Al-Abbas Sugar Mills Limited
Al-Abbas Sugar Mills Limited (PSX: AABS) has been in operation since 1991, and listed on stock exchange the next year. Besides its primary business of manufacturing and marketing of white sugar, its principal activities include processing and sale of industrial ethanol, manufacturing of chemicals and allows, tank terminal services providing bulk storage, and generation and sale of electricity to national grid.
Sugar crushing and processing unit of the company is located in district Mirpurkhas of Sindh province. The company currently operates at installed capacity of 7,500 tons of cane per day, which brings annual installed capacity to 1,125,000 based on industry standard of 150 days of crushing season. However, reported capacity varies based on actual number of days operated. Therefore, utilisation levels estimated below are not standardized.
The sugarcane processing unit also has installed capacity to process byproduct molasses into industrial grade ethanol which has become an important revenue source for the company in recent years. Installed capacity for ethanol production currently stands at 170,000 litres per day. The Mirpurkhas mill unit also a 6MW captive power unit that caters to manufacturing unit’s energy demands internally.
The company also has a captive coal power plant of 15MW located at Dhabeji which produces different chemicals and alloys with annual capacity of 27,220MT. The tank terminal unit is located at Kemari Karachi with storage capacity of 34,900 M.T of liquids.
Sponsor group and pattern of shareholding
Al-Abbas Sugar Mills is a tightly held business with almost 80 percent of issued shareholding held by sponsors through associated undertakings, related parties, and direct shareholding by directors and their dependents. It is part of the larger Hajji Ghani-Shunaid Qureshi conglomerate, which also holds interests in group companies such as Power Cement, and Ghani Holdings.
Business analysis
Performance of sugar division recorded a significant decline of 27 percent in value terms during the year. This was on the back of highest ever crushing ever, recorded at 659,154 tons during marketing year 2017. High production level was achieved under expectation of improvement in retail prices of sugar and anticipation of timely permission to export by the government considering the bumper crop, neither of which materialised.
As a result, number of plant operation days increased substantially compared to the previous year, from 93 days to 125 days. In line with days operated, capacity utilisation in absolute terms increased substantially, taking a significant leap of 10 percentage points, closing at 59 percent.
Sugarcane crushing increased by about 18 percent over last year, along with year-on-year increase in white sugar production of 20 percent. Year-on-year change in white sugar production is on the higher side of year-on-year increase in crushing due to improvement in sucrose recovery rate by 23bps.
As domestic demand of sugar did not record significant increase, company recorded significantly lower volumetric off take, which explains the overall decline in top-line. As per disclosures in annual report, Al-Abbas managed to sell only 48,353 tons of white sugar, which is one-third less than production level achieved during the year.
This resulted in steep climb in ending inventory for the year, which increased by 2.77x times during the period under review. From ending inventory of a little over Rs700 million as at September, 2016, inventory increased to more than Rs1962 million.
Moreover, due to a supply glut in global market, the company was not able to obtain white sugar export quota, as a result, its entire gross (white sugar) sales are recorded in Pak rupee.
However, it is of note that company’s core revenue diversification increased significantly during the year, with sales from ethanol business capturing more than 51 percent of net sales for the first time. This is both a function of increased efforts at diversification reflected in higher spend on distribution efforts and marketing of exports. At the same time, excess supply of sugar in the market naturally resulted in reducing its share in the revenue pie.
Note that as the country has been producing surplus sugar for past couple of years, as per PSMA sources the country had a carryover stock of 2.5 million metric tons as it entered crushing season in January 2018.
Despite a glut of sugar in global commodity market, price of end product is left on the mercy of market forces whereas price of raw material is dictated by the government, and strongly favours the supplier (farmers) due to underlying political considerations.
However, despite total allowed export of 925,000 tons during MY17, Pakistan has an excess supply of close to 2 million metric tons of sugar.
Financial analysis
Due to excess supply, which has resulted in depressed domestic prices of end product, company’s revenue declined considerably at 8 percent. As per disclosures in notes, per kg price of white sugar sold during the year comes out at Rs51 (net of sales tax), whereas per unit cost of white sugar sold comes out at Rs54 per kg (using cost of sales of sugar division as a proxy). Thus, on segment analysis basis, the company posted a gross loss for the sugar division.
Ethanol segment business nevertheless allowed the company to maintain profitability at the gross level, resulting in gross margin of 9.60 percent, which was 3.6pp lower compared to previous marketing year. Note that 94 percent of ethanol segment sales came from export.
The slump in top-line caused due to depressed sugar demand cascaded downwards; however, control on overhead costs ensured that incremental decline in operating margin was not significantly greater than decline in gross margin.
Financing costs increased during the period as lack of resolution on pending subsidy payments led the company to increase reliance on bank borrowing to finance operating cash flow needs. This, in addition to lower other income, ensured that before-tax earnings were less than half of previous year, with PBT margin declining by over 5pp.
Outlook
Sugar milling sector has recorded a highly uncertain period of performance over the last 9-month MY18. On one hand, sugarcane plantation and area under cultivation in company’s home province remains stable as support price makes the crop highly lucrative for farmers. On the other hand, management claims that subsidy payments against exports for past several periods remain pending with the government, increasing company’s reliance on borrowed cash for operations.
Interim financials of the company report that huge carryover stock of sugar from last two seasons has significantly depressed the retail price, which as per company has declined to Rs45 per kg. While this appears to be counterfactual compared to retail prices as reported by industry association, it is true that most firms in the sector have reported dismal performance due to the floor price imposed on raw material.
For crushing season MY18-19, the country expects surplus stock of 1 – 2 million tons. Export permitted by federal government during MY18 came with a strict criterion; moreover, export quota announced in March was not accompanied by a subsidy announcement. Since global sugar prices have plummeted, review of interim accounts of major sugar players indicate that the industry is expected to perform poorly in the financial year ended September 30, 2018.
Sources say if the support price is not revised down substantially for crushing season beginning November 2018, millers could outright refuse purchase during the next marketing year.
