Food Products: UNILEVER PAKISTAN FOODS LIMITED - Analysis of Financial Statements Financial Year 2005 - Financial Year 2008
Unilever Pakistan Foods Limited, formerly known as Rafhan Best Foods Limited (RBL) has been one of the leading producers of consumer food products in the country. The spectrum of RBL's product range contains some leading brands like Rafhan, Knorr, Energile, Glaxose-D, Bestfoods etc.
The majority of RBL's shares are held by Bestfoods USA, which is engaged in producing a vast range of food products in 63 countries across 5 continents. RBL was incorporated in Pakistan 1997 and is listed on Karachi and Lahore stock exchanges.
On 24th April 2007, Rafan Best Foods Limited was renamed Unilever Pakistan Foods Limited, after Unilever's acquisition of Bestfoods. In Pakistan, Unilever made its debut in 1948, and today it is one of the most prominent multinationals in the country operating though two affiliated companies namely, Unilever Pakistan and Unilever Pakistan Foods. The two public listed limited companies have 5 wholly-owned and 7 third party manufacturing sites across Pakistan and have around 1,500 people on their payroll and many thousands indirectly. Currently, Unilever Foods Pakistan has 5 major brands: Knorr, Rafhan, Energile, Glaxose-D and Unilever Food Solutions.
FINANCIAL PERFORMANCE (DEC03-DEC08)
The company's sales continue to grow consecutively for the 5th year, registering a growth of 29.5% in FY08, compared to 22.53% in FY07, as the company continues to built the growth momentum starting in 2004 after the loss it was incurred in 2003. Since 2004, the company grew at a rate of 24.97% CAGR. Good marketing strategies and the company's bold venture into new products like Knorr meal maker, Rafhan Magic Jelly and Energile ready to drink yielded positive results.
Furthermore, two new variants of Knorr noodles were introduced and the Energile range was re-launched; both ventures proved successful and generated a significant value. The export business, aimed at traditional taste and halal markets, mainly in Asia and Europe region, registered inspirational growth, with revenues from exports for the FY08 increased more than twice from those in FY07. Significant investment in Pakistani factory to overcome capacity constraints has also been made.
An impressive growth in sales was however mitigated by rising COGS, on the back of rising food inflation, energy crisis and other situational externalities in the country coupled with competitive pricing, thereby maintaining pressure on the gross margins. The COGS for FY08 showed almost a proportionate increase of 29% from FY07. Operating Profit growth was around 56% compared to FY07. Gross Profit Margin showed a steady stage since FY05. The company witnessed a loss in 2003, but was able to recover till recent times with a CAGR of 89.75%. The growth in profit margin was 11.31% in FY08 (2007: 37.38%). ROA showed an incline, as the growth in profits (56% in FY08) was much higher than the growth in assets.
In FY08, equity shows a recovery from the big drop in FY07 as the company had announced dividends of Rs 75 and Rs 25 per share, causing a big drop in reserves, and spiking the FY07 ROE. The liquidity ratios of the company had started to show a declining trend since FY05, due to massive amount of short-term borrowings taken by the company in 2006 and 2007. In FY08 the liquidity ratios project a stable pattern, showing no significant change. The finance cost showed a sharp rise in FY08 of 227% changed during the year (2007 growth rate being 56%). These short-term borrowings are causing the company's current liabilities to surge and the laggard growth in current assets have caused a decline in company's ability to pay off its short-term obligations, as shown in the accounts of 2007.
The quick ratio, a better measure of liquidity showed a steady trend from FY03 to FY06 and then plunged downward, depicting that like the Current Assets, Quick Assets growth also lagged behind that of Current Liabilities. Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. Unilever's inventory turnover was slightly lowered in 2005 but since then has been on the rise. This shows that Unilever's efficiency in turning its inventory to sales is on the decline, but still it is in reasonable trend. The prime reason is due to the growth in sales being more than the growth in inventories (which actually showed a decline in FY 08)
Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. DSO for Unilever has been on the decline since 2003. It has shown a reduction from 36 days to 12 days in 2007 and in 2008, it further declined to 8 days. This shows that Unilever has a firm policy for debtors, but it should also be considered that the policy has not yet affected the sales of the company, which continue to grow. It is interesting to note that the Unilever Food's inventories showed a decline of 6.77% in FY08. The operating cycle of the company is seen following a similar trend to that of the inventory turnover days, with the FY08 rate being 69 days as compared to 81 days in FY07.
