Unity Foods Limited (PSX: UNITY) was incorporated in Pakistan as a private limited company in 1991 and was subsequently converted into a public limited company. The company was initially engaged in yarn manufacturing but then changed its principal business activity to edible oil extraction, refining and related businesses. Sunridge Foods (Private) Limited is a wholly owned subsidiary of UNITY and is engaged in the processing of food items.
Pattern of shareholding
As of June 30, 2023, UNITY has a total of 1,194 million shares outstanding which are held by 10,544 shareholders. Associated companies, undertakings and related parties i.e. Wilmar Pakistan Holdings Pte. Limited and Unity Wilmar Agro (Private) Limited have the majority stake of 35.65 percent in the company followed by local general public accounting for 34.89 percent shares of UNITY. Directors, CEO, their spouse and minor childrenhold 11.88 percent shares of the company while joint stock companies have an ownership of 7.45 percent in UNITY. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-23)
UNITY’s topline has been showing remarkable growth over the years. However, its bottomline doesn’t follow the suit and nosedived in 2020, 2022 and 2023 despite topline growth. UNITY’s margins have been showing an oscillating pattern over the period under consideration (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.
In 2019, the company expanded its refining operation through acquisition of an oil refinery in Port Qasim which took the overall refining capacity of UNITY from 150 metric tons per day to 650 metric tons per day. This project was funded by a right issue of 221.83 percent which raised Rs. 3,750 million for the company. During the year, the company also introduced two new edible oil brands, Zauqeen and Ehtimam targeting the discount segment whose off-take was tremendous and contributed greatly to the overall sales of the company. 406.7 percent year-on-year topline growth during the year came on the back of both local and export sales, however, local sales constituted 93 percent of the overall sales mix of the company. The cost of sales grew by a staggering 406 percent year-on-year in 2019. This restricted the growth of GP margin which showed a minor uptick from 8.92 percent in 2018 to 9.06 percent in 2019. Operating expenses showed an unabated growth during the year mainly in the categories of salaries and wages, freight and forwarding expenses and fuel and power charges etc. Other expenses also magnified on the back of exchange loss as well as WWF and WPFF during the year. Operating profit grew by 276 percent over the year; however, OP margin succumbed to towering operating expenses and dropped from 5.4 percent in 2018 to 3.99 percent in 2019. Finance also grew by 456 percent year-on-year in 2019 on the back of high discount rate, increased short-term borrowings and right issue expenses during the year. The bottomline grew by 110 percent during the year to clock in at Rs. 255.07 million. NP margin dropped to 1.8 percent in 2019 from 4.4 percent in 2018. EPS dropped from Rs. 1.18 in 2018 to Rs. 1.03 percent due to addition of 375 million shares in the outstanding share volume of the company.
During 2020, the company made another right issue of 82.71 percent to fund its working capital requirements. The right issue was intended to control the finance cost of the company which was soaring on the back of upward revisions in discount rate. Another noteworthy development during the year was the acquisition of 69 percent shares of Sunridge Foods (Private) limited. The topline of UNITY grew by 111.9 percent year-on-year in 2020. The volumetric sales showed an improvement during the year as the company being an “Essential services” provider was allowed to continue its operations while other sectors were grappling against production halt owing to global pandemic. UNITY gross profit enhanced by 58.5 percent in 2020, however, it GP margin squeezed as edible oil prices crashed during the year owing to COVID-19. GP margin slid to 6.78 percent in 2020. The rebound in sales also increased the operating expenses particularly marketing and advertising expense as well as freight and forwarding expense. Exchange loss incurred during the year on the back of weakening local currency also pushed the other expenses up. While Operating profit managed to bag 30.6 percent year-on-year growth, OP margin slipped to 2.46 percent in 2020. Despite company’s effort to control its finance cost by issuing right shares, the finance cost grew by 90 percent year-on-year because of high discount rate during the first three quarters of FY20 coupled with increased short-term borrowings to meet working capital requirements. Not only this, UNITY also secured long-term financing facility under refinance scheme by SBP for the payment for salaries and wages during the year. The company also undertook lease liabilities during the year which further added to its finance cost. The increased borrowings are also evident in the massive hike in UNITY’s gearing ratio in 2020 (see the ratio of gearing ratio & finance cost). The bottomline couldn’t sustain the towering expenses and plunged by 17.8 percent year-on-year to clock in at Rs.209.63 million in 2020. EPS stood at Rs.0.35 while NP margin hovered around 0.7 percent in 2020.
