Friday, 5 June 2015

Al Shaheer Corporation (MeatOne) IPO

Al Shaheer Corporation (MeatOne) IPO

Al Shaheer Corporation recently announced its IPO and will be offering its shares to the public very soon. I have gone through the company's prospectus and feel it could be a very good investment. I must make it clear from the outset that I have no position in the stock and am in no position in any way to benefit from this recommendation. I just think MeatOne is a good brand, has good market value/reputation, good management, good financials and operates in a good industry, and these among a few other things make it a good investment. Furthermore, I also think that the IPO price of Rs. 43 per share is pretty low and gives chances of good return.


The company is growing rapidly. Formed in 2010, it clocked in at almost Rs. 4.4 billion in FY14 revenues and is on track for significantly more in FY15 since the first half of FY15 was an off season. The post-rights EPS comes out 1.25 for first half of FY15, implying a forward PE of 17, which could be high, but adding consumer as well as growth flavor to it makes it cheap. The impressive revenue growth profile can be witnessed below.


The company derives only 25% of its revenue from the Meatone brand, the rest coming from Halal meat exports to GCC countries. Having export clients such as Lulu and Carrefour in the UAE certainly means something. Finally, Meat exports is a growing market, so is processed, or packaged fresh meat in Pakistan. So all of these are good growth angles.

Execution Risk

One source of risk however remains that the company will be using IPO proceeds largely for entering a new industry, that is, processed chicken, going head to head with K&N's and other brands. Competition might be intense, however given a growing industry, this should not be much of a problem.


The board of directors of the company is impressive with experience from Citibank, Unilever, E&Y, Meezan Bank, etc being counted. I think it is a pretty impressive profile. No wonder the forward PE is so high. The company also counts as 'Saeed Anwar' and 'Muhammad Yousuf' as significant shareholders. Wondering if they could be the cricketers:


Having strong management, growth profile, growing industry etc makes this a good investment. A multiple return on investment cannot be ruled out in a relatively short period of time.

Monday, 21 July 2014

What is Driving Ecopack 2.0

Half an year ago, I wrote a post about Ecopack. I wrote about how the stock was taking advantage of the changing fortunes of the beverage industry in pakistan, with the increasing consumption of beverages, shift towards PET bottles, and ecopacks increasing sales and margins as a result. I also wrote about how this was translating into increasing EPS y/y. Half an year and two quarters later, it appears the trend is continuing.

What made me write this port is an article where coca-cola talks about setting 3 more plants in Pakistan. This goes on to show that beverage demand in the country is increasing still.

Now coming back to the financials. The following graphs add the last two quarters whose results have been announced since I wrote my last post. The two quarters colors' have been changed to make them distinguishable:


The above two graphs clearly depict an improvement in sales and EPS for the last two quarters on an year/year basis. However most notable is the improvement in Gross Profit Margin as given below. The move towards a higher value added product has clearly bode well for the company.

The last quarter of the year is always the defining one as far as earnings go. This is evident from all three charts and for the last 4 years which shows that the June quarter is best in terms of earnings, sales and GP margin. So we can assume the same for June-14, whose result is around the corner. From these graphs we see a clear trend. The June result just keeps on getting better. At least from the EPS perspective. 

The GP Margin is a great determiner of earnings as well and we see that it has been positive in the last two quarters despite being quite negative in the same period last year as well as last-to-last year. So good gross profit margins coupled with good revenue could indeed result in a record-breaking FY14 for Ecopack!

Thursday, 26 December 2013

What is driving ECOPACK?

What is driving ECOPACK?

Disclaimer: I have a position in this stock

Double digit CSD (Cold and Soft Drink) Growth, under-capacity of PET Bottle Industry and a shift in consumption patterns towards PET bottles, are few of of the factors fueling the changing economics of Ecopack. After 4 years of consecutive losses, the company appears to be finally gaining traction and reporting better numbers. The biggest plus point up till now has been the more than Rs. 2 EPS of the company that was reported for September 30th, 2013, which was up almost 100% when compared to the same period last year. More noteworthy still, is the more that 4 Rs. EPS the company reported for the June quarter Fuelled by seasonally high demand in the summer season apart from the Ramzan which is typically associated with high consumption.

Growing Beverage Industry
According to Coca Cola Icecek, which is the holding company of Coca Cola Pakistan, volumetric sales in first nine months of 2013 were 22% higher year on year. This comes on the back of 23% year on year increase in sales the same period last year resulting in over 50% volumetric growth in two years.
Pepsi reports similar sales growth with growth being in ‘double digits’. All in all this points towards a growing industry. The trend does not appear to be understandable given the lacklustre performance of the economy as a whole but be the same has some parallels to the consumer industry where the success of Unilever and nestle in the past few years can be highlighted. Whether the trends is here to stay for the next few years has yet to be investigated.

Shift towards PET bottles
The shift towards PET bottles, as reported by the company appears to make sense. According to of the company, it is selling more bottles as compared to pre-forms, the latter being a low margin product. This according to the company (as reported in its annual report) is because of the growing demand of PET bottles and low capacity. Now why was the company making losses in the past 4 years was, again as reported by it, was over capacity. However now that the industry does appear to be growing (as reported by the Coca Cola and PepsiCo figures) increased capacity utilization of the PET bottle industry appears to make sense and there is at least some credence to the story.

