The Pakistan Credit Rating Agency Limited / Paper & Packaging

Ratings (June 2014)

Packages Limited (PL)

New / Previous
Entity
Long Term / AA / AA
Short Term / A1+ / A1+

FinancialData PKR (mln)

Dec-13 / Dec-12 / Dec-11
Equity / 42,089 / 30,623 / 29,548
Net Income from continued operation / 1,796 / 1,347 / 1,568
Income from discontinued operations / (249) / (4,292) / -
Gross Margin / 13.4% / 11.6% / ^2.0%
Debt coverage (x) / 2.4 / 1.6 / ^0.8
Total Debt/ (Total Debt + Equity) % / 23.3% / 27.2 / ^26.6

* Unaudited

^including discontinued operations

Analysts

Umer Farooq

+92 42 35869504

Amara S.Gondal

+92 42 35869504


Rating Rationale and Key Rating Drivers

  • The ratings reflect the sustained improvement in risk profile - both business and financial - of the company. This primarily emanates from hiving down of struggling operation and partnership with an established international player in JV company - Bulleh Shah Packaging (BSPL). The benefits have started flowing in the form of turnaround in core performance. The continuing operations at Packages, being already profitable, have experienced further improvement due to higher productivity of tissue plant and focused efficiency in packaging operations. The company is now eying a mega real-estate project, through a subsidiary, on which work has started. Meanwhile, with transfer of Bulleh Shah and related debt to respective company and improved cashflows of remaining business, Packages' financial risk profile has improved. At the same time, the ratings draw comfort from stable dividend stream from its sound investment portfolio.
  • The ratings are dependent on the company's ability to execute its envisaged strategy of growth and expansion. Meanwhile, further strengthening and formalizing of oversight mechanism for its investee companies is important.

Assessment

  • Packages’ diversified stream of income emanates from its core operations – packaging and consumer products – and non-core business – dividends from investment portfolio. Packaging division, dominating sales mix, represents 72% of total sales revenue followed by consumer products (17%).The company’s market share is (flexible packing: 27%, folding cartons: 22%, consumer products: 56%). The company generates one third of the revenue from three major customers, which are multinational large corporate. The top ten customer concentration improved in CY13 as the company increased its customer base.
  • In CY13, revenue from core operations witnessed an increase of 27% with both divisions contributing towards growth – packaging(14%) and consumer products (23%).The improved capacity utilization and efficiencies in packaging division (CY13: 74%, CY12: 68%) impacted positively on overall gross margins of the company (CY13: 13%, CY12: 11%). At the same time, operational cost and selling expenses increased inline with topline, translating into substantial (38%) increase in the absolute operating profit (CY13: PKR 2,942mln). The core operations have turned around post-demerger (effective Apr-13) of its paper and paperboard division; the size of operating profit now stands at 10times of that pre-demerger (CY11). The dividend income (PKR 2,043) from investment book is majorly driven by Tetra Pak (71%) and Nestle (21%).Although the finance cost increased by 60%, the handsome results from core and non-core operations ended up with significant improvement in bottomline.
  • Going forward, PL intends to strengthen its market position by following a multi-faceted strategy, which includes a) bringing better product mix, b) production efficiencies, and c) high capacity utilization to improve operating results. With reference to achieving growth in business volumes, the company, while mainly banking on additional demand from existing clientele, intends to expand its customer base. Moreover, management eyes optimization in value chain and distribution system to bring efficiencies. The operations of its major subsidiary, BSPL, would take a few years to show up sizeable profits. Moreover, the company has initiated a real estate project, through establishing a fully owned subsidiary. The project shall be financed from 50% debt and is expected to be completed in 2017. This would bring hefty rental income inflows.
  • Packages maintain a sizeable Investment book (end-Dec13: PKR 40,594mln). The book, though diversified in 10 companies, is concentrated in terms of value in Nestle (68%), followed by Bulleh Shah Packaging (BSPL, 25%), Tri-Pack Films (5%), and IGI Insurance (2%); rest comprise small size. The company holds a nominal stake in Tetra Pak, however, enjoys the right to 44% of the company’s dividends until 2018. These investments have long-term horizon mitigating market risk. The investee companies – particularly Nestle, Tripack Films, Tetrapak, and IGI Insurance – enjoy strong fundamentals. The dividend stream is expected to continue in CY14 as well.BSPL commenced commercial operations with effect from April 1, 2013 and achieved pre-tax profit of PKR 181mln in 9M13 post demerger. BSPL would start promising stream of earnings in 2015.
  • PL has a low leveraged capital structure (end-Dec13: 23% ex-revaluation surplus). Post demerger, the leveraging has improved on the back of a major chunk of repayments of borrowings as well as well improved equity base on the back of operations. Upon demerger, long term liabilities of PKR 5,669mln was repaid by taking a short-term loan facility of PKR 5,100mln which was transferred to BSPL, and later paid off. Now the PL’s long term borrowing stands at PKR 5,398mln at end-Dec13, a major portion of which represents convertible preference shares (PKR 2,470mln). The company has the right to refuse conversion against cash. The company services interest payments against these liabilities out of dividends. Nevertheless, the free cashflows from operations (PKR 439mln) absorbs only finance cost (PKR 423mln) and debt repayments (PKR 200mln) shall be met out of dividends inflows – which are hefty in amount. This buffers the risk absorption capacity of the company.Debt raised to finance real estate project would be parked on the Balance Sheet of newly created subsidiary representing the project. Hence, it would have no impact on leveraging of the company. However, leveraging on consolidated bases would be increased.

Profile

  • Packages Limited (PL), a flagship company of Ali group, owned (49%) through various individuals, corporate & trusts, was established in 1957. The company is listed on all three stock exchanges.
  • The ten members BoD of Packages, comprises two independent, five non-executive, and three executive directors. The diversified background and relative expertise of the members, is a key source of guidance to the management. The Managing Director, Mr. Syed Hyder Ali, has worked in the company in different capacities since 1987. He is assisted by a team of qualified and experienced professionals.

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