Cement: MAPLE LEAF CEMENT FACTORY LTD - Analysis of Financial

Statements Financial Year 2003 - 2001 Q 2010

Highlights - Corporate News

OVERVIEW : Maple Leaf Cement Factory is a part of Kohinoor Maple Leaf Group
(KMLG). The group comprises companies, which are ranked amongst the top
companies in the cement and textile sector. Maple Leaf Cement Factory Limited
(MLCFL) is one of the pioneers of cement industry in Pakistan. MLCFL owns and
operates three production lines of grey and three production lines of white cement.
The plants are located at Daudkhel District Mianwali. Its total annual clinker
capacity is recorded at 3,690,000 tons.

OVERVIEW OF THE ECONOMY

Pakistan s economy has faced a huge slump this year with the GDP growth
mounting to just 5% for 2008 and it s expected to be just 2% this year. The
economy witnessed surging inflation rates which touching 25% high and so as the
case with the interest rates. The crash of the stock market reflected a sheer drop in
the stock prices and the fall of real estate markets followed the suit. The reduction
of expenditure in the real estate and construction business had adverse effects on
the cement sector.

This is evident by a drop in investment as a percentage of GDP from 22.5% to mere

19.1% this year. To make matters worse, the electricity and water shortages girded
the industries and caused high losses. This fiscal year s beginning saw highest oil
prices ever and the subsequent of this high price was suffered by each and every
industry. Law and order was again an issue that made the market opportunities
uncertain.

RECENT RESULTS 1Q10

The company achieved cement sales of 840,717 metric tons during the period Jul-
Sep 2009 against sale in the corresponding period of 768,256 metric tons.
Production of cement was recorded at 865,201 metric tons during the quarter
against 755,396 metric tons during the corresponding period last year. The overall
capacity utilization was recorded at 83% during the quarter as compared to 79% for
the corresponding period last year. However, reduction in net retention prices and
increasing costs led to declining profitability. Company made pre-tax loss of Rs
289.343 million during the period after accounting for financial charges of Rs
573.447 million.

During the corresponding period last year, the pre-tax loss was recorded at Rs
213.179 million. Going forward the demand of cement in the domestic market may
be effected due to adverse economic, financial as well as the law and order
situation currently prevailing in the Country. The prices of cement in the domestic
market may be under pressure due to stiff competition, which will reduce the
retentions accordingly. Moreover, the energy cost which is the major cost of
production has started increasing again due to increase in the oil and coal prices in
the international market, this will have a negative impact on the profit margins of
the industry.

PROFITABILITY

The cement sector saw growth of 2% in fiscal year 2008-09. This growth was seen
because of a large number of companies looking for new avenues outside the
Pakistani market. Those who were very successful tried to reach the Middle East
and the African markets. MPL capitalized on the growth potential of the countries
that are in a process of reconstruction like Iraq and Somalia. However, Maple Leaf
Cement focused on India and after Mumbai attacks, it suffered a lot as India
imposed ban. Despite all the problems, Maple Leaf Cement s sales are raised
considerably.

The increase in sales for Maple Leaf Cement this fiscal year was 95.13%. If we break
it up further, 52.34% increment was witnessed in local sales while 175.12% rise was
witnessed in export sales. The reason of increased local sales was partially because
of high inflation that has been given as 20% for year 2009 by State Bank of
Pakistan. MLC was exporting to India in large amounts. But after the Mumbai
attacks MPL suffered significant hindrance in sales to India. In an attempt to find
new markets outside Pakistan MPL looked towards India, our neighbor that is one of
the most growing economies. However, the Mumbai attacks led to a significant
imposition of duties and the sales to India dropped after that.

Maple Leaf Cement despite increase in sales was unable to lift its profits. If we
compare it with the other companies in the industries, Maple leaf Cement has
under-performed. Actually it has shown worst performance this fiscal year. All the
companies that had showed losses or decreased sales have improved but Maple
Leaf incurred further losses. This high increase in sales was coupled by 59%
increase in cost of goods sold. The major chunks that caused such high increment in
CGS for Maple Leaf Cement were 57.31% increase in packing material consumed,
90.07% increase in fuel and power expense and 71.63% increment in rents, rates
and taxes.

