Cement: BESTWAY CEMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2009
OVERVIEW (February 26 2010): Bestway Cement Company Ltd (BWCL) is a subsidiary of Bestway Group of United Kingdom. It was listed on Karachi Stock Exchange in February 2001. The company is a major manufacturer and seller of cement. In FY09, Bestway Cement held 13.2% local market share and 10% share in total exports of country's cement industry.
Bestway has a major exporter to Afghanistan and began exporting to India, Africa and Middle East recently.
Company Name BESTWAY CEMENT LIMITED
Industry Construction- Cement Producers
Ticker Symbol BWCL
Market Capitalization PKR.6,531,239,200
Average Share Price PKR.23.2
Earnings per Share PKR.3.17
Bestway Group decided to set up its first cement plant in Pakistan in 1992. The company commenced work on its first cement plant at Hattar, Haripur in NWFP with an initial investment of US $120 million. The plant's initial capacity was 0.99 million tons per annum. Hattar plant's capacity was enhanced to 1.17 million tons per annum in 2002 owing to increased domestic demand. In 2005, the plant's capacity was further increased to 1.20 million tons per annum of clinker. During FY07, the clinker production at Hattar reached 1.14 million tons and cement production was 1.17 million tons.
Initially, the cement plant used furnace oil as fuel. Around 2001, the plant was converted to natural gas. This was a prudent step towards achieving the cost-efficiency, as a hike in the petroleum prices was anticipated. In 2003, the plant was converted from gas to coal with an investment of dollar 10 million. Now, the Bestway Cement Hattar plant can operate with all the three major fuels. These measures have reduced the energy cost component, which at times constituted about 65% of the total production cost of the company.
In 2004, BWCL set up a new cement plant near village Tatral of District Chakwal in Punjab to meet the growing cement demand in the domestic market. The plant had a cement capacity of 1.8 million tons per annum and it had cost dollar 140 million. The plant was fully functional and production started in June 2006. In FY07, cement production and clinker production at Chakwal was 1.119 million tons and 1.061million tons, respectively.
In an attempt to increase its presence in the cement industry, BWCL bought 85.3% stake in Mustehkam Cement Limited in 2005. The plant had a capacity of 0.63 million tons per annum and was close to BWCL's plant at Hattar. BWCL planned a project of upgrading and modernizing Mustehkam plant to a capacity of 0.9 million tons per annum.
In May 2006 the company announced plans for setting up of a second 1.8 million tonnes per annum capacity plant adjacent to the plant in Chakwal at a cost of US $180.0 million. With such major capacity expansion plans the company's cement manufacturing capacity is set to exceed 6.0 million tonnes per annum by FY08, making Bestway the second largest cement producer in the country.
Bestway Cement's capacity expansion has been in line with the trend of the entire cement sector. The overall production capacity of the cement sector increased substantially to 38.95 million tons at the end of 3Q08 as compared to 30.1 million tons at the same time in FY07. In FY09, the production capacity further increased by 12.4% to 41.67 million tons.
The cement sector of Pakistan showed an impressive growth of 24.3% in the cement dispatches during FY08. Total cement dispatches grew from 24.22 million tons in FY07 to 30.11 million tons in FY08. In FY09 the total dispatches grew only slightly by 1.61% to 30.755 million tons.
There was a 6.5% growth in local cement dispatches as demand for cement in the domestic market due to increased construction activity and government spending on infrastructure development. Local cement demand witnessed a decline of 13 percent Y-o-Y in FY09 at 19.4 million tons versus 22.4 million tons in FY08. As per data, northern cement market recorded a decline of 17 percent at 15.9 million tons, whereas the southern market posted a growth of 4 percent at 3.5 million tons during FY09.
Considering the fact that there is a direct relationship between the economic growth and cement demand of the country, Pakistan's cement industry has started to bear the brunt of ongoing economic slowdown with a notable decline in domestic dispatches of the year. After six years of consecutive YoY growth, the domestic cement market depicted a declining pattern in the wake of lukewarm construction activities amid economic slowdown, high interest rates, liquidity crunch and cut in infrastructure spending both in public and private sectors.
The slight increase in total dispatches came from the record high cement exports during the year. Despite global economic turmoil, the country's cement exporting players have managed to depict upbeat performance by exporting 11.40 million tons of cement - an all time high level depicting a phenomenal growth of 47 percent. Interestingly, during June 2009, the industry also achieved its highest-ever monthly exports of 1.22 million tons with 35 percent capacity utilization.
However, during FY09, domestic cement plants operated at 74 percent capacity utilization level as compared to 81 percent in the last year. The decline in utilization level was mainly the function of lower domestic demand and addition of new capacities during the year. The utilization for the domestic market stood at 46 percent, as against the previous year's level of 60 percent. On the other hand, the utilization level for export sales recorded at 27 percent versus 21 percent in FY08. The rising export demand helped the local cement industry to operate at an optimum level during the FY09.
