Analogies can be deceptive, especially if the right parallels are not drawn. The third quarter CY10 results of Packages Limited highlight this fact quite aptly, as a comparison with the year ago period shows a stark contrast to a quarter-on-quarter comparison from the second quarter 2010.
The disposal of Packages investment in Tetra Pak in the first quarter of 2009 is the real catch in the story. The said sale upped the profits for CY09 considerably, thus resulting in a high-base effect for any comparison of the companys CY10 numbers with the previous year.
Thus the fall in investment income and profits in 9MCY10 by 90 and 97 percent, respectively, over 9MCY09 should not come as a surprise.
The more relevant cause for concern, however, is the decline in the companys top line of about 3 percent over the second quarter of CY10. And the scenario is further aggravated by lower gross margins which fell to 4.4 percent during the quarter, from a relatively healthy 6.2 percent a quarter ago.
Company sources complained of the unexpected gas loadshedding as being the real culprit behind the drop in sales, as well as the increase in the cost of sales. Since costlier furnace oil has to be used in case of non-availability of power due to gas shortages, the cost of sales shot up. And since the product becomes pricey, not every client is willing to purchase it at a higher price, thus explaining the plummeted sales.
A positive for this quarter was an increase in investment income, owing mainly to the half-year dividend payout by Nestle Pakistan last quarter.
The biggest dent to the bottom line was however, caused by the financial charges, which continue to be higher than the gross profits - thus eroding any chance of a green bottom line. For a firm such as Packages, with low gross margins, such a substantial financial cost does not bode well for profitability.
The outlook remains a challenging one for the company, mainly due to external factors. Even though prices of paper pulp, the key raw material for the company, have been falling slightly over the past few months, the southward journey is expected to continue for a few more months before rising again in 2011.
Expectations of further gas shortages this year will also keep the company on its toes for adopting cost-cutting measures, as highlighted in the directors report for the second quarter of 2010.
Yet some improvement is expected in the fourth quarter results as the effect of increased demand of packaged goods after the floods is likely to be reflected in the books at the year-end.
As the company moves towards enhancing the production capacity of some of its machineries in the Bulleh Shah paper mill in Kasur to meet rising product demand, one wishes them luck in tackling the challenges ahead, particularly that of soaring financial charges.
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PKGS P&L
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(Rs mn) 9MCY10 YoY 3QCY10 QoQ
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Sales 14,344 42% 4,583 -3%
Cost of sales 13,504 39% 4,380 -1%
Gross profit 840 104% 203 -31%
Administrative expenses 381 12% 121 -16%
Distribution & marketing 437 44% 144 -3%
Finance costs 898 -8% 302 2%
Investment income 892 -90% 102 113%
PAT 123 -97% (156) -271%
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EPS (Rs) 1.46 (1.85)
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Source: KSE notice
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