Pakistan s Largest Cement Bag Supplier

Transcription

1 REP 057 Pakistan Equity Paper & Board Report completed on November 28, 2017 Prices as of November 27, 2017 Pakistan s Largest Cement Bag Supplier Adnan Sami Sheikh AC adnan.sheikh@topline.com.pk pk Tel: , Ext: 152 Topline Securities, Pakistan Best Local Brokerage House 2015 & 2016 Best Local Brokerage House Brokers Poll 2011, 2012, 2013, 2014 &

2 Executive Summary is Pakistan s largest cement bag supplier and is expected to benefit from 1) upcoming cement expansions where it caters to the sector s packaging needs and 2) venturing into high growth flexible packaging. CPPL s main product is 50kg Kraft paper bags for storage of Cement. For this they previously hdi had installed capacity of 265mn paper bags per annum. However, they have recently increased paper bag capacity to 400mn bags via installation of state of the art new Universal Papersack line with capacity of 135mn bags. This new line can also produce smaller bags of various size & weight. Besides gearing up to cater for the increased demand of the cement industry, this new paper line will allow them to cater other segments as well, for example, flour, chemicals and other powdered materials. Not Rated KATS Code CPPL Bloomberg Code CPPL PA Reuters Code CHPR.KA Market Price Rs Market Cap Rs6.6bn/US$62.9mn Free float Market Cap Rs4.1bn/US$38.8mn 1 Yr Avg. Daily Vol. 38,348 1 Yr Avg. Daily Val. (mn) Rs11.1/US$0.1 1 Yr High/ Low Rs377.6/173.9 Estimated free float 62% Share outstanding (mn) Index weight 0.20% CPPL vs KSE-100 Index 35% CPPL KSE % 5% -10% -25% -40% -55% Nov-16 J an-17 Mar-17 May-17 Source: PSX, Topline Research Jul-17 S ep-17 Nov-17 2

3 Executive Summary CPPL also produces Polypropylene l (PP) bags, a substitute for paper bags. CPPL has capacity to produce 195mn PP bags. PP bags can be made in various sizes of 10kg, 25kg, 40kg, etc and besides cement bags (mainly export quality) they can be used for sugar, fertilizer, etc. Over 95% of bags produced by Cherat Packaging are used for cement. Further, CPPL has decided d to tk take astep ahead, transforming itself into areal packaging magnate by entering the flexible packaging business, which will target the consumer sector. For this CPPL recently issued right shares, raising ~Rs500mn to partially finance the Rs1.7bn flexible packaging venture. CPPL: Key Numbers FY13A FY14A FY15A FY16A FY17A EPS Earnings Growth 66% 112% 159% 41% 24% PE at Rs Dividend Yield 1% 2% 4% 5% 5% ROE 10% 19% 36% 33% 19% PBV Source: Company Accounts, Topline Research 3

4 Cement Industry Expansions to Boost Demand for Bags Cherat Packaging sells bags to around 20 cement companies. As of FY17, cement industry installed capacity was 46.3mn tons while production was 40.3mn tons. This pegs current demand of around 800mn bags. Going forward, cement industry is aggressively expanding it s capacity to meet upcoming demand growth on the back of CPEC related projects and overall growth in housing. By FY21, cement installed capacity is expected to swell to 70.3mn tons, where 5.35mn tons will be added in FY18 and 18mn tons will be added by FY21. We believe demand for cement will grow from 40mn tons in FY17 to 54mn tons by FY21, indicating a 5 years CAGR of 6%. 54mn tons of Cement will require 1,080mn paper sack bags to be filled. Bulk sales, in both local and exports, account for less than 1% of total cement sales. To cater for this additional demand, CPPL recently commissioned new Universal papersack line with ihadditional i capacity of 135mn bags, taking their total paper bag capacity to 400mn bags per annum. 4

5 Expansion in papersack may boost market share to 50% Cement Capacity & Utilization: Existing and Post Expansion mn tons FY13A FY14A FY15A FY16A FY17A FY18E FY19F FY20F FY21F FY22F A) Cement Capacity B) Cement Demand mn bags Industry requirement* ,068 1,248 1,406 1,406 Paper Bags demanded* ,022 1,088 CPPL Paper Capacity CPPL PP Capacity CPPL Total Capacity CPPL Total Sales CPPL Utilization 58% 64% 71% 83% 77% 68% 82% 87% 93% 98% CPPL Market Share 32% 38% 41% 44% 44% 48% 54% 54% 54% 54% 5yr avg. market share 40% 5yr avg. estimated market share 53% Source: Company Accounts, APCMA, Topline Research *20 bags per ton of cement As per our estimates, we observe CPPL has maintained average 40% market share in cement bag industry over past 5 years. While going forward new paper line may allow CPPL to enhance market share above 50%. Besides CPPL, Nishat Paper, subsidiary of D.G. Khan Cement (DGKC), produced 119mn bags while Thal Limited (THALL) produced 105mn bags in FY17. Combined these 3 players make up ~70% of market. 5

6 Paper Bags are Produced From Imported Kraft Paper Reels A paper sack is packaging material made of paper with high quality and weight, usually Kraft Paper. Paper sack is normally used for transporting powder materials such as cement, flour, animal feed, chemicals etc. A paper pp sack can be made from several layers of Kraft paper depending on toughness required. Kraft Paper reels are folded, glued & cut by a series of rollers to produce paper bags. Since there is no reliable quality producer of Kraft Paper in Pakistan, Cherat Packaging has to import Kraft paper reels (raw material used in paper sack bags) primarily from leading Europeanpackaging supplier MondiGroup. 6

