The Pakistan Credit Rating Agency Limited / Cement

Ratings (July 2010)

Maple Leaf Cement Factory Limited (MLCFL)

FinancialData

PKR (mln)

Mar-10^ / Jun-09 / Jun-08
Total Assets / 26,096 / 25,661 / 26,152
Equity / 5,985 / 6,718 / 8,361
Turnover / 10,056 / 15,251 / 7,816
Operating profits/(Loss) / (375) / 2,421 / 343
Net Income / (1,844) / (983) / (676)
Gross Margin (%) / 21.4 / 32.5 / 16.9
Total Debt/ Equity (%) / 280.2 / 238.2 / 191.1

^ Based on unaudited accounts for nine months ended March 31, 2010

Analysts

Awais Khan

+92 42 586 9504

Adnan Dilawar

+92 42 586 9504

Sukuk Issue

The company issued a privately placed secured Sukuk of PKR 8,000mln in Jan’08. The instrument was issued for a period of 8 years. However, MLCFL was not able to meet the due interest installment in Dec 2009, which led to restructuring of the Sukuk. Under new terms, the total tenor of the instrument is 9 years (ending Dec 2018) including a grace period of 2.75 years. The principal redemption is in 36 quarterly installments and would commence in September 2012. The markup on the issue is 3MK+100bps, which would increase to 3MK+170bps after the fifth year. The Sukuk is secured by first pari passu charge over all present and future fixed assets of the company with additional 25% margin.

Rating Rationale and Key Rating Drivers

  • The ratings reflect high business risk of the company emanating from challenging industry dynamics, which is further accentuated by emerging capacity overhang in the sector. Meanwhile, the financial profile of the company remains under pressure due to highly leveraged capital structure and distressed cashflows, although recently concluded debt restructuring would provide short-term relief. The ratings incorporate the company’s diversified product mix and established brand name in the local market.
  • The ratings are dependent on the management’s ability to achieve optimal capacity utilization, while generating requisite positive cashflows. Simultaneously, prudent financial risk management by creating cushion for meeting upcoming debt obligations during the grace period would remain crucial. Meanwhile, sponsor support, especially in distressed situation would be important.

Assessment

  • The cement industry, characterized by cyclical nature and intense competition, has experienced weakening of tacit understanding among producers putting pressure on selling prices. Moreover, the profitability of the sector was impacted by rising energy costs − comprising around 50% of total raw material costs – and slowdown in export markets. Although the recent pick up in domestic demand augers well for the sector, various socio economic challenges could dampen its prospects.
  • The earlier ratings were based on the company’s established position in the local industry further augmented by commencement of new production lines. Moreover, promising export prospects and expected improvement in the company’s margins, boded well for the entity. Although these factors played in favor of the company initially and resulted in higher turnover, the overall risk profile of the company increased considerably, due to weakening fundamentals of the cement industry and MLCFL’s highly leveraged capital structure. This led to substantial increase in financial charges. Moreover, the company entered into cross currency interest rate swaps and incurred substantial losses due to Rupee depreciation against Dollar, further compounding the problem. Consequently, MLCFL defaulted on its debt obligation (Sukuk Interest) in Dec-09. However, the company has successfully restructured majority of its long-term loans (apart from a loan from ICD of USD PKR 12.8mln) and Sukuk issue on favorable terms.
  • MLCFL is the fourth largest cement manufacturer in Pakistan with a market share of ~8%. The company completed its expansion in 2008 and added 6,700tpd clinker capacity. MLCFL’s plant is based on modern European machinery and comprises two dry process lines and two wet process lines, which offers operational flexibility. This enables the company to offer diversified products slate with specialized and value-added products. During the 9MFY10, the company’s total dispatches improved (11% YoY basis) mainly due to higher exports and increased demand on the local front. However, the turnover witnessed a decrease (9MFY10: PKR 10,056mln, 9MFY09: PKR 11,085) due to lower cement prices locally and internationally, which led to lower margins. The company posted substantial loss for the period mainly attributable to high transportation costs and financial charges.
  • Going forward, the management intends to consolidate its workforce and realign the organization to enhance efficiency in all areas of operations. The company is working towards establishing a logistics department, with an integrated supply-chain network, to rationalize high cost of transportation. Once, the waste heat recovery system becomes operational (end-Dec 2010), it is expected to reduce the overall energy cost of the company. These initiatives, if successfully executed would have a positive impact on the company’s margins.
  • MLCFL’s cashflows improved on account of better working capital management. However, with higher quantum of borrowings and ensuing financial charges, the coverages of the company remained under pressure, though recent restructuring on favorable terms would provide some cushion. Moreover, MLCFL faced liquidity constrains during the 3Q2010 due to withdrawal of working capital lines. The availability of these lines is critical for the company’s operations as the management meets its working capital requirements through short-term borrowings.
  • The company’s financial risk remains high on account of a highly leveraged capital structure, (9MFY10: 74%, FY09: 70%) despite the recent injection of PKR 1,000mln as interest free loan (quasi equity) by the sponsors. The current liabilities of the company remain high (FY09: PKR 9,963mln; FY08: PKR 7,382mln) when compared to current assets. This could potentially create a maturity mismatch.

Profile

  • Maple Leaf Cement Factory Limited, one of the leading cement manufacturers, was established in 1956 and is listed on all three stock exchanges of the country. The cement plant is located at Dadukhal, District Mianwali, in Northern Pakistan. The plant is based on modern European machinery with two dry process lines and two wet process lines with total capacity of 3.7mtpa. The company also has a diversified product portfolio.
  • Kohinoor Maple Leaf Group – mainly through Kohinoor Textile Mills Limited (KTML) – owns the majority stake (50%) in the company, while various financial institutions, corporate entities and individuals own the rest. The group also has presence in the textile sector (KTML) and in trading of agriculture machinery.
  • Saigol family effectively controls group companies including MLCFL with strong presence on the board of directors (five family members on MLCFL’s board) and key management positions. Mr. Sayeed Saigol, the CEO, joined the company in 2005. He is supported by a team of professionals with extensive experience in related fields.

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Tel: 92 (42) 5869504 Fax: 92 (042) 5830425