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Treet Corporation Limited (PSX: TREET) was incorporated in Pakistan as a public listed company in 1977. The company is engaged in the manufacturing and sale of razors and razor blades along with other trading activities. The company has a product range of over 75 SKUs including shaving razors, body razors, and feminine razors. The company, besides having a major share in the local market, sells its products to over 40 countries across the globe. Its production plant has the capacity to produce 2.15 billion units per year. TREET operates under the umbrella of Treet Group in Pakistan. Treet Holdings Limited, First Treet Manufacturing Modaraba, Renacon Pharma Limited, and Treet Battery Limited are the subsidiaries of TREET.

Pattern of Shareholding

As of June 30, 2023, TREET has 178.721 million shares outstanding which are held by 9592 shareholders. TREET’s directors, having a stake of over 42 percent in the company, form the biggest shareholding category followed by the general public with a 40.46 percent share in the company. NIT and ICP hold 6.5 percent shares of the company while Banks, DFIs and Insurance companies account for 3.62 percent of shares. Joint stock companies hold 3.38 percent of the company’s shares. Loads Limited, an associate company of TREET has a stake of 2.7 percent in the company. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

While the topline of TREET has been growing except for 2020, the company has been consistently posting net losses in all the years under consideration. In 2021, 2022, and 2023, the company was able to post operating profit; however, this couldn’t trickle down into a positive bottom line except in 2021. TREET’s gross margin dropped in 2019 followed by a sound recovery for the next two years. The GP margin dipped again in 2022 and then reached its optimum high value in 2023. The operating margin followed an inclining trend since 2021. The detailed performance review of the period under consideration is given below.

In 2019, the consolidated net sales of TREET registered a year-on-year rise of 27.22 percent. Except for its trading business and bike sales, all other segments - razors, soap, corrugation, pharmaceutical, and battery registered year-on-year growth in net sales in 2019. The battery segment led the pack with over 446 percent year-on-year growth in its net sales in 2019. 35 percent year-on-year hike in cost of sales in 2019 was the consequence of the Pak Rupee depreciation, high global commodity prices as well an elevated level of inflation. The company was in the process of gird installation during the year and hence high fuel costs had to be borne by the company. Corrugation margins were also compressed due to rigorous completion. Overall, gross profit plunged by 15 percent year-on-year in 2019 with GP margin falling down from 15.6 percent in 2018 to 10.4 percent in 2019. Administrative expenses spiked by 37 percent year-on-year in 2019 on account of generous donations and increased payroll expenses as the number of employees increased from 2898 in 2018 to 3051 in 2019. Distribution expenses also multiplied by 28 percent year-on-year in 2019 on the back of higher salaries & wages and increased advertisement budget. Operating loss magnified by 750 percent in 2019 to clock in at Rs.793.19 million. Higher profit-related provisioning, exchange loss as well as unrealized loss on short-term investment at FVTPL resulted in a 103 percent escalation in other expenses. However, it was absorbed by 88 percent higher other income which primarily came on the back of hefty scrap sales and export rebates. 165 percent higher finance cost incurred by TREET in 2019 was the result of monetary tightening and increased short-term borrowings. TREET posted a net loss of Rs.2125.25 million in 2019, up 237 percent year-on-year. Loss per share was recorded at Rs.12.69 versus a loss per share of Rs.3.97 in 2018.

In 2020, the company’s factories were closed due to the lockdown period resulting in a marked drop in the sales of soaps and blades, bikes, and corrugated boxes. While pharmaceutical and battery sales and trading business registered growth, yet couldn’t sustain the topline which dropped by 7.18 percent year-on-year in 2020. The major hit came from the export sales because of restrictions on the movement of people and products in the major export markets of TREET. Gross profit improved by 5 percent year-on-year due to improved selling prices and cost-cutting measures. GP margin also climbed up to 11.8 percent in 2020. While distribution expense dropped by 10 percent during the year due to lesser advertisement and marketing activities, however, proportionally, it stands at over 11 percent of the company’s revenue and hence a major culprit behind the company posting operating losses in most of the years. Administrative expenses also slid by 39 percent year-on-year in 2020 on the back of lower payroll expenses as TREET rationalized its workforce to include 2791 employees. During the year, there was a marked increase in impairment allowance on expected credit loss of trade debts. Operating loss plummeted by 54 percent in 2020 to clock in at Rs.365.92 million. Finance costs grew by 35 percent as the discount rate was high for the major part of the year. Lower profit-related provisioning, abridged exchange loss, and reduced unrealized loss on short-term investments at FVTPL resulted in a 16 percent decline in other expenses. Other income also dipped by 57 percent in 2020 on account of curtailed scrap sales and export rebates. Share of loss from associate companies as well as loss from discontinued operations also played their due role in suppressing the bottom line which clocked in at Rs. 2655.891 million in 2020.