In 2021, the company acquired the remaining 31 percent shares of Sunridge Foods (Private) Limited with the latter becoming the wholly owned subsidiary of UNITY. During the year, 122.3 percent year-on-year topline growth was the result of 75 percent year-on-year increase in sales volume and 45 percent year-on-year improvement in prices. Increase in international commodity prices posed challenge for the company, however, with the upward revision in the selling prices, GP margin improved to 7.82 percent in 2021 with 156.4 percent year-on-year growth in Gross profit. Operating expenses grew in line with inflation; however, other expenses showed some respite as UNITY made exchange gain in 2021 as against exchange loss in the previous year. Other income did a marvelous job in 2021 as it grew by 3608.9 percent mainly on the back of profit on TDRs. This helped operating profit grow by 480.7 percent year-on-year in 2021. OP margin also elevated to 6.43 percent in 2021. Despite downtick in discount rate, finance cost continued to build up on the back of increased borrowings – both short-term and long-term – during the year which is eminent in UNITY’s gearing ratio which climbed up to 52.39 percent in 2021. The bottomline grew by 1384.4 percent during the year to clock in at Rs. 3111.74 million in 2021 with NP margin of 4.69 percent and EPS of Rs. Rs. 3.56.
2022 was another tough year for UNITY where topline growth couldn’t trickle down to produce a healthy bottomline. In 2022, UNITY’stopline managed to post 23.8 percent year-on-year growth driven by price revisions as the off-take shrank by 32 percent year-on-year in 2022. The GP margin improved to 9.55 percent in 2022 with 51.1 percent year-on-year growth in gross profit. While distribution expenses slid on the heels of low sales volume during the year, administrative expenses continued to rise owing to soaring inflation and increase in the number of employees from 486 in 2021 to 551 in 2022. Other income grew by 166.2 as the company made lofty income on TDRs amidst high discount rate. Moreover, the company also earned profit on the redemption of mutual funds units during the year. A heavy blow to the bottomline came on the back of a massive exchange loss of Rs.2910.47 million during the year owing to sharp depreciation of Pak Rupee. This squeezed the operating profit by 2.7 percent year-on-year with OP margin clocking in at 5.05 percent in 2022. Finance cost also continued to rise on the back of unprecedented increase in discount rate. This took its toll on the bottomline which fell by a drastic 21.7 percent in 2022 to clock in at Rs.2436.42 million during the year with an EPS of Rs.2.04. NP margin also dropped to 2.96 percent in 2022.
In 2023, UNITY’s topline posted a marginal 9.7 percent year-on-year rise on account of superior pricing strategy and favorable sales mix. Easing international crude palm oil prices enabled UNITY to attain 54.7 percent year-on-year rise in its gross profit in 2023 with GP margin reaching its optimum value of 13.46 percent. Higher freight and forwarding charges, payroll expense and distributor expense resulted in 35 percent spike in distribution expense in 2023. Administrative expense also surged by 37.4 percent in 2023 on the back of increased travelling & conveyance charges, donations and repair & maintenance. Decrease in profit related provisioning and no re-measurement loss incurred on investment in mutual funds resulted in 94.4 percent lesser other expense recorded by the company in 2023. Exchange loss magnified by 157.3 percent in 2023 due to sharp depreciation of local currency. All these factors trimmed down UNITY’s operating profit by 14 percent in 2023 with OP margin eroding to 3.96 percent. Finance cost mounted by 104.8 percent in 2023 due to unprecedented level of discount rate and increased borrowings which pushed up the gearing ratio to its highest value of 52.69 percent in 2023. UNITY’s net profit plunged by 76.7 percent in 2023 to stand at Rs.567.46 million with EPS of Rs.0.48 and NP margin of 0.63 percent – the lowest among all the years under consideration.
Recent Performance (1QFY24)
During 1QFY24, UNITY’s topline posted a marginal 1 percent year-on-year rise. Steady palm oil prices and stability in the value of local currency resulted in 8.3 percent decline in cost of sales in 1QFY24, resulting in 302 percent higher gross profit recorded by the company with GP margin mounting to 11.89 percent from 2.99 percent in 1QFY23. Lower sales volume during the quarter resulted in lower freight and distributor expense. As a consequence, distribution expense slid by 4.7 percent in 1QFY24. Administrative expense hiked by 12 percent on account of inflationary pressure. Stronger Pak Rupee trimmed down UNITY’s exchange loss by 90 percent year-on-year in 1QFY24. Other income improved by 32.7 percent year-on-year during the quarter supposedly on the back of higher profit on TDRs. UNITY was able to record operating profit of Rs.1796.25 million in 1QFY24 versus operating loss of Rs.2011.04 million during the same period last year. Increased short-term borrowings as well as elevated discount rate pushed up finance cost by 225 percent in 1QFY24. This coupled with heightened tax burden resulted in net loss of Rs.280.98 million, down 87.5 percent year-on-year. Loss per share stood at Rs.0.24 in 1QFY24 versus loss per share of Rs.1.88 during 1QFY23.
Future Outlook
Variation in commodity prices due to geopolitical tension, limited foreign exchange reserves available for imports and spike in indigenous inflation will continue to take their toll on the margins of the company in the coming times. Considerable decline in consumers’ disposable income is another factor impeding demand. However with continuous enhancements in the product mix and pricing strategy as well as operational efficiency, the company can withstand the macroeconomic headwinds. The company is targeting new geographical destinations to boost its revenue and reduce the demand-supply gap. Elevated level of finance cost, however, may continue to pose serious challenges to the company’s profitability like it did in the recent quarter and warrants a reconsideration of capital structure.
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