The first reason for these increments is electricity shortage in the city. The nation
witness unprecedented power outages this year. This has adversely affected the
operations of the industrial sector. Even if MPL use the generators, the surging fuel
prices don t help. Despite the drop in international prices of oil, there was not a drop
in Pakistani market because of removal of subsidy on oil. This removal was because
of conditions imposed by IMF for bestowing loan to Pakistan. The loan demands
removal on subsidies and increase in price of the energy sector. These adverse
effects have deteriorated the company s profitability ratios.

Maple Leaf Cement s gross profit margin has increased steadily as 274.36%
increment was witnessed in gross profit due to 95.13% rise in net sales. However,
we see that once again profit margin shows negative sign. Although the situation
has improved from -8.65% to -6.45%, the condition is not good. The cement sector
has improved a lot this year but it seems that Maple Leaf is the worst performer.
One must also notice that the financial charges have increased by 87.77% because
of surging interest rates. This rate is very high because of conservative approach by
State Bank of Pakistan. Hence the major factor that shows lack of correspondence in
profit margin and gross profit margin is Finance cost.

As shown by the following graph from state bank of Pakistan, the surging discount
rates of this fiscal year were very high. Moreover, as MPL made loss last year, this
year Maple Leaf Cement s credit rating would have been worsened. This is evident
by Maple Leaf Cement s increased mark-ups. MPL need to diversify Maple Leaf
Cement s markets or increase sales because the return to assets and to equity has
gone down by 48.16% and 80.94% respectively. This is also evident by reduction in
Maple Leaf Cement s equity by 19.65% this year and hence, leading to a 51%
reduction in earnings per share.

LIQUIDITY

Due to immense losses accumulated by Maple leaf Cement this year, Maple Leaf
Cement s liquidity is also affected. MPL are worse off at this avenue as well with
current ratio going down by 35.54% because of 13.01% reduction in current assets
while 34.95% increment in liabilities maturing within this year. MPL increased Maple
Leaf Cement s short term borrowing by 30.05% in order to meet the liquidity
requirements.

The current ratio of 0.52 is an alarm bell, as the company will not find it easy to pay
off its liabilities and MPL have huge liabilities coming up this year. It is also
worthwhile to mention that Maple Leaf Cement s current assets contain deferred
taxes of 162 million, highlighting that MLC will have difficulties this year in paying
off liabilities.

ASSET MANAGEMENT

In an attempt to recover from Maple Leaf Cement s previous year s loss, MPL
employed ingenious techniques. MPL is now getting accounts receivable quickly and
this improvement is by about 52%. A reason for this quick conversion is export-
oriented approach. The government of Pakistan has made it mandatory to do
transactions in foreign countries via Letter of credit. This allows them to get money
before maturity and hence Maple Leaf Cement s receivables are being collected
sooner. There is a 5.43% decline in the time MPL take to sell of the inventory. This
fall in time is because of export centric approach again. However, the reduction
would have been significant had the Mumbai attacks not happened, MPL would have
very easily improved Maple Leaf Cement s time to ell inventory. Currently MPL holds
inventories worth 651 million rupees that is 49.97% higher than what was Maple
Leaf Cement s situation last year. Consequently, Maple Leaf Cement s operating
cycle is now 28.86 days that is 33.33% less than last year. This reduction in
operating cycle shows that MPL have improved Maple Leaf Cement s operations but
not to the extent that MPL get into the profit zone.

The inventory turnover rate has improved by 5.74% that means that MPL are
generating more sales on the same amount of inventory. Once again this rise is due
to increase prices. One must also take into notice that the cartel formation of
cement manufacturers caused inflated price that went up to Rs 300 per bag. There
is 142.86% rise in sales to equity ratio. This ratio being mathematical has its
shortcomings and this huge increment is not just because of sales but also because
of reduction in equity by 19.65%.

