Foods: RAFHAN MAIZE COMPANY LIMITED - Analysis of Financial Statements Financial Year 2006 - 1Q Financial Year 2011

Rafhan Maize is the premier provider of refined corn-based products and ingredients in the region. Corn is the main ingredient of the company and the company uses it to produce food ingredients and many industrial products.
The company was incorporated in Pakistan in 1953, and since then through its product innovation, high customer satisfaction and good business practices has been able to thrive itself in different time periods. It is a subsidiary of Corn Products International, Inc USA and its headquarter is located in Faisalabad.
The company has broad portfolio of products, which can segment into three broad segments - industrial, food and animal nutrition and health ingredients. Due to the wide products portfolio, it has very diversified customer base. Some of the important members of its customers' base include textiles, paper, food, confectionary, baking, pharmaceutical, livestock feed and edible oil refiners.
BUSINESS OVERVIEW
The year 2010 proved to be very challenging for the economy of Pakistan. Market conditions for industrial ingredients business also remained very unfavourable. In August 2010, the country hit by a worst level of flood, which damaged around one-fourth of country's agricultural lands and destroyed over three million bales of cotton, resulting a cumulative loss of about 1.5% to GDP. The problem was further compounded by severe energy crisis, high inflation and high cost of private lending by the financial institutions.
However, considering the case of Rafhan Maize, the year proved to be very favourable for the financial performance of the company. The demand of paper and paper board in the country has grown in line with the growing education demand which in turn helped to generate high demand of the Company's Q-Tac(r) starches brand. The corrugation and paper sack industries also operated at a normal pace to cover demand for packaging of industrial, electronics and food products; creating demand for the sale of Tex-o-Film(r) and Coragum(r) starches and Dextrins. The performance of the food segment also remained good due to the high demand from export-led sugar confectionary segment for liquid glucose.
The animal nutrition and health business also showed good performance because of stable demand from poultry, livestock and aquaculture segments. The prices of poultry products remained firm due to high demand in the country. The dairy and livestock sector has made considerable progress due to government policies, which promote dairy farming.
However, one of its large business customer, the textiles industry was badly hit due to short availability of cotton coupled with a drastic increase in prices of cotton yarn, the liquidity crunch and frequent disruptions in electricity supply. Many of the units were shut down during the year. However, the company was able to nullify the negative effects of it by maintaining a diverse products portfolio. The year 2010 closed one of the successful years of Rafhan's history.
RECENT RESULTS (1Q11):
Net sales increased to Rs 4.7 billion as compared to Rs 3.0 billion in the corresponding period of FY10. Nutrition and animal segments showed healthy demand while paper and corrugation along with textile was affected due to various problems plaguing the industry like power crisis, rising cost of production, shrinking margins etc. Proportionally the COGS also increased from Rs 2.3 billion to Rs 3.7 billion. Distribution costs and operating expenses increased in line with inflationary pressures. Operating profit increased to Rs 869 million from Rs 631 million in the same period last year. PAT was Rs 522 million as compared to Rs 397 million. EPS was Rs 56.54 as compared to Rs 42.99 in the same period last year.
FINANCIAL PERFORMANCE (FY06- 10)
During FY10, the net sales of the company remained 13.912 billion rupees as against Rs 11.428 billion rupees last year, showing an increase of 22% over the period. The company achieved such a high growth rate due to strong local and international demand of its products. The export of the company stood 518 million rupees compared to 304 million rupees last year showing an increase of 70% over the period, in sympathy with rising commodity prices in the international market.
The profitability of the company has gone up by 41% from 1.29 billion rupees to 1.83 billion rupees resulting in positive change in return on assets and return of equity during the period. The return on assets increased from 24.73 times to 25.32 times and return on equity gone up from 32.36 times to 37.10 times. However, the company faced some problems due to the high flood in the country and liquidity crunch in the market. The distribution cost of the company has increased by 12% due to the logistic problems caused by the flood and the private financing has decreased by 35% due to the high interest rate cost in the market.
The current ratio of the company has slipped from 2.05 times to 2.44 times. This does not seem to be a big problem for the company but if we compute the quick ratio, it seems very alarming. The quick/acid test ratio has decreased from 1.05 to 0.3 during the period. The stock in trade of the company has increased by 168% during the year.
The inventory turnover ratio of the company decreased from 6.23 days to 3.09 times due to high inventory buildup. The Day Sales Outstanding for the company has decreased from 10.07 days to 9.89 days. This decline shows an increase in efficiency of converting credit sales into cash. The total assets turnover of the company has decreased from 2.15 times to 1.92 times due to inventory remaining unutilised during the period. The Sales to Equity ratio has however gone up because of the significant increase in the sales during the period.
The debt to asset and debt to equity ratio of the company have gone up during the period because significant amount of trade payable generated by the current year operating cycle remained unpaid. The debt to assets ratio has increased from 0.24 to 0.32 whereas the debt to equity ratio increased from 0.32 to 0.47. Times interest earned (TIE) ratio has also significantly gone up due to profitable performance of the company in the current year and due to the decrease in the borrowing from financial institutions due to high interest rate cost. TIE ratio has increased from 42.26 times to 88.75 times. The long-term debt to equity ratio has slightly increased from 0.06 to 0.07.
Due to current year profitable operation, the EPS and BPS ratios of the company increased significantly during the year. The EPS ratio has increased from 140.43 rupees to 198.99 rupees and BPS ratio has increased from 433.9 rupees to 536.4 rupees during the year. The DPS ratio has also increased from 90 rupees to 100 rupees, which shows that the company has shared its profitable operation with its shareholders in the form of two interim dividends.
Despite excellent financial performance of the company, the market value of the share of the company remain stable at 1485 rupees and PE ratio declined from 10.57 times to 7.47 times This happen because of payment of two interim dividends during the year and to some extent due to inefficiency of Pakistani financial market and macroeconomic instability in the country during the year.
Beta of Rafhan Maize was 0.6541 during the period, which means that the stock has varied with the market but with little low magnitude.
FUTURE OUTLOOK
Pakistan is currently going through a tough time period. Tax-to-GDP ratio in the country is one of the lowest in the world. To meet its expenditure, Pakistani government is continuously borrowing from commercial banks, withdrawing its subsidies from various sectors and introducing new form of taxation policies. Coupled with them, there are problems like, the poor law and order situation, energy crises etc. All of these are adding to challenging external environment and higher cost of operation in the country, but the future of Rafhan Maize does not seem bleak. There are many of the things which resulted in the profitable operation this year like the rising international agricultural products prices, poultry prices and strong demand of paper in the country are expected to last in near future.