After a dip in 2020, the topline of TREET regained momentum in 2021 and grew substantially by 27.7 percent year-on-year. The topline growth was backed by higher sales volume in blades, pharma, and battery segments and was partially offset by lower volumes in the soap business. Better sales volumes coupled with improved pricing and product mix resulted in a 94.5 percent rise in gross profit with a GP margin of 17.9 percent in 2021. Administrative expenses heightened by 89 percent in 2021 on account of hefty payroll expenses despite the reduction in employee count to 2800 in 2021 from 3051 in 2020. Distribution expense ticked up by 9.6 percent in 2021 due to higher salaries and benefits. ECL on trade debts lowered by 25 percent in 2021. As a consequence, TREET posted an operating profit of Rs.401.33 million in 2021 with an OP margin of 2.8 percent. The company also showed off its financial cost by paying a major portion of its bank loans during the year. The low discount rate also helped keep the finance cost in check. TREET’s debt-to-equity ratio marched down from 67 percent in 2020 to 52 percent in 2021. Other income proved to be a major upbeat factor as it grew by over 12 times its value in 2020. This was the result of the reversal of deficit on revaluation, export rebate, and gain on short-term investments. During the year, TREET recorded a profit of Rs. 598.64 million from the divestment of 100 percent equity interest in Global Arts Limited (subsidiary company). This helped TREET record profit after tax of Rs.547.88 million in 2021 as against losses recorded in the previous year. EPS clocked in at Rs.3.22 while NP margin was recorded at 3.9 percent.

TREET posted a topline growth of 11.2 percent in 2022. This was supported by the corrugation, battery, and pharma businesses while the performance of the soap business wasn’t satisfactory during the year. With better cost control measures and improved sales volume, gross profit grew by 4.8 percent year-on-year with a marginal downtick of 100 bps in the GP margin to clock in at 16.9 percent despite soaring inflation and Pak Rupee depreciation. A meticulous check on the operating expense was the result of a compressed advertising budget, payroll expenses as well as legal and professional charges incurred in 2022. During the year, TREET rationalized its workforce to 2674 employees in 2022, down from 2800 employees in the previous year. Abridged operating expenses coupled with a plunge in the impairment allowance culminated in a 97.9 percent bigger operating profit with an OP margin of 5 percent in 2022 as against 2.8 percent in the previous year. Finance costs registered a year-on-year growth of 7 percent owing to a discount rate hike. Other expenses slid by 34.6 percent due to lower profit-related provisioning and fewer assets written off during the year. Other income also declined by 69.2 percent in 2022 mainly on account of no reversal of deficit on revaluation recorded during the year as well as thinner export rebate. TREET posted a net loss of Rs.302.99 million with a loss per share of Rs.1.76 in 2022.

2023 stands out during the period under consideration with a staggering 47.9 percent year-on-year growth in its topline. The robust sales growth was the consequence of improved sales volume across segments (except bikes) as well as price optimization strategies. As a result, gross profit multiplied by 92 percent in 2023 with GP margin climbing up to its optimum high value of 22 percent. Administrative expense surged by 32.4 percent in 2023 on account of inflation and expansion in workforce which stood at 2697 employees versus 2674 employees in the previous year. Higher salary expenses, elevated advertisement budget as well as towering warranty claims and provisions resulted in a 54.5 percent spike in distribution expense in 2023. The company didn’t book any provision for ECL in 2023. As a consequence, operating profit picked up by 204 percent with OP margin registering its highest value of 10.3 percent. Finance cost surged by 75 percent in 2023 on account of an unprecedented level of discount rate as well as increased long-term financing obtained during the year for balance sheet re-profiling. Hefty exchange loss translated into 63.4 percent higher other expenses incurred by TREET in 2023. Conversely, other income declined by 24.8 percent in 2023 on account of lesser profit recorded on the disposal of property, plant, and equipment. TREET also booked a share of loss worth Rs.218.12 million from an associate company. The company booked a net loss of Rs.0.697 million in 2023 with a loss per share of Rs.0.004.

Recent Performance (1QFY24)

TREET’s net sales posted year-on-year escalation of 14 percent in 1QFY24 on account of increased sales volumes across categories except batteries and motor bikes. Upward revision in pricing and cost cutting measures resulted in 45 percent rise in gross profit with GP margin climbing up from 18.1 percent in 1QFY23 to 23.1 percent in 1QFY24. Administrative and distribution expenses surged by 27 percent and 25 percent respectively during the period on account of inflation and increased operations. TREET was able to boost its operating profit by 65 percent year-on-year in 1QFY24 to clock in at Rs.853.51 million with OP margin of 12.8 percent versus 8.8 percent in 1QFY23. Finance cost mounted by 73 percent during the period on the back of higher discount rate and increased borrowings. Increased profit-related provisioning drove up other expense by 19 percent during 1QFY24. TREET also registered hefty net other income of Rs.79.64 million in 1QFY24. Share of loss from associate company dropped by 27 percent during the period. All these factors translated into net profit of Rs.117.44 million in 1QFY24 versus net loss of Rs.34.30 during the same period last year. EPS clocked in at Rs.0.54 in 1QFY24 versus loss per share of Rs.0.2 during the period last year

Future Outlook

The company is making greater strides to improve its sales volume which is evident from its topline growth over the years. Besides growth in volumes, TREET is also undertaking price optimization to pass on the impact of cost hike to its consumers. However, hefty net sales can only translate into profits given the company undertake an overhaul of its highly leveraged capital structure to reduce its finance cost along with supply chain optimization to keep a check on its cost of sales. Besides launching new products (shaving foam and twin blade rubberize handle razor), the company also plans to enhance the capacity of its hygiene razors due to high demand. New production facility of Renacon Pharma Limited is also under process. The company plans to finance these initiatives through right issue of shares. This will enhance the flexibility of its balance sheet and help in eliminating short-term debt.

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