A Note on Costs
PTA is the ultimate raw material of the company. It appears they are on low levels, largely caused by supply glut in view of new capacities and not enough demand. For instance, in late November, Asian PTA prices hit 16 month low. Low PTA prices obviously auger well for the company in terms of improved margins. However, they are not that good for Lotte PTA.

Highly Seasonal Business

Ecopack has a highly seasonal business. Sales tend to peak in summer months, associated with high beverage consumption and then decline in the winters months. The same effectively translates into the EPS of the company with the company reporting profits in the June and September quarter, and losses in the December and March ones, as given from the below graphs:

So while the last two quarters result has been humongous, (cumulative Rs. 6 for the summer season), we might as usual see some losses in the December quarter.

It appears the stock has risen up 50% in the last few days alone. Whether it goes up any further is yet to be seen.

Wednesday, 23 October 2013

Descon Oxychem Limited - Result for 1st Quarter 2013.

Descon Oxychem Limited announced its result two days back and it was a loss of Rs. 0.5 per share against my forecast of Rs. 0.4-0.5 per share. The basis of my forecast was increased Peroxide Prices which still stands. The result was possibly due to lower volumes as I had already highlighted in my posts.

If investors want to recoup their losses they should probably hold on till December result since apparantly the prices are holding up up till now and any seasonal factors for sales will be accounted for by then as well.


Monday, 21 October 2013

Price Fixing and Power Price Shocks - All in a day for the Cement Industry of Pakistan!

Temporary value drainers like cartel-breaking rumors and electricity prices increases have created significant opportunity in the cement sector which continues to be the most lucrative in Pakistan.

High cement prices, supported by the evil of cartelization, persevering demand (September dispatches were highest in the country’s history) and low coal prices (Coal is the largest cost driver for the industry) are all a few factors that continue to support stellar margins and exceedingly high profits.

Now doubt, the Cement sector has been one of the best performing in the last two years as given by the following graph.

Swamped with cash, companies like Lucky Cement have gone for acquisitions, while others like Pioneer cement have swathes of cash on their balance sheet and no idea what to do with it.

Scares like cartel break-up have hurt investor returns in the last one month, but this only presents the shrewd investor with opportunity. Given investigations and revelations by KASB and other brokerage houses, the scare is unwarranted, and the camaraderie is here to stay. Cement prices are likely going to stay high in the intermediate term and continue to support the margins of these cash cows. In fact just recently there was news of price increases in the Northern region where players have already increased prices by around Rs. 20 per bag.

Given the evil of cartelization, it is thus with a confused and heavy heart that I must present the sector as a viable investment opportunity. While my heart tells me that I should be writing against this evil, let us just put being a Samaritan on the back burner for a while and concentrate on making money.

Owing to recent the cartel scare, along with the electricity price scare, both of which are explained later on cement stocks have been beaten to the point of whimpering. The following chart explains this rather beautifully (as made by me):

Big Scare 1.0

Cartelization is perhaps the most pertinent theme of the industry, perhaps seconded only by low coal prices which is like the sonay pe suhaga. You see the cement industry has vast overcapacity. Days of good development in the early part of 2010s resulted (we all remember financing our cars at 4% don’t we) resulted in increased demand of cement and the industry invested heavily in capacity expansion. However, later on Zardari came and destroyed everything end of story. So now there is significant capacity and not enough demand. Under normal (and fair) economics, the cement companies decrease prices and go into competition, in order to sell more and drive up capacity utilization. But obviously doing so can be disastrous for many as low prices eat into margins. In fact cartelization  was pretty much the case when CCP busted APCMA’s office sometime back ( In don’t know the exact time) and loads of companies such as Pioneer Cement, Gharibwal Cement, Bestway Cement and the world famous Maple  Leaf Cement restructured their debt obligations (effectively defaulted).

Later on, the companies got braver and the country got Zardarier, and ‘The Cartel’ (sounds like the Mafia or something) has been getting its way ever since. Perhaps we need ‘the Untouchables’ to save us. Even Ajay Devgan would do.

However, the scare was not as deadly as it sounds, the apparent damage was caused by a smaller player wanting to drop prices while the a bigger player threatened to walk away which was all amicably resolved later on. No action by the CCP or anything. Just an internal matter. However, the market was not as brave, and the cement index lost significant capitalization as a result. Later on news of a patch up duly appeared the stocks had their heyday again. However, their woes did not end there and then came big scare 2.0.

Big Scare 2.0

Just as stock prices came up at the surface gasping for air, the government dropped another bomb on them by announcing an increase in electricity tariffs by around 60%. The scare hasn’t been felt by the masses as it used to before the present government (political gimmickry?) but cement stocks took hit hard and hence the Big Scare 2.0 as illustrated in above graph.

An increase in electricity prices is especially harmful for those companies, that obviously, buy their electricity form the natural grid rather than produce it in-house. Companies like Fecto Cement take the brunt of such changes.

