Equity Analysis /
Pakistan

Packages Ltd: CY19 Analyst Briefing Takeaways

  • PKGS’ NPAT in CY19 clocked in at PKR1.35 bn (EPS PKR15.06) as compared to PKR 2.7bn (EPS PKR29.69) in CY18.

  • During CY19, PKGS booked an impairment of PKR676mn on its associate Tri-Pack Films Ltd

  • PKGS is looking to expand into new business lines in the Consumer segment.

Intermarket Securities
31 May 2020

Business Segments and Market positioning

Packages Ltd (PKGS) began tissue production in the 1980s and has the largest flexible packaging plant in Pakistan, with large operations in South Africa and Sri Lanka as well. Packages generates c.75% of its sales from the flexible packaging business and 24% from consumer products. About 79% of the overall sales come from multinational consumer companies in Pakistan (Nestlé, PepsiCo, Unilever, P&G etc) and the rest from locals (National, Dalda etc.)

In the Consumer segment, PKGS sales have a 62% market share. About 78% of its tissue sales are through retail outlets, while the remaining are B2B and others. In the Flexible packaging segment, more than 70% sales are made to Food-related industries. Packages has the largest retail distribution network with 60,000 outlets.

The company continued to strive for greater innovation and market penetration during 2019, having launched: (i) Single ply napkin in February for restaurants which offer free tissues to customers (for better cost-savings), (ii) Zoop kitchen towel for kitchen usage in March, (iii) luxury facial tissues (3 ply tissue which makes usage softer) in July, (iv) lotion tissue for relieving stuffy nose in August, and (v) 3 ply pocket pack tissue in December.

The Covid-19 pandemic has turned out to be broadly positive for the company’s topline. Initially, its tissue segment performed well amid stockpiling by consumers (during March and April). In May, however, cessation of stockpiling and the impact of lower consumer spending power have slowed down sales. During these months, PKGS has started exporting its products for the first time. They exported majorly to UAE and now the management is eyeing exports to the UK and US.

Consumer demand has shifted to more sales for hygiene and personal care purposes, with much less sales for cosmetic purposes.

Financial performance and Future outlook

PKGS’ NPAT in CY19 clocked in at PKR1.35 bn (EPS PKR15.06) as compared to PKR 2.7bn (EPS PKR29.69) in CY18. Key reasons for the sharp decline in profitability were (i) elevated finance cost, (ii) lower investment income (last Tetrapak dividends in 1QCY19), and (iii) one-off impairment on its investments (details below).

During CY19, PKGS booked an impairment of PKR676mn on its associate Tri-Pack Films Ltd, which was backed by an independent assessment by PWC based on the latter’s projected future cash-flows.

PKGS’ 100% owned subsidiary, Bulleh Shah, has performed well in CY19 and posted a revenue of PKR26bn as compared to PKR22bn in CY18 and its EBIT also improved by 20% yoy to PKR1.2bn. both its businesses – corrugated packaging and paper & board – are operating at 85% capacity utilization. Despite lower volumes amid lockdowns, the business is on track to meet the company’s targets.

The Mall, however, is presently facing challenges. Its cinema and other entertainment outlets – major sources of footfall – are restricted by the prevalent lockdown conditions. Future dividends from Bulleh Shah and the mall are expected to ultimately overcome the loss of Tetrapak dividends; however, PKGS now assumes that to be achieved in 2-3yrs’ time. 

PKGS has announced plans to restructure its investments into a separate company, thereby assuming a Holdco structure like IGI Holdings Ltd. The company is completing the necessary regulatory approvals presently.

Future opportunities: In the backdrop of the Covid-19 pandemic, PKGS is looking to expand into new business lines in the Consumer segment. It is presently assessing a partnership with SC Johnson (an American giant) for local manufacturing of hygiene and home-cleaning products (synergies with tissue sales), including masks and other supplies to hospitals.