Merit Packaging in discussion with McDonald for business

· Merit Packaging Limited (MERIT) held its analyst briefing session today to discuss its 1QFY22 result. To recall, the company posted a loss of PkR57mn (LPS: PkR0.65) in contrast to a loss of PkR165mn (LPS: PkR1.87) in same period last year, an improvement of 65%YoY and a loss of PkRPkR141mn (LPS: PkR1.59) in previous quarter, an improvement of 60%QoQ.

· The topline has increased by 36%YoY/18%QoQ as the company has been able to increase the number of orders from its existing customers after the revamp. In addition to this, the gross margin has increased from 2.7% in 4QFY21 to 5.7% in 1QFY22. As a result, the company has posted operating profit of PkR14mn as compared to the losses in previous quarters. This has been made possible due to synergies by combining the manufacturing facility in Lahore (which had largely remained idle) with the Karachi factory, thereby decreasing the overheads.

· The production output during the last several years hovered in the range of 800MT whereas the company is now delivering output of ~1,200MT. At current capacity, the maximum output that the company can deliver is ~1,300MT. The management expects the orders to increase in medium term, hence, the company may start the expansion soon.

· Regarding the McDonald’s business, the company is in the process to receive the required certifications. McDonald’s team is expected to visit the MERIT’s premises in Jan’22. According to the management, the company will be ready to take orders from McDonald’s by the end of FY22 and start the production in FY23. Once this milestone is achieved, the company plans to target other food chains as well.

· In the flexible packaging business, the company is eyeing growth of ~15%, in line with the industry. The documented size of the market is 40,000MT while the total market size is roughly 2-3x the size of documented segment. In the current scenario, the supply exceeds the demand due to which the industry is highly competitive. The competitive edge for MERIT is its huge client base, majority of which include FMCGs and MNCs.

· Going forward, the company expects to increase the topline by ~40%YoY in FY22, exceeding the milestone of PkR4bn which emanates from higher number of orders and better pricing while the McDonald’s business in FY23-24 is expected to make the company profitable at the NPAT level.

Courtesy – AKD Research

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