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Organic Meat Company Limited (PSX: TOMCL) was incorporated in Pakistan as a private limited company in 2010. The company is engaged in the production and marketing of halal meat and allied products. It is also one of the largest exporters of red meat and meat products. Middle East countries are the major export market of TOMCL. However, the company has recently added pet food raw material to its portfolio which has enabled it to tap the US and European markets. Besides, the company also has important money from Far East, CIS and South Asian markets. The company offers Online Master Qurbani service in Pakistan. The company has its manufacturing facilities at Korangi and Gadap Town in Karachi.
Example of Shareholding
As of June 30, 2022, TOMCL has a total of 122.99 million shares held by various categories of shareholders. Directors, CEO, their wife and minor children have the highest share of 55.55 percent in the company. This is followed by the general public holding 20.57 percent of the company. Modarba and Mutual Funds have a share of 9.58 percent in the company followed by Insurance companies with ownership of about 9 percent shares. Commercial banks and joint stock companies account for 2.6 percent and 2.4 percent shares of TOMCL respectively. The remaining shares are held by other categories of shareholders who hold less than 1 percent of the shares.
Historical Performance (2018-22)
TOMCL’s topline has been growing by leaps and bounds since 2018 with the bottom line following a similar trajectory. Other income” was a game changer in 2019 and 2022 and resulted in a NP margin greater than the OP margin in both years. Let’s dive into the financial statements to explain the details of the financial performance for each year.
In 2019, the topline grew by 26 percent year-over-year which resulted in a GP margin of 16 percent instead of 17 percent in the past. What kept the company going strong during 2019 was a huge year-on-year increase of 120 percent in the distribution fund together with the signed allowance for doubtful debt which took its toll on operating profit which went by 46 percent year-on-year -over the year with OP margin clocking in at 5 percent in 2019 against 12 percent in 2018. The main culprits behind the humungous distribution expense are clearance and forwarding costs, international services as well as advertising and promotion expense. The cost of financing also grew on the back of a high discount rate coupled with short-term loans that increased during the year to meet working capital requirements. While things look bleak for TOMCL, other revenue worth Rs. 203 million proved to be a silver. The impressive growth in other income came on the back of exchange gain and a shift in supply against commercial debt. This resulted in a 52 percent year-over-year increase in net profit with NP margin clocking in at 8.5 percent in 2019 versus 7 percent in the previous year.
In 2020, TOMCL achieved the highest top-line growth of 31 percent year-on-year. The main growth factor during the year was the export of cold meat products; however, the export of frozen bone vacuum products has witnessed a complete halt due to COVID-19. To maintain the increasing demand of fresh meat products, TOMCL increased its capacity by 300 tons a month. Apart from growing sales of fresh meat products, exports to far eastern countries also showed impressive growth during the year. High sales volume coupled with better pricing and cost management led to an increase in GP margin from 16 percent in 2019 to 19 percent in 2020. This year, the company can keep a check on its distribution expense which is down by 12 percent year-on-year. -year. Provision for doubtful debt has also come down resulting in year-on-year growth of 179 percent in operating profit with OP margin clocking in at 11 percent in 2020. Cost of financing increased as the discount rate rose for the first three quarters of FY20. coupled with increased short-term borrowing during the year. Another income which did very well in 2019 slid by 99 percent year-over-year in 2020 due to thin exchange profit. Net profit grew by 22 percent year-on-year with a slight decrease in NP margin to clock in at 7.9 percent in 2020. The bottom line growth would have been much higher if other income was strong in 2020 as well.
During 2021, the total export of meat decreased by 10 percent in one year. While frozen meat and frozen meat exports grow by 78 percent and 1016 percent respectively in 2021, the export of frozen meat decreased by 36 percent year-on-year due to lack of sales in the CIS market. Locally, the company received a strong response from its Online Qurbani service as the signs of COVID-19 are not over and people are enthusiastically opting for online qurbani services. The export of fresh meat accounts for 49 percent of TOMCL’s business. Poor performance in this category offset the volume growth in other segments resulting in no volume growth during the year. However, due to favorable pricing and cash flow capabilities, the company is able to post 16 percent year-on-year growth in 2021. The sales price increased from Rs. 437 per kg to Rs. 498 per kg in 2021 on the back of higher purchase price and reduced costs due to increase in fixed assets. This has pushed GP’s margin down to 16.5 percent in 2021. While the company is reviewing its advertising and promotion costs, clearance and shipping costs push the dividend expense up by 34 percent year-over-year in 2021. This could has put a limit on its OP margin, thanks to the allowance for doubtful debts which gives some breaks and drops by 82 percent year-on-year in 2021. Therefore, the OP margin remains intact in 2021. The budget will be about 1 percent year-on-year on the return of the low discount rate during the year. Other incomes also flow down on the back of exchange profit, profit on saving accounts as profit on physical assets. The NP margin is still at the same level as in 2020 despite the decline in the GP margin.
In 2022, the company’s export sales grow by only 2 percent a year. During this period, frozen meat exports performed well while frozen meat and frozen meat exports increased by 78 percent and 37 percent respectively. The pricing power and the reduction in the price increase increased by 19 percent in a year. However, the high cost of sale which stands at Rs. 646 per kg in 2022 resulting in a marginal GP reduction of 13 percent. Administrative expenses grew by 45 per cent year-on-year in line with inflation and also due to the release of resources as the company started its fattening farm. Distribution costs also grew by 81 percent year-on-year on the back of higher cargo costs due to a global container shortage as well as a depreciating Pak Rupee. operating profit dropped by 52 percent year-on-year with the OP margin thinning over 4.3 percent. The financial cost would have been higher by 37 per cent a year, but it was offset by a lower provision on export refunds in line with IFRS. There are other incomes to save the bottom line by passing through more than 24 times on the back of large exchange profit and profit on biological assets. Therefore, the background grows by 36 percent year-on-year with a higher NP margin of 9 percent in 2022.
Recent Activity (1HFY23)
During 1HFY23, TOMCL’s top line grew by 12 percent year-on-year as export sales volume showed a revival. Also, the new business line of pet foods also shows improved performance. Cost of sales grew in line with inflation with a significant impact seen in oil and energy costs as well as raw material and packaging material costs. As a result, GP margin has dropped to 15 percent in 1HFY23 as compared to 17 percent in the same period last year. Operating expenses grew significantly on the back of higher freight costs during the period. This reduced operating profit by 22 percent year-on-year with margin clocking in at 6 percent in 1HFY23 versus 9 percent in 1HFY22. The cost of financing also grew by 85 percent year-on-year on the back of several upward revisions in the discount rate. The increase in remittances on account of export sales also increased the tax expenditure by 47 percent in one year. Other income provided much-needed support to the bottom line with year-on-year growth of 28 percent mainly on the back of exchange gain. Bottom line decreased by 19 percent year-on-year in 1HFY23 with NP margin standing at 8 percent in 1HFY23 vis-à-vis 11 percent in 1HFY22.
Diversification in terms of product categories as well as regional products will enable TOMCL’s growth trajectory in the coming times. A high sales volume coupled with a favorable pricing strategy will generate upward momentum. The high cost of production, freight cost and financing cost will continue to be the Achilles heel for the company. However, a large exchange rate gain on the back of Pak Rupee surplus will reduce the downside.