Maple Leaf Cement
Maple Leaf Cement started operations as a private company in 1992 when it was acquired by the Kohinoor Maple Leaf Group. Based in Lahore, the company has since positioned itself as a prominent cement manufacturer of the country with a diverse customer base.
Copyright Business Recorder, 2012
MLCFL owns and operates three production lines for grey and three production lines for white cement. The plants are located at Daudkhel District Mianwali. It is the largest producer of white cement in the country with 80 percent of market share and total annual clinker capacity of the company is recorded at 3,690,000 tons.
Industry review After a tough FY11 when the country was hit by the Great Floods of 2010, FY12 saw local cement retention prices going up, lending some price-based support to local cement manufacturers. In addition, post-flood reconstruction activity and greater housing construction in some parts of the country also brought about a volumetric growth in local sales - an eight percent year-on-year improvement in 9MFY12 at 17.4 million tons. Export sales, however, continued to be stifled during the year, clocking in at 6.2 million tons during 9MFY12, 8 percent less than the same period last year.
As has been happening in the local cement industry at large, Maple Leaf Cement is also enjoying the bonanza of rising cement prices in Pakistan. Relative to the same period last year, cement prices have increased by a substantial 19 percent in FY12.
In line with the industry trend of high cement prices, during 9MFY12, net sales improved by about 16 percent, driven primarily by improved retention prices of cement during the period under review, as well as enhanced local sales volumes. This cascaded into a year-on-year improvement of about nine percentage points in the gross margins of the company for July-March FY12.
Many players in the cement sector have been working towards lowering their production costs by employing cost reduction measures by using alternate power sources such as the Waste Heat Recovery Plants installed by several key players. With Maple Leaf cement also running its Waste Heat Recovery Plant, some of the improvement in gross margins can also be attributed to this attempt of the company.
Further, many players up North have been relying less on exports via sea because of lower margins on exports, especially in the wake of better prices at home. Consequently, Maple Leaf's export sales also witnessed a decrease in terms of the volume of exports via sea. The result was evident in reduced distribution expenses, which decreased from 13 percent of sales in 9MFY11 to only six percent of sales in 1HFY12.
Overall, reduction in distribution and selling expenses turned around the operating profits of the company, which improved by a whopping 14 percentage points in 9MFY12 relative to the same period last year. Compared to an operating profit of Rs 58 million in 1HFY11, the company registered operating profits worth Rs 1.6 billion in 9MFY12.
However, finance costs are the real Achilles heel of the company, eroding on any operating gains the highly leveraged company could boast of. Since FY09, the company's finance costs have been over 15 percent of net sales for all the fiscal years, and were 16 percent of net sales in 9MFY12. This is a marginal reduction in 9MFY12 from 16.8 percent during the same period last year, and can be explained by the greater increase in net turnover, since finance costs have increased by 11 percent in 9MFY12 relative to 9MFY11.
But thanks to the improved operating results for 1QFY12, the loss in the first nine months this year was Rs 221 million, considerably less than the Rs 1.6 billion recorded for the same period last year. The company actually reported a profit of Rs 2.4 million in 3QFY12 as opposed to a loss of around Rs 0.5 billion in 3QFY11, showing that the improving margins are gradually pulling the company towards a green bottomline.
Leverage Maple Leaf Cement's leverage position has put it under the radar of rating agencies. The company had taken up immense debt for expanding cement production capacity, putting the financial health of the company in jeopardy. Since FY10, the debt-to-equity ratio has been fairly high at approximately 2.0.
Beginning 2008, the company's financial health came under severe pressure; the company issued a privately placed secured Sukuk of Rs 8 billion in Jan'08. The instrument was issued for a period of eight years. However, Maple Leaf was not able to meet the due interest instalment in December 2009. The company attempted to negotiate with lenders regarding restructuring their debt in 1HFY09, but this did not materialise, resulting in Paccar downgrading Maple's Sukuk issue of Rs 8 billion from BBB to D.
When the company did succeed in getting a majority of its long-term loans restructure in FY10, with the sponsors - the Kohinoor Group - even injecting Rs 1 billion as 'quasi-equity' interest-free loan into the company, the company's credit rating was revised to BB.
However, rising energy costs, poor economic conditions leading to dwindling cement demand, together with interest rate spikes witnessed in most of FY11 struck a further blow to the company's ability to service its debt obligation. The capacity expansion for which the company took these pains was unable to see the light of the day in such grave economic conditions.
"Just when the company completed its expansion projects, increasing production to 12,000 tons per day, demand for cement in the local market nose-dived," said an article by BR Research in July last year.
The company was unable to honour the first mark-up payment of its restructured Sukuk, which was due on September 3, 2011, putting it back under the watchdog Paccar, to the extent that the agency in its latest report on Maple leaf said, "The delay in meeting the financial obligations by Maple Leaf is tantamount to default."
Unsurprisingly, the company was downgraded back to a D. According to Paccar, Maple leaf is in the process of negotiating further restructuring agreements with favourable lenders, and the improvement in operating margins at the back of improving sale prices of cement may help them in this end.
However, in order to turn the losses into profits, the company's sales volumes need also be pumped up to improve, not only its profitability, but also cash flows and ability to service debt obligations.
During 9MFY12, Maple Leaf has managed to bring down its total debt by about Rs 1 billion. It restructured its existing short term loan of Rs 160 million and running finance from HSBC Bank Middle East Limited into a medium term loan of Rs 200 million. Maple Leaf sits on hefty financial charges which erode on its profitability. But the improved operating performance this fiscal year has helped beef up the interest coverage ratio from 0.04 in 9MFY11 to 0.89 in 9MFY12.
Liquidity With a company as cash-strapped as Maple Leaf, liquidity constraints come as no surprise. The company's net working capital has been in the negative since FY08, standing at a negative Rs 5.3 billion by 9MFY12. The current ratio, on the other hand has lingered around 0.5 during the last three fiscal years, deteriorating from 0.8 seen in FY08.
On the cash flow side, in 1HFY12, a significant cash outflow of Rs 1 billion was seen, plausibly attributable to the company's heavy short-term borrowing of Rs 3.8 billion. The hefty finance costs and short-term borrowing further reflect on the company's ailing working capital situation.
Investment and valuation Unsurprisingly, Maple Leaf Cement has not paid any dividend to its investors in the last three fiscal years, and is being traded below par at the KSE at the moment.