The future roadmap of Unity Foods Limited

Unity Foods Limited (UNITY) held its corporate briefing session recently to discuss its financial results for the year ended June 30, 2020, and the future roadmap. To recall, the company reported earnings of PKR 0.21Bn (EPS: PKR 0.35) in FY20, as opposed to 0.26Bn (EPS: PKR 0.85) in FY19, down 16%.

The decline in profitability was mainly on account of: 1) business disruptions due to COVID-19 , 2) higher policy rate during 1HFY20, and 3) exchange losses due to declining rupee. Additionally, the company took a hit during FY20 due to higher inventory levels ahead of Ramadan, and slump in international palm oil prices post COVID-19 global spread. As a result, gross margins witnessed a decline of 2.0ppts during FY20 to 6.79%.

Despite the decline in earnings, the company recorded sales at PKR 29.87Bn during FY20, up 2.12x YoY. Bulk oils contributed 47% to the total revenue in FY20, while branded oils and animal feed contributed 25% and 21% respectively. Higher bulk volumes resulted from increased orders from various organisations during 2HFY20 for “Rashan drives” for those affected by COVID-19.

During 1QFY21, the company showed recovery and posted earnings of PKR 0.59Bn, up 3.52/6.35x QoQ/YoY. Net revenue also recorded a growth of 1.32x QoQ mainly owing to higher sales volumes due to Eid-ul-Adha. Bulk oils contributed over 50% to total revenue while branded oils contributed around 18%. Gross margins also normalised during the period and clocked-in at 8.23%.

As per the company, its total oil refining capacity stands at 650MT per day, whereas its solvent extraction plant capacity, and flour production capacity stand at 450MT, and 130MT per day. The company’s capacity utilization during 1QFY21 stood at 67%, 2% and 52% for oil refinery, solvent extraction, and wheat plant respectively. Going forward, the company expects the capacity utilization to improve to 85%, 35% and 80% for its oil refinery, solvent extraction, and wheat plant respectively.

The company has recently acquired 69% stake in Sunridge Foods (PVT) Limited as part of its consumer staples strategy. As per the management, the company intends to further expand its operations and enter staples food category.

The total paid up capital stood at PKR 9.94Bn in FY20. The company did not enter into long term borrowings during the period due to its strong equity base.

Going forward, the company announced plans of capacity expansion of its flour mill to 440MT per day by 4QFY21, and its oil terminal to 45000MT by 2QFY22. Additionally, its soap production line is expected to begin operations in 3QFY21. The company also announced plans of commencing two new projects which include Physical & Chemical Refinery plant and Fractionation plant.

Furthermore, the management expects the international oil prices to remain stagnant and have projected top-line growth of around 50% during FY21 with gross margins expected to be in the range of ~10-12%.

BMA Capital Management Ltd

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