JS Securities Limited – JS Research (30 May 2023)

Karachi, May 30, 2023 (PPI-OT): PKGS: Robust sales growth intact

Packages Limited (PKGS) held its Analyst Briefing yesterday to discuss financial performance and outlook. To recall, company reported CY22 consolidated net revenues of Rs121.9bn, up by 52% YoY. Despite higher sales, consolidated PAT for CY22 clocked in at Rs6.9bn (EPS: Rs77.5), increase of a mere 1% YoY. Bottomline for 1QCY23 also remained under pressure clocking in at Rs1.4bn (-63% YoY), primarily due to higher other expenses and financial charges.

Bulleh Shah's corrugated packaging expansion is expected to come online by 3QCY23. Following capacity expansion, the firm intends to grow its market share in the segment.

PKGS increased its stake in TRIPF through additional investment last year making it one of its subsidiaries. TRIPF now stands as the 3rd highest contributor to consolidated revenue of the company. Moreover, PKGS completed the Sanofi transaction last year and now holds 41.1% in the Pharmaceutical company.

Bottomline growth restricted despite growth in revenue

Packages is a holding company with holdings in the paper and paperboard, packaging, calcium carbonate production and Real estate businesses. PKGS held its Analyst Briefing yesterday, during which the management covered its financial results and future prospects. Recall that the business reported consolidated net revenues of Rs121.9bn, up by an astounding 52% compared to the same period last year. The expansion in sales was driven by a number of factors, including the inclusion of TRIPF in the consolidated accounts and an increase in demand from the food industry, which has increased revenues for all the company's food-related businesses.

Operating profit increased by 24% YoY to Rs11.9bn, mostly due to cost-cutting measures and revenue growth, as well as a one-time net bargain purchase gain from the business combination on the acquisition of Tri-Pack Films Limited (TPFL). After tax earnings for the year, however, remained flattish owing to high finance cost and clocked in at Rs6.9bn translating into and EPS of Rs77.5. The company announced a dividend of Rs27.5/share alongside the annual result.

Bulleh Shah - highest contributor to revenue

Bulleh Shah Packaging is primarily engaged in the manufacturing and conversion of paper and paper board and corrugated boxes. Despite experiencing economic obstacles brought on by the local and global geopolitical environment, Bulleh Shah Packaging came out to be the highest contributor to revenue. During CY22, company posted net sales of Rs47.6bn, up from Rs36.9bn during SPLY, depicting

a 29% YoY increase. Company's profit before tax increased to Rs5.5bn (+25% YoY), majorly as a result of increased revenue and better control over fixed expenses.

The paper and board division contributed 71% to Bulleh Shah’s sales whereas the rest came from the Corrugated packaging division. The corrugated packaging plant is expected to come online by 3QCY24. Following capacity development, the firm intends to grow its market share in both segments.

Packages Converters ltd to focus on consumer products

Packages Converters Ltd showed considerable growth in revenue during CY22 growing to Rs42bn, which is up by 39% YoY. Packages Converters produces folding cartons, flexible packaging and consumer products. Flexible packaging accounted for 46% of the segment's sales, while folding cartons accounted for 25% and consumer items accounted for 46% of Packages Converters’ revenue. Due to increasing need for products like tissues, paper cups, and paper plates, the consumer products segment is anticipated to keep growing. Despite a growth in revenue, Earnings before tax from the segment remained flattish YoY at Rs2.6bn owing to the increased finance cost which escalated by 2.7x on back of increase in interest rates.

TRIPF - the third largest company of the group

PKGS had increased its stake in Tri-Pack Films Limited (TRIPF) during CY22 through additional investment taking it from 49.9% to 69.0% making it one of its subsidiaries and the 3rd highest contributing company in consolidated net sales of PKGS. TRIPF is primarily engaged in the manufacturing and sale of Biaxially Oriented Polypropylene (BOPP) films and Cast Polypropylene (CPP) films.

During CY22, the company generated net sales of Rs24bn, reflecting a 27% increase in sales on a YoY basis. Due to rapidly rising finance costs, TRIPF’s profit before tax decreased by 2% YoY to Rs1.4bn.

Other group companies also on track

Packages Real estate which owns Packages Mall showed a 39% YoY increase in revenue and 31% increase in Profit before tax during CY22. The company has started leasing of offices to corporate customers from Jul-2022.

PKGS injected capital of Rs1.4bn in its 100% owned subsidiary Starch Pack (Pvt) Ltd during the outgoing year, the new company will be principally engaged in the manufacture and sale of corn-based starch products, its derivates and by-products. The plant will commence operations from 2HCY23.

PKGS also incorporated a wholly owned foreign subsidiary in the UAE by the name Packages Trading FZCO which will be engaged in commercial trading with import, export, distribution and warehousing of the products manufactured within the group. Moreover, PKGS completed the Sanofi transaction last year and now holds 41.1% in the Pharmaceutical company.

Packages Lanka Limited (the Sri Lankan based packaging subsidiary of Packages Limited showed revenue growth whereas the Flexible Packages Convertors company based in South Africa showed a decline in sales despite currency devaluation during the year. The group’s JVs DIC Pakistan Ltd and Omya pack Limited both posted growth in revenue during CY22.