year, this year their credit rating would have been worsened. This is evident by their increased mark-ups. They need to diversify their 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 their 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, their liquidity is also affected. They 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. They increased their short term borrowing by 30.05% in order to meet 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 they have huge liabilities coming up this year. It is also worthwhile to mention that their current assets contain deferred taxes of 162 million. This shows that they will have difficulties this year in paying off liabilities.
In an attempt to recover from their previous year's loss, they employed ingenious techniques. They are now getting their trade debt cleared 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 their receivables are being collected sooner. There is a 5.43% decline in the time they 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. Currently they hold inventories worth 651 million rupees that is 49.97% higher than what was last year. Consequently, their operating cycle is now 28.86 days that is 33.33% less than last year. This reduction in operating cycle shows that they have improved their operations but not to the extent that they get into the profit zone.
The inventory turnover rate has improved by 5.74% that means that they 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 Cement Factory limited has incurred losses this fiscal year again. This has led to reduction in shareholder's equity by 19.65% as mentioned above. Their liquidity has also gone down. Now in order to finance their assets, they have incurred loans. These loans are of both short term and long term in nature. Their Long term debt has increased by 242.22% this year. This huge increment is because of following reasons: First they entered into a financing agreement in HBL for a Waste Heat Recovery plant worth 1.16 billion. The second reason is payment of tranches of their long term loan. Their long term loans have now matured and they have to pay them back as well.
Due to increased debt and reduced equity, their debt to equity ratio has rose by 32.52% while debt to asset showed just 8.5% rise. This shows that basically they have restructured their balance sheet and because the increase in debt is only being used as a means of providing a cushion for the reducing equity. Their TIE has increased by 195.07%. However, this ratio being mathematical may be misleading. Firstly, one must acknowledge that they have done robust activities for sales and increased their earnings before interest and taxes by 453.45%. However, due to high loans, the financial charges also surged up by 87.57%.
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. Since it was a systematic risk, Maple Leaf Cement was not the only one affected from it. 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 they 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 program this year. This plan is worth 646 billion rupees. Of this budget 25 billion has been allocated to the earthquake rehabilitation and 67.59 billion towards building 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, they 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 room for real estate again.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi,