S. S. Oil Mills Limited

S. S. Oil Mills Limited (PSX: SSOM) was incorporated as a Public Limited Company under the Companies Act, with subsequent listing on the then Karachi and Lahore Stock Exchanges. Registered office of the company is located in New Garden Town, Lahore; whereas manufacturing unit is located in district Vehari, south Punjab.

The company is engaged in solvent extraction business, which includes extraction of edible oil as well as animal feed meals extracted from oilseed plants. The firm is primarily engaged in B2B category as its line of business includes extracting, refining, processing, and sale of semi-refined washed oil and meals.

Pattern of Shareholding

S. S. Oil is a tightly held business with over two-thirds of shareholding directly held with sponsors. Largest chunk of individual shareholding is held with sponsor directors, Nawabzadah Shahzad Ali and Shahryar Ali; with additional shareholding held by non-director Nawabzadah Shafaquat. Between them, the three family patriarchs own over 50 percent of shareholding; with additional 14 percent held through associated undertaking M/s Sikandar Commodities, a private-limited trading house. Remainder sponsor share is held by other directors of the family.

No significant shareholders exist outside of family; with salient minority shareholding held with certain mutual funds. Note that Pattern of Shareholding as of June 30, 2019 – date of latest ending financial year – were not available alongside annual report for the year; therefore, pattern of shareholding as at June 30, 2018 has been used as proxy.

However, as S. S. Oil Mills is a tightly held family owned business, little to no change is expected between the two year-ends, except for any possible change in shareholding with mutual funds sell-off. Due to the low mutual fund share, the effect of any such change would be non-material.

Also note that no significant change in sponsor family share was observed as per the trend between annual reports of 2013-2018.

Past Business Performance

For the better part of the last decade, company’s production and sale volumes have remained stagnant owing to an increasing trend in raw material prices (oilseed) due to poor extraction levels amid high domestic demand.

As a result, despite installed oilseed crushing capacity of 90,000 tons; the company saw utilization level as low as 16 percent in FY13; at that time, the company had a stable balance sheet position, with controlled debt levels and no long term debt.

During FY13 to FY16, the company saw its principle washed oil production level decline to as low as seven thousand tons; with stagnation in the meal and soap business.

Starting FY16, the company geared up its focus primarily toward meal and soap business, which picked up pace. Production volume increased by 122 percent during the four intervening years, with meal and soap business forming the core chunk of sales as of FY19.

Financial Performance

During the outgoing financial year, topline increased by 12 percent on the back of improved prices in the domestic market, even as sales volume of both washed oil and meal & soap lines declined by 16 and 2 percent respectively, on year on year basis.

The increased in prices in the domestic market came on the back of poor crop performance year, which in addition to a significant contraction in major crop sector also led to a decline in oilseed business as per annual Economic Survey.

Nevertheless, as selling prices increased in anticipation, the company was able to reap nominal benefit of lower-cost carryover inventory from the previous year; which led to gross profit margin increasing by 125bps to close in 5.9 percent.

Note that on ex-depreciation basis, the gross margin is highest since FY16; but still lower compared to industry levels. The low-base gross margin leaves the company with little room to manoeuvre for operating expenses; which by and large have remained between 1 and 2 percent of topline for the past several years.

Cashflow analysis of EBITDA and PBT levels reveals that the company loses its biggest chunk of profitability to financial expenses, with increasing reliance on short-term debt since FY16. In fact, based on financial statements alone, it could be extrapolated that the company ramped up its production capacity utilization levels beginning FY16 based primarily on increasing reliance on ST debt, which has increased by over 3 times from Rs400 million to Rs1258 million by FY19 close. Even though leverage levels and interest cover are under sustainable levels as the company has no external LT debt, excessive reliance on ST loans creates a skewed debt profile and increases maturity risk.

Outlook                                                                 

Oilseed crops are expected to perform better in the ongoing fiscal year (FY20) owing to better water availability and increased support and interest by the incumbent government. Renewed focus on oilseed crop is also reflected in oilseed cultivation being identified as a priority area under National Agriculture Emergency Program. This is expected to bring oilseed prices lower in the coming years, however, no significant change is expected in the short term.