Al-Khair Gadoon Limited (PSX: AKGL) was incorporated in Pakistan as a private limited company in 1990 and was converted into a public limited company in 1995. The principal activity of the company is the manufacturing and sale of polyurethane foam and allied products including mattresses, sofa beds, furniture, pillows, bed sheets etc under the brand name “Five Star”.
Pattern of Shareholding
As of June 30, 2023, AKGL has a total of 10 million shares outstanding which are held by 329 shareholders. The company’s directors, their spouse and children collectively account for 80.68 percent shares of AKGL followed by general public having 16.42 percent stake in the company. Around 2.89 percent of AKGL’s shares are held by public sector companies. The remaining ownership of the company is divided among ICP, Modarabas and leasing companies.
Financial Performance (2018-23)
Since 2018, AKGL’s topline and bottomline slid twice i.e. in 2018 and 2023. In the remaining years under consideration, both topline and bottomline posted a staggering rise. AKGL’s margins have shown a cyclical pattern over the years (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.
In 2019, AKGL’s topline rose by a splendid 55 percent year-on-year. This was the result of better sales volume, improved sales mix and full-year operations versus 10 months operations in 2018 due to fire incident in the factory. AKGL produced 1455 tons of products in 2019, up 32 percent from last year’s production volume due to rising demand. Cost of sales also escalated by 55 percent year-on-year as the cost of imported raw materials surged due to drastic depreciation in the value of local currency. Gross profit improved by 54 percent in 2019, however, GP margin slightly fell from 15.13 percent in 2018 to 14.99 percent in 2019. Operating expense multiplied by 34 percent year-on-year in 2019 due to increase in payroll expense as well as advertisement and promotion budget. The company posted a net other expense of Rs.1.76 million in 2019, down 79 percent year-on-year due to high-base effect on account of loss of its fixed assets and materials due to fire in 2018. Operating profit rebounded by 176 percent year-on-year in 2019, culminating into OP margin of 7 percent versus 3.9 percent in 2018. Finance cost surged by 266 percent in 2019 as the company increased its external borrowings for import of raw materials and also because of higher discount rate. AKGL’s bottomline registered 163 percent growth in 2019 to clock in at Rs.19.39 million. This translated into an EPS of Rs.1.94 in 2019 versus Rs.0.74 in 2018. NP margin also picked up from 2 percent in 2018 to 3.4 percent in 2019.
The incredible topline growth of 2019 was followed by a slide of 24 percent in 2020. The decline in sales was the result of combination of fiscal measures undertaken by the government to boost tax revenue coupled with the breakout of COVID-19 and the associated lockdown which halted the production activities of the company. AKGL’s production volume slumped by 17 percent year-on-year in 2020 to clock in at 1205 tons. Cost of sales soared by 25 percent year-on-year in 2020 due to hike in the prices of imported raw materials as well as Pak Rupee depreciation. Gross profit declined by 18 percent year-on-year in 2020, however, GP margin ticked up to 16 percent on account of rigorous cost control measures and better product mix. Operating expense largely remained in check and increased by 7 percent year-on-year. AKGL posted a net other income of Rs.1.23 million in 2020 as it sold its fixed assets at a gain and booked lesser provisioning against WWF and WPPF. Despite keeping a check on its cost and expense, operation profit plunged by 40 percent year-on-year in 2020 with OP margin slipping to 5.5 percent. Finance cost shrank by 35 percent year-on-year in 2020 on account of a drop in AKGL’s short-term borrowings. Bottomline plummeted by 59 percent year-on-year in 2020 to clock in at Rs.8 million with an EPS of Rs.0.8 and NP margin of 1.8 percent.
AKGL’s topline registered a robust turnaround in 2021 as it grew by 84 percent year-on-year due to upward revision in prices and better sales mix. Production volume was recorded at 1205 tons, same as last year. Cost of sales spiked by 87 percent year-on-year due to an increase in global commodity prices. GP margin marched down to 14.4 percent in 2021. AKGL posted a 38 percent hike in its operating expense in 2021 as the number of employees significantly increased from 179 in 2020 to 211 in 2021. Higher provisioning against WWF and WPPF translated into a net other expense of Rs.1.39 million in 2021. Operating profit grew by 102 percent year-on-year in 2021 with OP margin jumping up to 6.1 percent. Finance cost ticked up by 5 percent year-on-year in 2021 despite discount rate cuts as the company obtained a long-term loan of Rs.14.45 million which represented borrowing under SBP Refinance scheme for the payment of salaries and wages and also lease finance facility for plant and machinery. This coupled with twofold short-term borrowings in 2021 when compared to 2020 drove up AKGL’s gearing ratio to 40 percent in 2021 versus 26 percent in 2020. Net profit augmented by 185 percent year-on-year in 2021 to clock in at Rs.22.81 million. This translated into an EPS of Rs.2.28 and NP margin of 2.8 percent in 2021.
In 2022, AKGL’s net sales outshone the previous year by 44 percent despite intense competition in the industry and high cost of materials due to Pak Rupee depreciation and high energy charges taking its toll on the margins. The company’s production volume was recorded at 1750 tons, 45 percent higher than last year. High cost of sales resulted in the erosion of gross margin which clocked in at 12.8 percent in 2022. Operating expense spiked by 39 percent year-on-year in 2022 primarily due to exorbitant rise in utility charges, travelling and conveyance charges as well as advertisement and promotional expense. Net other expense posted a 91 percent hike on account of higher provisioning against WWF and WPPF. As a consequence, operating profit picked up by 12 percent while OP margin slumped to 4.7 percent. Despite multiple rounds of monetary tightening in 2022, AKGL was able to squeeze its finance cost by 1 percent due to lower bank commission charges. Net profit grew by 34 percent year-on-year in 2022 to clock in at Rs.30.57 million with an EPS of Rs.3.06 and NP margin of 2.6 percent.
Recent Performance (2023)
AKGL’s net sales couldn’t sustain the economic and political headwinds and lost its grounds by 8 percent in 2023. The company’s production declined by 10 percent year-on-year in 2023 to clock in at 1575 tons. This was on account of reduced remand due to shrunken pockets of consumers due to unprecedented inflation. Cost of sales also plummeted by 8 percent, resulting in a static GP margin of 12.8 percent in 2023. Operating expense inched down by 6 percent year-on-year in 2023 as the company significantly compressed its entertainment, advertisement and staff welfare expense. Net other expense shrank by 78 percent in 2023 as the company booked lower provisioning against WWF and WPPF and earned income from bank deposits. Despite rigorous measures to drive down its cost and expense, AKGL couldn’t stop its operating profit from sliding down by 9 percent in 2023. OP margin marginally dropped to 4.6 percent in 2023. Finance cost proved to be the Achilles heel for the company as it surged by 186 percent on account of high discount rate. This was despite the fact that the company reduced its borrowings its 2023 which pushed down its gearing ratio to 25 percent. Net profit eroded by 57 percent year-on-year to clock in at Rs.13.02 million with an EPS of Rs.1.3 and NP margin of 1.2 percent – the lowest among all the years under consideration.
Future Outlook
Exorbitant level of inflation has considerably taken its toll on the sales volume of the company by reducing the purchasing power of consumers. As foam and its allied products are not need-based products, the consumers may avoid or delay its purchase or switch to cheaper alternatives to ensure affordability. In such situation, the company may not be able to pass on the entire effect of cost hike to its consumers in order to stay competitive. This may further squeeze its margins. International market for polyurethane foam is showing great potential on account of rising demand of smart homes, focus on energy conservation and expanding automobile industry. AKGL may capitalize on the enlarging global market to offset the depressed demand in the home market.
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