We initiate coverage of Roshan Packages Ltd. (RPL) with our Jun’18 Target Price of PKR 87.0/share; at current price levels the scrip offers a 53% upside potential. The scrip trades at a FY18/FY19 PE of 11.3(x) and 10.7(x), respectively. Our investment thesis is premised on
the expansion in RPL’s capacity of both corrugated and flexible plants,
RPL successfully increasing its market share by targeting large FMCG brands and widening its product portfolio, and
planned backward integration of its corrugated plant to provide improvement in RPL margins through cost savings.
Capacity Expansion to Drive Profitability
Roshan Packages only recently announced the commencement of commercial production from its enhanced corrugation plant, with twice the production capacity from 30,000 to 60,000 metric tons per annum. On the other hand, an expansion of 1,440 MT is expected by FY19 under RPL’s flexible plant, already running at a ~60% utilization of its installed 10,800 MT capacity. While in the 9MFY17, the company posted a 12% growth in its revenues, it is pertinent to mention that RPL successfully managed to grow the volumetric sales by 17% YoY. Going forward, as the prices of paper and polyethylene film gradually recover in the international markets, we expect RPL to achieve a revenue CAGR of 16% in the six years FY16-22, on the back of rising consumption of FMCG and Food products in-turn raising demand for packaging products.
Growing Market Share in a Growing Industry
RPL’s sales to FMCGs grew at a CAGR of 43% in the last five years FY11-16, predominantly to some of the largest blue-chip multinationals in the country (flexible segment registered a rapid growth with a 28% CAGR since commencement in FY12, along with modest 5% growth in corrugation). Going forward, as the company will operate at twice its prior capacity, the management is employing aggressive strategies to increase its market share via further product penetration of FMCGs (for both corrugated boxes and flexible packaging).
Planned Backward Integration to Provide For Better Margins
RPL management is on its way to establishing a dedicated corrugated paper mill, Roshan Sun Tao (RST), in a 60/40 equity collaboration with Shandong Yongtai Paper Mill Company Limited embarking on a PKR 3,944mn project, anticipated to come online by FY20. We expect Roshan Sun Tao to be a shrewd investment for Roshan Packages, as the subsidiary with a capacity of 137,000 metric tons per annum will provide higher quality yet cheaper raw materials to RPL substituting its reliance on both low quality domestic and expensive imports. RPL’s costs are expected to decline substantially, providing a boost to its gross margins from an expected 18% in FY19 to 20% in FY20. Net margins are also expected to register a rise in excess of 100bps the same year.
To recall, during 1QFY18 RPL’s sales witnessed a volumetric growth of 10% YoY. Production was split between Flexible and Corrugated Segment as 1,800 tons and 7,634 ton, respectively during 1Q.
Albeit, revenue ticked higher by a minor 3% YoY. Key reasons behind this remained the downward trajectory observed in raw material prices (set in motion since May’17) as well as advent of smaller new players which forced the company to slash prices by 6% YoY in order to maintain market share.
This however, had an adverse impact on company margins as they pulled back by 8ppts YoY to 6% during the period under review. Margin attrition was also owed to recognition of additional depreciation post expansion in Jun’17.
Pertinently, international prices of paper are increasing whereas a major producer of polyethylene resin in Middle East has also shut down operations. It appears that local prices of paper may experience some uptick in the near future.
With that said, RPL is now focusing on further augmenting revenue and in this regard, management has commenced negotiation with their customers (B2B) to nudge up prices, indicating improvement in topline.
Whereas capacity is set to reach 70% levels (70% in Flexible and 55% in corrugated products) during FY18 from the current 60%. This too shall support company margins. Going forward, the company targets a gross margin within a range of 10%-12% in FY18.
Moreover, the company has already borne the cost of installing two additional machines for the Flexible Segment; these will come online in Jun’18 and 1QFY19, respectively. This will take up capacity for the segment to over 12,000 tons p.a.
Whereas key update on the corrugated segment was the ongoing discussion (initial stages) regarding further capacity addition to 90,000 tons per annum by the end of 2019.
We were also informed about Roshan’s Sun Tao paper mill. Land has been acquired and the management is in the process of securing some regulatory approvals. Once these are granted, the company targets project completion by FY19.
We also highlight claim to tax credits as a key catalyst for company profitability. With a zero tax rate booked in the first quarter of FY18, the company believes this to sustain by the end of the year. Tax credit benefit is set to continue for a period of 5 years on the IPO, BMR, equity financed expansion and depreciation under the Income Tax Ordinance
Roshan Packages was converted to a public limited company on 23rd Sept, 2016 and got listed on 24th Feb, 2017 at PSX. Company is involved in manufacturing and sales of corrugation and flexible packaging materials. The corrguation facility of the company is located at Sunder raiwand road, lahore and flexible packaging of the company is located at Sunder industrial estate raiwand lahore.
Financial performance 1QFY18
Net sales of the company witnessed growth of 3.4% YoY to PKR 1.086bn against PKR 1.050bn in SPLY due to volumetric growth of 10% while, prices of the products fell by 6% YoY. Gross margins of the company went down by 8pps YoY to 6.1% compared to 14.1% in SPLY as company lowered its prices due to tough competition in the industry. Finance cost of the company enhanced by 84.9% YoY and tax expense remained zero on account of tax credits.
Financial performance FY17
Company reported PAT of PKR 239mn against PKR 261mn in FY17, down by 8.4%YoY despite of 11% increase in net sales. Gross margins of the company witnessed fall of 0.7pps YoY to 13.5% compared to 14.2% in SPLY as company recorded depreciation of new plant. Selling and admin expenses went up by 24.4% YoY to PKR 200mn compared to PKR 151mn in FY17. Finance cost of the company increased from PKR 46mn to PKR 106mn, because earlier company was capitalizing this amount. Company announced final cash dividend of PKR 1 per share and bonus dividend of 10%.