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RAFHAN MAIZE - FINANCIALS

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INCOME STATEMENT              2006        2007         2008         2009         2010

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Net Sales                6,127,127   7,578,339   10,746,826   11,428,104   13,912,769

Gross Profit             1,571,059   2,098,172    2,741,246    2,435,642    3,297,736

Operating Profit         1,320,865   1,754,639    2,415,173    2,130,943    2,954,876

Profit Before Tax        1,252,394   1,681,101    2,299,065    2,011,864    2,799,989

Net Profit                 809,279   1,089,184    1,492,365    1,297,080    1,837,937

BALANCE SHEET                 2006        2007         2008         2009         2010

Total Equity             2,726,645   3,025,696    3,578,441    4,007,730    4,953,885

Current Liabilities        609,808     667,578    1,473,657    1,036,473    1,954,308

Non-current Liabilities    190,195     252,337      235,273      260,321      351,754

Current Assets           1,877,391   2,256,985    3,099,295    2,531,960    4,015,673

Non-current Assets       1,613,511   1,688,626    2,056,715    2,753,216    3,244,274

Total Assets             3,490,902   3,945,611    5,287,371    5,304,524    7,259,947

LIQUIDITY                     2006        2007         2008         2009         2010

Current Ratio                 3.08        3.38         2.10         2.44         2.05

ASSET MANAGEMENT              2006        2007         2008         2009         2010

Inventory Turnover            3.41        3.47         2.98         6.23         3.09

Days Sales Outstanding       15.68       15.81        11.67        10.07         9.89

Operating Cycle              85.11       73.43        77.78        63.89        61.31

Total Asset Turnover          1.76        1.92         2.06         2.15         1.92

Sales/Equity                  2.25        2.50         3.00         2.85         3.10

DEBT MANAGEMENT               2006        2007         2008         2009         2010

Debt to Asset Ratio           0.23        0.23         0.32         0.24         0.32

Debt to Equity Ratio          0.29        0.30         0.48         0.32         0.47

Long Term Debt to Equity      0.07        0.08         0.07         0.06         0.07

Times Interest Earned        64.73      143.38        64.65        42.26        88.75

PROFITABILITY                 2006        2007         2008         2009         2010

Gross Profit Margin          25.64       27.69        25.51        21.31        23.70

Profit Margin                13.21       14.37        13.89        11.35        13.21

Return on Assets             23.00       28.79        37.82        24.73        25.32

Return on Equity             29.00       39.34        49.32        32.36        37.10

MARKET VALUE                  2006        2007         2008         2009         2010

Book Value                  295.21      327.58       387.43       433.91       536.34

EPS                          87.62      117.92       161.57       140.43       198.99

DPS                             70       90.00          100           90          100

Price Earnings Ratio         10.27       19.12        14.74        10.57         7.47

Market Value                   900        2255      2381.42         1485      1485.63

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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].
Copyright Business Recorder, 2011