TATO of Unilever Foods have been on a steady inclining trend over the years, reflecting that the assets and sales are growing at a steady rate and the growth of sales is higher than the growth of assets. This trend continues in FY08. This shows that the company is responding well with the sales in terms of asset management. Sales/Equity had declined during 2004 due to low sales but since then has been on a steady rise and managed accordingly in 2008, the Sales/equity stood at 10.23. The decline in FY08 as compared to FY07 has been due to the sharp growth in equity of about 56%.
Regarding debt management, both the Debt to Equity and Debt to Assets ratios are following similar trend. From 2003 to 2005 they were showing a declining trend, whereas since 2005 to 2007, they were showing more of a rising trend. In FY08, the D/E shows a decline mainly due to a sharp rise in equity and a comparatively modest rise in liabilities. The company managed to keep the liabilities down till 2005. However, thereafter the liabilities show a consecutive rise for 3 years until 2008 mainly on back of rising finance charges. The increase in liabilities in FY 08 is caused by a growth of 202% in the non-current liabilities whereas the current liabilities show a decline of 8% from the previous year because of the finance cost incurred during the current year.
The long-term debt/equity ratio had been almost near bottom at a very steady rate for the past few years, this year ie FY08, the long-term debt to equity ratio stood higher (0.14) from previous year's low (of 0.07). Again, this can be attributed to the steep rise in non-current liabilities for FY08. The TIE ratio for Unilever Foods that showed a rising trend from 2003 with a spike in 2006, nose-dived in 2007 and continued to plunge in FY08, standing 24.85 this year. Looking at this, it can be inferred that Unilever Foods is being adversely affected due to higher mark-ups and finance costs. The EPS has been on an upward march since 2003. After the loss faced by the company in 2003, it has not lowered its EPS yet and the FY08's figure stands at Rs 56.60.
Any change in EPS is caused by the profits earned by the company, as the number of shares has been the same for 5 years. The increase in FY08 was more than the previous years because of the increase in profits. The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). The P/E for Unilever Foods have been on the downslide from 2004 to 2006 as the growth in EPS has been much higher than the share price. The yearend market prices have been on the increase over the five-year period, with 2007 showing major increases.
In 2007 it was observed that the yearend market price of the company's share had been much higher than previous years (2006: Rs 414 to 2007: Rs 921), causing the increase in P/E multiple to 36.5x. In 2008, the P/E ratio again declined to stand at 29.31. This decline is mainly due to an increase of 25% in year-end price of the share whereas the earnings grew by 55%, the net effect being decrease due to the disproportionate nature of the growth. Since 2003 to 2006 the company's book value has been almost steady, declining slightly in 2004 and then rising till 2006. The changes in book value are caused by the changes in equity of the company, as the number of shares outstanding is the same throughout.
The nose-dive in 2007 was caused by the decrease in equity on the back of decrease in reserves of the company. In 2008, the book value again showed signs of recovery and stood at 48.92 (FY 07 Rs 32.31). The main reason for this is the FY08 growth in total equity of about 58.3% from FY07. The dividend payout has also shown a steady rising trend from 2004 to 2006 (dividend were not given in 2003 due to losses), followed by an extremely healthy dividend payout of Rs 93/share in FY07, and in FY08, the dividend payout stood at Rs 36/share. The major beneficiary of which would be its associated companies and undertakings followed by the individual shareholders of the company.
FUTURE OUTLOOK
The global recession has set in with global decline in consumer spending and weak demand for consumer goods due to reduced buying power and inflation, which has plagued almost all major economies of the world. The full impact of the global downturn is slowly impacting Pakistan and consumers are now more discerning in making buying decisions and are spending more prudently. Despite a challenging environment, Unilever foods have managed to remain profitable and maintain a positive outlook, which is an essential thing for any company under the current situation.
The pressure on the company's margins is expected to continue and the company remains unfazed and committed to face competition and deliver better quality at cheaper prices. Another major concern to Unilever Foods is increasing mark-up rates that it is facing for the past two years, as they are causing some troubles in managing. The company needs to effectively manage its short term borrowings at its earliest.
