Century Paper and Board Mills Limited – BR Research

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Century Paper and Board Mills Limited (PSX: CEPB) was established in 1984 as a public limited company under the Repealed Companies Ordinance 1984. It started commercial production in 1990. The company, which is part of the Lakson group of companies, manufactures and markets paper, board and related products.

Shareholding model

As of June 30, 2021, nearly 69% of the shares were held by associated companies, companies and related parties. The majority of shares in this category are held by SIZA (Private) Limited and SIZA Services (Private) Limited. More than 13 percent is held by the general public, followed by almost 6 percent held in modarabas and mutual funds. The directors, CEO, their spouses and minor children hold less than 1% of the company’s shares, while the remaining shares of around 12% belong to the rest of the shareholder categories.

Historical operational performance

Since fiscal year 10, Century Paper and Board has experienced consecutive growth in revenue, with the exception of fiscal year 15, where it contracted by 10%. Profit margins increased through FY13, decreased through FY15, before increasing again through FY21.

Fiscal 2017 revenue grew 15% year-on-year, topping Rs 15 billion in value. A volumetric gain in sales was also 15 percent. This has been attributed to an increase in the domestic market share in the total revenue. Production was also higher, at 214,468 metric tonnes, resulting in improved capacity utilization. On the other hand, production costs have been reduced to more than 88% of turnover, compared to more than 90% last year. As a result, the gross margin was recorded at a higher level of 11.6 percent. With most of the other factors remaining more or less unchanged as a revenue share, and with some support from other revenue, the net margin also increased to 3.9%. Other income nearly doubled in value due to a settlement agreement in favor of the company for an 18 MW coal-based cogeneration power plant between Century Paper and Board and Runh Power Corporation Limited.

The company has experienced the highest growth rates seen over the past seven years, in terms of revenue in fiscal 2018, at over 23%. Sales volumes increased 5 percent, but this translated into a 23 percent increase in net sales due to higher prices; the burden of the higher input costs was passed on to the consumer. Production costs fell further to nearly 87% of sales, bringing the gross margin to over 13%. Overall operating costs saw a marginal decrease in revenue share, therefore the effect rippled through the bottom line as well, with a net margin recorded at over 5 percent for the year.

The revenue growth momentum continued throughout fiscal 2019, as revenue sloped 17.3%, surpassing Rs 22 billion in value terms. Sales volumes were also higher, albeit slightly by 1 percent, at 216,771 metric tonnes. Production costs, which had declined consecutively over the past three years, increased in FY19, reaching 88% of revenues due to higher prices for inputs, fuels and depreciation of currency ; as a result, the gross margin was reduced to almost 12 percent. The net margin fell further to almost 4%, due to an escalation in financial expenses. This was brought about by a rise in interest rates resulting from a tightening of monetary policy, in addition to the long-term financing obtained to undertake capital expenditure.

Revenue growth in FY20 was relatively moderate, falling to single digits, over 9%. The economy had started to stabilize somewhat after the government’s economic measures. But the second half of the year was negatively impacted by the Covid-19 pandemic which led companies to stop production. Most of the impact was concentrated in the last year of FY20; sales volumes during the year were half a percent lower. In FY20, the company also exported moderate volumes to Afghanistan and the Middle East. Production costs, on the other hand, fell to 83.8% of sales, allowing the gross margin to improve significantly to 16%. While the net margin also improved, to 6.2 percent, the increase was limited due to an increase in finance charges and taxes. Financial charges were higher due to high interest rates which only declined in the last quarter of FY20.

Recent results and future prospects

During FY21, although the size of the paper and board market decreased, its consumption continued to grow. But it was still lower than that observed in FY19. The demand for packaging board and corrugated boxes has increased as online shopping has been preferred during Covid-19. Sales volumes grew 8 percent, resulting in 17.7 percent growth in sales. Production costs fell to an all-time low of 80 percent, which allowed gross margin to peak at nearly 20 percent. Other income also provided additional support to the net income of Rs 182 million. Despite the higher taxes, the company posted a net margin of 10.3 percent, the highest on record as net profit was recorded at nearly Rs 3 billion.

The company expects the trend of online shopping to continue, therefore the demand for shipping boxes and packing boxes will remain. However, the loss of demand for printing paper is not expected to recover. Given the upward trend in input prices, the company plans to continue to undertake BMR activities that would help increase volumes and reduce costs in order to maintain profit margins.

© Copyright Business Recorder, 2021
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