PAKISTAN CABLES – Analysis of Financial Statements – Financial Year 2009 – 3Q Financial Year 2011

The performance of the company is highly dependent upon the global movements in the commodity prices of copper and aluminum; during most part of FY10, copper prices showed an upward trend rising to an average value of $7745 per ton in April 2010 as compared to $5216 in FY09.

However, with the decrease in the demand gap for copper in the global market as most recovery projects came online, the average copper prices eased to a significant level of $6499 in June 2010. Aluminum mimicking the movements of copper rose steadily but modestly from July 2009 to April 2010, finally declining to a level of $1931 per ton in June. Given that both these metals are prime raw materials in the company’s product portfolio, the impact of such volatility in prices was reflected in the financial performance of the firm during this past year.

The leading position that the firm enjoys in the cables and wires segment stands heavily contingent on the strength of demand for the industrial base of our nation. The firm continued to extend its support to famous names like BYCO, Tetra Pak, Coca Cola, Engro, FFC, Siemens and Descon during this financial period. The introduction of Triple Extruded 15kv medium Voltage cables was a significant achievement as far as the innovative capacity of Pakistan Cables is concerned. The company continued its strong delivery in the Alum-Ex product category having successfully formed association with Army Housing Schemes, Basic Health Unit and Safari Villas along with other public sector projects during the year.

RECENT RESULTS (3Q11)

Sales for the nine months period ended March 31, 2011 at Rs 2.9 billion is 8% higher than sales for the same period of last year. The increase in sales is mainly in Trade and Projects segments. Gross profit of Rs 335.1 million is 11.7% of sales against Rs 255.0 million (9.6% of sales) in the same period of last year.

Selling and administrative expenses for the nine months are Rs 196.8 million compared to Rs 140.6 million in the same period of last year. The increase is mainly due to higher expenses on account of advertising and publicity and other expenses resulting from higher sales. Financial charges for the nine months are Rs 80.8 million and are 30% lower than the same period of last year. Short-term borrowing in the US dollars at low rates and investment by General Cable helped to reduce the financial charges. The rupee continued to appreciate against the US Dollar and closed at Rs 85.25 at the end of March 2011, resulting in an exchange gain of Rs 9.7 million during the current quarter.

Profit after tax for the nine months period of Rs 41.4 million compared to a loss after tax of Rs 7.4 million in the same period of last year. Earning per share has increased to Rs 1.67 compared to Rs (0.34) in the same period of last year.

Long-term loans have shrunk to Rs 56 million as compared to Rs 260 million in the same period last year. Financial charges may well decrease further on in the coming quarters. There has been equity investment by G.K Technologies, a subsidiary of General Cables Corp, by way of purchase of 7,000,000 ordinary shares, which is 24.6% of the increased share capital at a subscription price of rupee equivalent of USD 1 per share.

FINANCIAL PERFORMANCE

Within the context of a staggering economy plagued by political instability, law and order indiscipline, acute water and electricity shortages and ambivalent external economic circumstances, the operations of a company with demand derived from the performance of the industrial sector like Pakistan Cables can only be expected to deteriorate. With the rising prices of copper and aluminum, the pressure on the operating performance of the firm increased significantly; the 13% rise in sales over the previous fiscal year reflects not just a rise in the prices of the products as the firm passed on some of its rising cost burden onto the customers but also a sustainable increase in sales volume. However, as the graph below depicts a significant rationalization in the gross margin of the firm’s sales came about; this decline was a function of tough competitive position, rising import costs with rupee devaluation and the inability of the company to pass an exhaustive burden of rising costs onto the customers.

Moreover, the figure above provides insights into the possible reasons for the trim down of the net profit margin from an already low 1.9% to 1.2%. Other than the rising cost of goods sold and the reasons thereof cited above, we see that the firm has implemented extensive cost control with respect to overheads. Whether it is selling or administrative expenses both have been brought down by a significant margin however, there has also been a decline in the other income head. This reduction in the income buffer is potentially one of the causes that prevented the net margin from increasing despite extensive expense control.

As far as the efficiency of operations is concerned, a significant let down seems to have come about during this tenor in the productivity of the firm’s operations. The debtor, inventory and total asset turnover all declined substantially, indicating that the firm moved on to adopt significantly liberal credit policies in an effort to increase sales while the decline in the overall economic activity was reflected in the other indicators.

As far as the debt position and absorptive capacity of finance costs is concerned, the firm’s capital structure seemed to have been fairly altered during the fiscal year. Debt rose to a phenomenal 62% of total capital, making the company highly leveraged and increasing its risk profile. However, at the same time the finance costs were significantly controlled during the year as interest expenses actually fell despite the take on of additional debt. The prime factor that explains such contradictory moves is the switch that the company made towards high value short term import financing; the competitive rates that the firm enjoyed through this mode of financing helped to reduce the finance costs but at the same time the tough economic circumstances forced the company to take on additional amounts of loans than prior years, aptly reflected in the altered debt to equity structure. A marked improvement was seen in the interest cover as it swelled from a modest 1.4 times in 2009 to 2.3 times in 2010 again reflecting the same alteration in debt composition discussed above.

Lastly, from the investor’s perspective Pakistan Cable’s performance was not as strongly hit as some might have feared. The EPS declined to 2.12 per share from 2.98 in the previous year a decrease of 28.9%. However, owing to the revaluation surplus and ploughed back earnings, the book value of the firm remained consistent at Rs 65 per share. The fluctuation in share price however tells us the complete story with the average price gone up to Rs 54 per share in 2010 as compared to Rs 34 in 2009; one cannot refute the fact that prospective investors see some merit in Pakistan Cables as a viable investment option. The cause of such an increase is the positive expectations associated with the future performance of the company after the imminent investment in its shares by the leading General Cables in September 2010.

===========================================================
PROFITABILITY FY09 FY’10
===========================================================
Gross profit margin 15.9 10.9
Profit margin 1.9 1.2
Return on Total Asset 2.1 1.2
Return on Common Equity 8.9 6.3
———————————————————–
LIQUIDITY RATIO
———————————————————–
Current Ratio 1.1 1
Quick Ratio 0.4 0.5:1
———————————————————–
ASSET MANAGEMENT
———————————————————–
Debtor turnover (Times) 10.4 6
Inventory turnover (Times) 4.3 3.4
Total assets turnover (Times) 1.1 1
Creditor turnover (Times) 14.1 15.1
Capital employed turnover (Times) 1.8 2.1
———————————————————–
DEBT MANAGEMENT FY’09 FY’10
———————————————————–
Debt 53 62
Equity 47 38
Times Interest Earned (Times) 1.4 1.3
———————————————————–
PER SHARE FY’09 FY’10
———————————————————–
Earning per share 2.98 2.12
Price earning ratio 11.4 24.1
Market value per share Rs 34 54
Break-up value per share
including surplus on revaluation Rs 65.2 65.3
Dividend payout % 75.6 70.7
Dividend yield %* 6.61 2.94
Dividend Cover (Times) 1.4 1.3
===========================================================

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s