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BALANCE SHEET 2003 2004 2005 2006 2007 2008
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In PK 000's
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Property, plant and equipment 152,516 117,971 103,067 102,310 196,350 307,707
Other non-current assets 204,809 216,737 212,874 187,126 197,780 191,469
Inventories - - - 279,859 378,002 352,394
Trade debts - - - 64,279 88,101 49,976
Cash and cash equivalents
at the end of the year (148,941) 83,931 100,834 172,096 (346,216) (234,569)
Current assets 641,991 400,560 426,277 597,016 552,418 516,437
Quick Assets - - - 317,157 174,416 164,043
Total assets 999,316 735,268 742,218 886,452 946,548 1,015,613
Ordinary share capital 61,576 61,576 61,576 61,576 61,576 61,576
Preference share capital - - - - - -
Reserves 442,470 433,213 463,849 497,888 137,406 239,647
Total equity 504,046 494,789 525,425 559,464 198,982 301,223
Surplus on revaluation
of fixed assets - - - - - -
Non-current liabilities 14,984 8,124 8,248 12,606 13,926 42,079
Current liabilities 480,286 232,355 208,545 314,382 733,640 672,311
Total liabilities 495,270 240,479 216,793 326,988 747,566 714,390
Total equity and liabilities 999,316 735,268 742,218 886,452 946,548 1,015,613
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PROFIT AND LOSS 2003 2004 2005 2006 2007 2008
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in PKR 000's
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Net sales 1,556,623 1,217,507 1,489,952 1,939,515 2,376,408 3,081,879
COGS 1,127,273 874,068 964,296 1,208,264 1,488,073 1,924,766
Gross profit 429,350 343,439 525,656 731,251 888,335 1,157,113
Operating profit / EBIT -5,290 42,540 167,017 294,461 352,872 552,544
Finance Cost 16,278 5,794 6,111 4,345 6,798 22,233
Profit before tax -21,568 36,746 160,906 290,116 346,074 530,311
Taxation -4,250 15,215 62,536 102,137 121,582 181,765
Profit after tax -17,318 21,531 98,370 187,979 224,492 348,546
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2003 2004 2005 2006 2007 2008
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PROFITABILITY RATIOS
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Profit Margin -1.11% 1.77% 6.60% 9.69% 9.45% 11.31%
Gross profit margin 27.58% 28.21% 35.28% 37.70% 37.38% 37.55%
Return on Assets -1.73% 2.93% 13.25% 21.21% 23.72% 34.32%
Return on Equity -3.44% 4.35% 18.72% 33.60% 112.82% 115.71%
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LIQUIDITY RATIOS
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Quick Ratio 1.00 1.00 1.00 1.01 0.24 0.24
Current Ratio 1.34 1.72 2.04 1.90 0.75 0.77
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ASSET MANAGEMENT RATIOS
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Inventory Turnover(Days) 67.00 86.00 60.00 65.00 81.00 69.00
Day Sales Outstanding (Days) 36.00 27.00 17.00 13.00 12.00 8.00
Operating cycle (Days) 103.00 113.00 77.00 78.00 93.00 77.00
Total Asset Turnover 1.56 1.66 2.01 2.19 2.51 3.03
Sales/Equity 3.09 2.46 2.84 3.47 11.94 10.23
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.50 0.33 0.29 0.37 0.79 0.70
Debt to Equity Ratio 0.98 0.49 0.41 0.58 3.76 2.37
Long Term Debt to Equity 0.03 0.02 0.02 0.02 0.07 0.14
Times Interest Earned -0.32 7.34 27.33 67.77 51.91 24.85
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MARKET RATIOS
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Earnings per share (2.81) 3.50 15.97 30.53 36.46 56.60
Price/Earnings Ratio (87.12) 82.94 21.91 16.18 36.35 29.31
Dividend per share - 10.00 11.00 25.00 94.88 39.99
Book value per share 81.85 80.35 85.32 90.85 32.31 48.92
No of Shares issued 6,158,000 6,158,000 6,158,000 6,158,000 6,158,000 6,158,000
Market prices(Year end) 245.00 290.00 350.00 494.00 1325.00 1659.00
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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