The price increase would indeed have spelled bad for the industry or specific companies, but the companies have taken a measure to circumvent this by increasing Cement prices by around Rs. 20 per bag - something that they have been doing since the last five years. Here I present a graph that details the quarterly retention prices (prices net of sales tax and other ancillary items) for a few companies during the last eight quarters:

The above chart only presents scanty prices. This is because I am only in the process of building financial models for all these companies. Nevertheless, prices for Pioneer Cement have been plotted back to almost 20 quarters. The graph aptly depicts cement price increase since last 5 years. But stretching back of Pioneer Cement Prices back to September 08 reveals a whole new page of history.

The Big Dip, as highlighted, was a time when CCP took action against alleged cartelization, raided APCMA offices and what not and what ensued was a dip in cement prices. Together with this, many cement companies defaulted since they could not sustain the debt they recently taken up for expansion. Maple leaf, the 16-bagger, is one of them.

Given the fact that the cement companies are getting out hands, would this happen again?

Well, we can only speculate at best. However we do know that the Big Scare 1.0 occurred because of an internal matter and not because of any regulatory action. Secondly, we also know that cartelization is most necessary in face of low capacity utilization. Given September quarter dispatches being the highest in history, I don’t think anyone would want to threaten prices for the sake of increasing utilization. So I believe the high prices are here to stay.

So what about the recent raise in electricity tariffs?

The tariffs will surely have an impact on margins for companies that produce their own electricity, like Fecto Cement. But that is a problem no more, as cement prices have recently been raised by Rs. 15-20 per kg, amounting to around Rs. 300-400 per ton. I have not run any calculations but something tells me they should be enough to cover any margin loss due to the power price hike.

On a side note, companies like DG Khan Cement (despite my detestation for large caps), and others, that produce their own electricity should benefit most from the price hike since for them there has been no price hike. They actually produce their own electricity from gas whose prices really haven’t risen much. Since cement prices move together, these companies will benefit most from the price increase.

Good times are here to stay for the Cement Industry. Inflated prices will keep margins inflated and ensuing earnings which will in fact continue to positively impact valuations. Given the beating the industry has taken over the past few weeks - the prices are at very attractive levels. And given the cement price increase as of late, stock prices are only going to go up and it is only a matter of time when the pre-cartel-breaking-rumors levels are going to be achieved. Perhaps the market already realizes all these factors and for this reason, many stocks in the sector closed at ‘upper-locks’ on the last trading day. Perhaps we are at the advent of another bull run. I see 25-30% returns from current levels in the next few weeks especially in the wake of the upcoming results reason and suggest taking positions as soon as possible for healthy returns, especially in the short term.

The market opens in about 1.5 hours. It is time to jump on the band wagon! 

Saturday, 12 October 2013

The Market Opportunity for Descon Oxychem Limited (DOL)

Despite improving fundamentals and capital structure as noted in my posts here and here respectively, the market appears to be paying no heed to DOL's significant improvement in financial performance for the coming quarters. After rising significantly since the result was announced on 23-09-13, the stock has witnessed serious beating especially during the recent market turn  down.

So why did this happen? Maybe investors were just too cautious around that time and decided to get rid of their more volatile holdings. 

Going through checkered financial performance in the past, DOL has been just that, having been regularly depressed as well as volatile since most of its lifetime as given below. The fact that it has never come above even its par value speaks volumes about the risk investors perceive it with. 

So what awaits us in the future? In line with the previously referenced articles, as well as this one. Significant opportunity has arisen in the last few days:.

Forgive the quirkiness. 

Friday, 11 October 2013

As per the Annual Report of FY13, Descon Oxychem is a much better company now!

As disclosed in its annual financial statements for FY13, management of Descon Oxychem (DOL) has taken steps that will free up some serious cash flow for the next two years. In a nutshell, the company has obtained a grace period of two years for all its debt, including both the bank as well as subordinated debt. Moreover, the subordinated loan will now accrue interest for two years meaning that no finance costs will need to be paid for it.

All this means that the company will save Rs. 300 million each year for the next two years which comes to around Rs. 3 per share per year. Not bad given the stock is currently trading at Rs. 5.5.

While there would be no significant impact on earnings, improved cash flows could reduce short term borrowings and save finance costs. Possibility of dividends can also not be ruled out.  

Now why did the management do this?  The company is in excellent financial shape especially as per the June quarter result. Peroxide prices are at an all time high and will stay high for the September quarter implying that the quarter result will be good.

Maybe they just wanted to be safe given the dip in peroxide prices experienced two years ago.
Fair values are fair values and people rarely take them seriously. However, if they have anything worth, the whole debt restructuring exercise has had a fantastic impact on company valuation. The cumulative shifting of Rs. 600 million in free cash flows two years forward has increased the fair value of the company to Rs. 15, giving us an upside of almost 200% given current levels.

Given the intermediate for the stock appears to be good as per business recorder, peroxide prices are still holding, which implies a good result for September quarter. 

So Descon Oxychem. Lao Maal!

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