The 2009, was another year of fierce competition, however, Bestway Cement was able to increase its share to 14.53% of the market in the north zone in FY09 as compared to 11% in FY08 and retained its position as one of the largest cement producers in the country. Bestway Cement continued to be one of the largest exporters of cement to Afghanistan and India.
The company recorded sales of Rs 19,577 million in FY09 as compared to Rs 10,670 million during the preceding year FY08. Net turnover amounted to Rs 14,815 million in FY09 compared to Rs 7,487 million in the corresponding period last year, which represents an increase of 98%, after payment of Rs 4,124 million towards Sales Tax and Excise Duty and Rs 638 million as rebates and discounts to customers. Gross profit increased to Rs 4,770 million in FY09 from Rs 1,008 million last year. Finance cost increased to Rs 2,286 million for the FY09 from Rs 1, 236 million last year, an increase of 85%. Profit before taxation for the FY09 stood at Rs 1,205 million as compared to loss of Rs 419 million for the previous year. Profit after tax for FY09 amounted to Rs 974 million as compared to Rs 169 million last year, which is an increase of 478%. Earnings per share (EPS) of the Company for FY09 on its increased paid-up capital stood at Rs 3.11 as compared to last year's restated EPS of Rs 0.59.
FY09 proved to be a good year for the company as it was able to turn its negative bottom line into positive figure during the year, despite increase in production and finance cost. Gross turnover increased by 84% during the year, contributing mainly to the positive post tax profit.
The cement manufacturers in the industry were faced with rising fuel and power costs during FY08; this problem persisted in FY09. The cost of production for the entire cement sector of Pakistan went up due to rise in the prices of imported coal. The cement companies in Pakistan have shifted from oil to coal or gas during the past few years. Coal is now used as a basic fuel by all the cement manufacturers. Pakistan has huge reserves of coal, but cement companies import it, as local coal has high sulphur content.
Fuel and power constituted around 74% of the cost of production of Bestway Cement Ltd. in FY08 and therefore it was greatly affected by the doubling of international coal prices and a huge increase in the country's power tariffs. There was a 49% increase in the fuel and power costs of the company (from Rs 3,231 million in FY07 to Rs 4,819 million in FY08).
In FY09 fuel and power constituted around 75% of the cost of production indicating the unrelenting burden of high fuel costs to the company. Y-o-Y there is an almost 58% increase in the cost of fuel and power during FY09. Cost of Raw material and packaging increased 44% during FY09.
The operating expenses of the company increased by a magnificent 265%; this was mainly due to the 364% increase in distribution costs. Cost of local freight and handling has proved to be quite costly in this period. Increase of 84% of finance cost during FY09 also diluted the earnings of the company. The financing cost of long-term borrowing increased by 157% whereas the cost of short-term borrowing decreased by 87%.
Profitability ratios of BWCL pick up in FY09 after a period of decline in FY08. Much of this is attributable to higher sales owing to positive off take in foreign markets.
Gross profit and net profit margins climbed higher in FY09 to 32.2% and 6.57% respectively. Return on assets improved remarkably owing to increase in sales. Total assets increased by 11% during FY09 contributing to the improved revenue generation capacity of the company. Common equity registered an increase of 19%, as during the year, the company issued 42,488,816 (2008: 25,750,798) ordinary shares of Rs 10 (2008: Rs 10) each issued at a premium of Rs 25 (2008: Rs 35) per share paid in cash. This resulted in an increase of 117% of the share premium, contributing towards strengthening the capital structure of the company.
LIQUIDITYDuring FY08, the company's liquidity position went down owing to 57% increase in the current liabilities of the company and a less than proportionate increase (33%) in the current assets of the company. The major reason for such rise in the current liabilities is the increased short term borrowing by the company. In FY07 short-term borrowing amounted to Rs 756.4 million but by the end of FY08 this figure reached Rs 1,507.7 million. The interest payables and trade payables also increased significantly for the company.
During FY09 current ratio of the company further declined by almost 7% to 0.65. Current assets increased by 28%, proportionately less than the 39% increase in current liabilities. Decomposition of current assets reveal an increase in the illiquid current assets as stock in trade grew by 44%. Advances and Bank balance increased by 67% and 30% respectively; an increase, which might save the company from liquidity problems in the days to come. Overall, the decline in current ratio is a cause of concern for the company.
ASSET QUALITYThe company has managed to improve its capacity utilization over the years and due to the company's ambitious capacity enhancement projects, which have increased the production capacity greatly. This has resulted in accumulation of inventory (raw material and work-in-progress) for BWCL.