DEBT MANAGEMENT

Maple Leaf has incurred losses this fiscal year again. This has led to reduction in
shareholder s equity by 19.65% as mentioned above. Maple Leaf Cement s liquidity
has also gone down. Now in order to finance Maple Leaf Cement s assets, MPL have
incurred loans. These loans are of both short term and long term in nature. The
company s long-term debt has increased by 242.22% this year. This huge increment
is because of following reasons: First MPL entered into a financing agreement in HBL
for a Waste Heat Recovery Plant worth Rs 1.16 billion.

Second, the payment of tranches of long-term loans. Maple Leaf Cement s long-
term loans have now matured and MPL have to pay them back as well. Due to
increased debt and reduced equity, Maple Leaf Cement Factory Limited s debt to
equity ratio has rose by 32.52% while debt to asset showed just 8.5% rise. This
shows that basically MPL have restructured Maple Leaf Cement s balance sheet and
because the increase in debt is only being used as a means of providing a cushion
for the reducing equity. Maple Leaf Cement s TIE has increased by 195.07%.
However, this ratio being mathematical may be misleading.

Firstly, one must acknowledge that MPL have done robust activities for sales and
increased Maple Leaf Cement s earnings before interest and taxes by 453.45%.
However, due to high loans, the financial charges also surged up by 87.57%. Now
one must take into consideration that all the long term loans that MPL have taken
way back in 2006 and 2007 have been on KIBOR plus certain rate. For the 2006 it is
KIBOR + 2% and for 2007 it is KIBOR + 1.5%. One must take into account that this
year, due to decreased liquidity in the market, KIBOR surged up. As the floor was
imposed in the market and there was no room to liquidate from the capital markets,
interbank rate showed new heights.

This is also one of the reasons why the financial charges increased. Along with this,
as discussed before in order to curb inflation, the State Bank of Pakistan kept very
high discount rate taking all the interest rates to high values. This also hurt them
even when the floor was removed and liquidity was available in the market because
of removal of floor and injection by the State Bank.

MARKET VALUE

The trend of incurring loss continued from the last year and hence the earnings per
share this year revealed negative results. Since the appropriation of losses has been
done, the Earnings per share have reduced dramatically. It s lower by 56.70% this
year. The slump in the stock market led to the fall of stock prices. One must see
that price earnings ratio has improved. This is because the price has reduced by
40% while the Earnings have reduced by 56.70%. This does not mean that the
company has performed well this year. A higher PE multiple just means that the
market is showing more confidence in Maple Leaf Cement Factory.

VOLATILITY

The returns of Maple Leaf Cement Factory showed just 0.3% variance in returns
with a mean return of 0.574%. This means that Maple Leaf Cement is not very
volatile and the investment is pretty safe, as the ups and downs do not affect the
stock as such. This is also to be considered that MPL have 115.12 million shares in
the free float out of 372.263 million shares. This shows that the share prices are
very good reflection of the sentiments in the market.

FUTURE OUTLOOK

The government of Pakistan has recently announced the largest Public Sector
Development Programme this year. This plan is worth 646 billion rupees. Of this, Rs
25 billion has been allocated to the earthquake rehabilitation and Rs 67.59 billion
for the construction of dams. This shows that the domestic demand would increase
in Maple Leaf being the 3rd largest in terms of market share would earn fair share
from the pie.

Moreover, MPL are planning to venture into African markets that are also a viable
option as we saw Attock Cement venturing into Middle East and Somalia, which led
to unprecedented profits this year. The electricity would be an issue for them this
year as the rental generators will provide expensive electricity and IMF loan tranche
asks the government to raise prices further in December and in April. Finally
recovery of the global economies will slowly and gradually open the room of real
estate again.

DISCLAIMER: No reliance should be placed on the [above information] by any one

for making any financial, investment and business decision. The [above information]
is general in nature and has not been prepared for any specific decision making
process. [The newspaper] has not independently verified all of the [above
information] and has relied on sources that have been deemed reliable in the past.
Accordingly, the newspaper or any its staff or sources of information do not bear
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