7 Polypropylene Woven Sacks Made From Imported Resins Polypropylene (PP) Woven Sacks can be used as an alternative to paper pp bags. They are produced using imported virgin grade (not recycled) PP resin. These are melted down and extruded into tape like fibers which are wound into bobbins for subsequent weaving. Tape fibers are woven into sacks & can be further coated, stitched & printed on. 7

8 Advantages of PP bags vs. Paper bags Plastics are the material of choice because of inherent advantages of functional performance and cost benefits. Relative merits with respect to functional requirement for bulk packaging gusing these three prime packaging gmaterials are summarized below. Functional Requirement for Bulk Packaging Parameter Kraft Paper PP Woven Sacks Seepage Low Low Moisture Prevention Nil Excellent Contamination / Infestation Nil Low to Moderate Organoleptic deterioration Moderate Minimum Aesthetics Good Good Availability Limited Abundant and Easy Cost High Low Seam Strength Strong Low Operational Convenience Good Good Stack Stability Good Good Drop Test Performance Poor Very Good Microbial attack High Nil Air borne pollution None None Biodegradability Yes No Energy Recovery Low High Reusability Nil Good Source: Topline Securities, China Woven Bag 8

9 Targeting Consumers with Flexible Packaging Venture To target the highh growth consumer sector, CPPL decided dto takeastepahead d& transform itself into a real packaging magnate by entering the flexible packaging business. CPPL recently offered right shares to raise ~Rs500mn to partially finance this Rs1.7bn venture. The remainder will be funded via debt and internal sources. Competition in flexible packaging may stem from Packages Limited (PKGS) & Roshan Packages (RPL). As opposed to Rigidid packaging (plastic bottles/containers t etc), t) Flexible packaging is defined as any package or any part of a package whose shape can be readily changed. Flexible packages such as bags & pouches are used for consumer & institutional products and in industrial applications, to protect, market, and distribute a vast array of products. Consumer flexible packaging in Asia is growing at an average rate of 6.6% per annum. According to Flexible Packaging Association Pakistan (FLEXPAC) there are 100 s of small unorganized converters but flexible packaging market in Pakistan revolves around 130 organized converters. Output is estimated at 1.3mn tons per year. While our channel checks indicate that flexible packaging has been growing at times GDP in Pakistan. 9

10 Financial Performance CPPL s revenues have grown at 5 year (FY13 17) CAGR of 12% from Rs4.1bn in FY13 to Rs6.4bn in FY17. Revenues growth has primarily stemmed from higher sales volumes where bags sold have increased 13% per annum. Increase in volumetric sales was due to capacity expansion & stable growth in cement dispatches, where CPPL production capacity increased from 370mn bags in FY13 to 460mn bags in FY17 & cement dispatches have grown by 5% per annum over past 5 years. Gross Profits on the other hand have growth at 5 year CAGR of 30% from Rs436mn in FY13 to Rs1.3bn in FY17, this is due to increase in gross margin from 11% in FY13 to 19% in FY17. Margins have increased due to decline in commodity & energy prices. Pre tax profitability has increased from Rs175mn in FY13 to Rs972mn in FY17, indicating i growth of 53% per annum. This can be attributed to financial charges decreasing by over half, fromrs157mninfy13 tors64mnin FY17duetolowinterestrates & better cashflow. After tax profitability has grown at 56% per annum from Rs119mn in FY13 to Rs702mn in FY17. Incase the currency devalues, we opine CPPL will pass on the impact to customers. 10

11 Financial Snapshot Income Statement Key Metrics Rsmn FY13A FY14A FY15A FY16A FY17A FY13A FY14A FY15A FY16A FY17A Net sales 4,129 5,356 6,224 6,889 6,444 Capacity (mn.bags) Gross profit ,307 1,582 1,256 Utilization (%) 58% 64% 71% 83% 77% Distribution expense Avg Prices (Rs/bag) Admin expense Sl Sales Vl( Vol. (mn.bag) Other expenses Vol. Growth (%) 27% 19% 11% 19% 3% Other income Operating profit ,133 1,380 1,037 Key Ratios Finance cost FY13A FY14A FY15A FY16A FY17A Profit before tax , DuPont Analysis: Tax Tax Burden Profit after tax Interest Burden EPS (Rs) EBIT Margin 8% 9% 18% 20% 16% Source: Company Accounts, Topline Research Total Asset Turnover Financial Leverage ROE 10% 19% 36% 33% 19% Balance Sheet Others: Rsmn FY13A FY14A FY15A FY16A FY17A Gross Margin 11% 11% 21% 23% 19% Non Current Assets 1,426 1,511 1,766 2,175 2,703 Net Margin 3% 5% 10% 13% 11% Current Assets 2,135 2,295 2,176 2,510 2,863 Pretax margin 4% 5% 15% 19% 15% Total Assets 3,561 3,807 3,942 4,685 5,566 Effective Tax Rate 32% 6% 29% 30% 28% Return on Assets 3% 7% 17% 21% 14% Equity 1,212 1,385 2,199 3,316 4,017 Debt to Equity Non Current tliabilities Interest tcoverage Current Liabilities 1,890 1, Current Ratio Total Equity & Liabilities 3,561 3,807 3,942 4,685 5,566 Quick Ratio Source: Company Accounts, Topline Research Source: Company Accounts, Topline Research 11

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