Since inventory forms such a major part of the company's current assets, it is important to analyze the management of this asset. The inventory turnover ratio of the company declined considerably during the FY08 showing that the inventory of the company was sold less number of times during the period as compared to in previous years. Thus, the days to sell average inventory increased from around 23 days in FY07 to 41 days in FY08.
Inventory turnover climbed slightly in FY09 to 9.51 from 8.88 in the previous year. This is understandable as company achieved a growth in sales in this period. The days to sell inventory reduced to 38 days indicating a high turnover for the current period.
Accounts receivables are the other major current assets of the company. The declining days sales outstanding ratio shows that the number of days within which the management is able to recover accounts receivables is decreasing. Thus the operating cycle of the company also decreased indicating that it took the company shorter to convert its inventory into cash in FY09. The reduction in the length of the operating cycle during FY09 means that quality of the BWCL's working capital has improved from last year FY08.
Sales/equity has increased in FY09. Lately, the ratio increased due to a large percentage increase in the sales revenue generated by the company. Higher sales resulted in the rising trend of total asset turnover ratio of the company. This shows that the company's management has been able to generate higher revenue in FY09 with regard to the increase in the asset and equity base of the company.
DEBT MANAGEMENT RATIOS
The debt situation of the company had deteriorated in FY07 as the debt to assets and debt to equity ratios continued to rise due to an increase in long-term loans taken by the company. However, in FY08, the debt to asset and debt to equity ratios declined to the same level from which they had risen in FY07. Thus, the debt situation was brought under control by the management. In FY09 the debt management abilities of the company proved their efficacy as debt/equity declined to 2.44 from 2.71 last year. Debt to assets also registered a slight decline. The total assets increased by 11% while the liabilities increased by 7.8%. The increase cost of borrowing has had an adverse affect on the financial position of the company; however the company emerged with an increase TIE ratio of 1.41 in FY09, an excellent increase from a dangerous 0.48 in FY08.
BWCL was a highly leveraged company in the industry as evident from its enormously high long-term debt to equity and debt to asset figures. Considerable part of financing comes through long-term debt mainly from banks, modarabas and syndicate financing. However, issuance of ordinary shares in FY09 improved the capital structure of the company, making space for reduced reliance on debt for financing expenditure and future growth.
Domestic demand for cement has seen steady growth in recent years. However, the year under review witnessed a sharp decline in cement off take due to unfavorable economic, political and law and order atmosphere prevailing in the country. High cost of borrowing and higher cost of inputs cut in developmental expenditure by the Government and curtailed spending by the private sector meant lower demand for cement.
Going forward, a substantially higher PSDP allocation and development-oriented foreign assistance should result in some improvement in domestic demand for cement. A reduction in interest rates is also on the horizon, which should further encourage economic activity in the country.
The pace of economic activity in the country may however be somewhat affected by the law and order situation. On the export front, the cement industry in Pakistan enjoyed another good year despite global economic slowdown. While some regional markets like the UAE have seen severe decline in construction activity, other markets like Afghanistan continue to generate good demand for Pakistani cement. Bestway is already firmly established as one of the leading brands in Afghanistan and will continue to expand its share in that market.
Other regional markets like India and Sri Lanka are likely to continue to generate some demand for cement for few more years to come. Bestway is constantly exploring other international markets and has been able to make good inroads into markets like Africa. Given the huge gap between supply and demand of cement in numerous African countries, it is anticipated that Africa will prove to be a good market for many years to come.
2009 2008 2007 2006 2005 2004 2003
Operating Results Rupees in million
Turnover (net) 14814 7487 5649 4544 3536 2666 1792
Cost of Sales 10044 6479 4637 2250 1987 1596 1334
Griss Porfit 4770 1008 1013 2294 1549 1070 458
Operating Profit 3163 587 871 2144 1431 1009 405
Financial Charges 2286 11236 1212 469 140 139 269
before taxation 1205 -419 56 1730 1298 994 159
Profit after taxation 974 169 52 1226 931 679 113
Shareholder's Fund 8216 6857 5544 4850 3597 2859 2181
Operating fixed assets 16991 16004 14175 10689 5069 3200 3306
Long term finance 11786 12507 12380 9459 3148 1895 1701
Net current liabilities 2606 1622 607 624 221 80 1289
Significant Financial Ratios Percentages
Gross Profit Margin 32.20 13.46 17.93 50.48 43.81 40.14 25.56
Net Profit Ratio 6.57 2.26 0.92 26.98 26.33 25.47 6.31
Interest Coverage Ratio 1.53 0.66 1.05 4.69 10.27 8.15 1.59
Return on Equity 29.90 7.09 2.02 52.37 43.75 35.10 5.84
Earnings per share 3.17 0.59 0.20 5.24 3.89 3.19 0.58
Dividend 10.00 10.00 10.00 7.50