Matco Foods Limited

Matco Foods Limited (MATCO) was founded by Syed Sarfaraz Ali Ghori in 1964 and was initially a supplier of Rice husking and polishing plants, grain dryers, grain handling, seed cleaning and grading plants to various companies and the Government of Pakistan. It set up some of the earliest rice processing plants in Pakistan along with Rice Export Corporation (RECP) in Punjab and Sindh.
In 1989, when the rice export by the private sector was allowed for the first time, Matco established a state of the art rice processing plant in Karachi. Since then, it has established itself as one of the largest rice exporters and one of the largest Basmati rice exporters from Pakistan with sales CAGR of 20 percent over the last 10 years.
Its current rice processing facilities are spread over 1,000,000 sq. feet at four separate locations in Karachi and one in Sadhoke, District Gujranwala, Punjab. With a total annual processing capacity of around 134,700 metric tons, Matco has eight different production lines.
In 2015, the company's name changed from Matco Rice Processing Private Limited to Matco Foods (Pvt) Limited to cater to the expanding scope of products, from rice to other food items. In 2017, Matco established another production plant in Karachi to manufacture Rice Glucose and Rice Protein with plant capacity of 10,000 metric tons per annum of rice glucose and 1,000 metric tons of Rice Protein per annum.
With major operations in Rice Processing Segment, the company provides premium quality basmati and non-basmati rice worldwide. Its main strength and focus is on Basmati rice, but it also sells some Long Grain Non-Basmati Rice (IRRI varieties).
Matco Foods has three brand ranges in the branded category: Falak, Amber Range, and Bahar for its rice products that are sold for different market segments. Its Falak brand is prominent in more than 40 countries through an extensive network of more than 65 distributors internationally.
Pattern of shareholding
As the table shows, major shareholding of the company is owned by the directors and the sponsors. The largest share is that of the Ghori family. Dr Tariq Ghori holds around 26 percent; Mr. Khalid Sarfaraz Ghori holds another 26 percent; and Mr. Jawed Ali Ghori also holds around 26 percent of the total paid up capital.
IPO and the expansion plans
Matco Foods Limited decided to go public with an issue of 29.14 million ordinary shares of face value Rs 10 each, which is 25 percent of the post-IPO paid up capital. Out of total issue, 75 percent of the total issues were to be issued through book building process at a floor price of Rs 26 per share. The remaining 25 percent of total issue will be issued to the general public through retail offer.
The company successfully completed the book building process with a total offer of 30.42 million shares at a strike price of Rs 26 per share. The gross proceeds to the company from the IPO amounted to Rs 757 million before deducting underwriting discounts, commissions and offering expenses. And just recently, Pakistan Stock Exchange has approved the application for listing and quotation of shares of Matco Foods Limited.
The purpose of the IPO as mentioned in the prospectus deals with utilization of the funds for expansion of its production facilities of Rice Glucose / Syrup and Rice Protein which will take the total production capacity of Rice Glucose and Rice Protein to 30,000MT and 3,000 MT per annum from currently 10,000MT and 1,000MT respectively.
Financial performance
Matco foods Limited's financial performance has improved with net profit growing at CAGR of 19.7 percent since 2013. Its sales have remained more or less stable. In recent couple of years, Matco's volumetric growth in basmati exports (exports represent 90% of the firm's sales volumes) has outperformed the industry, but the declining international rice pieces have kept revenues in check.
In 2017, the company reported improved earnings due to a recovery in the international rice prices. During the year, overall sales of the company grew by 10.5 percent and reached Rs 6 billion mark and as per management, commodity prices started to increase, which resulted in better margins for the company.
The company banks largely on recurring export and local sales of its brand "Falak" Basmati Rice and private label Basmati and IRRI rice. Other sources of revenue will now be rice glucose, which is manufactured form broken rice. Apart from export sales, the firm's prospectus shows that a significant portion of the revenue is driven from sales of by-products, which include rice bran, husk, broken rice, rice flour and color sorter rice.
The company however faces the commodity price risk as it is exposed to change in prices of raw rice. Any adverse movement in prices will impact profitability. Matco is also exposed to exchange rate risk. The company highlights that any appreciation in PKR against the USD or otherwise any stability against the fundamental to devalue may impact the company's export pricing.
Industry overview and outlook
After rice, Matco has started selling rice glucose in local market to pharmaceutical companies, biscuits manufacturers and confectionary companies. Looking at the company's revenue structure, the expansion into rice glucose makes sense for a rice exporting business. It intends to export its rice glucose products abroad as well due to higher prices in the international market.
The prospects are positive in both the local and international market. The company's prospectus mentions that the domestic market size of rice glucose is around 60,000 to 65,000 metric tons, while the estimated global demand for rice glucose stands at around one million metric tons with major export market comprising of USA, Europe, Middle East and Australia. Pakistan's share in the export market is only around 2.4 percent, while China and India are the top caterers to the export market in the west.
Also, market reports suggest that India - the largest basmati rice exporter in world - is currently facing a ban from EU nations on higher amount of Tricylazole chemical found in Indian crop as a result of higher usage of pesticide. Matco can exploit this opportunity as Pakistan's rice is considered free from Tricylazole.

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Matco Foods Limited - Pattern of Shareholding

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Description                            Percentage

                                          Holding

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Directors/Sponsors of the Company             80%

IFC and Other Shareholders                    20%

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Source: Company IPO Prospectus

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Matco Foods Limited - Financial Ratios

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                                2013     2014     2015     2016    2017

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Profitability

Return on Equity (%)               0     6.85     3.29     0.13    8.92

Return on Investment (%)        2.24     2.39     1.31     0.06    3.27

Gross Profit Margin (%)         13.5    10.79     14.7    11.45   15.74

Net Profit Margin (%)           2.08     2.17     1.61     0.07    4.38

Operating Profit Margin (%)    19.91    16.55    21.92     19.4   23.35

Liquidity & Solvency

Current Ratio                   1.32     1.27     1.32     1.37    1.32

Equity Ratio (%)               38.29    39.55    40.52    41.76   38.17

Interest Coverage               5.11     4.06     4.54     5.31    6.76

Long Term Debt to Equity        0.09     0.08     0.08     0.11    0.16

Total Debt to Equity            1.61     1.53     1.47     1.39    1.62

Long Term Debt to Assets        0.03     0.03     0.03     0.05    0.06

Activity

Total Asset Turnover            1.08      1.1     0.82     0.81    0.74

Fixed Asset Turnover            4.63     4.08     3.16     3.05    2.82

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