KARACHI, Aug 2: In the six months between January and June 2003, shares in fewer than four companies listed on the Karachi Stock Exchange, have outperformed the Tri-Pack stock: D.G. Khan Cement, which galvanised by 120 per cent; Nishat Mills that climbed by 112 per cent and Faysal Bank that shot up by 74 per cent.
The 10-rupee share in Tri-Pack Films is now trading at Rs80; On January 3, it stood quoted at Rs54. The big leap forward during the seven months of this year, would fade into oblivion if one were only to recall that the share was priced less than six years ago— in 1997, at the discounted price of only Rs8. So is the great gain in equity value justified?
Investors must make up their own minds based on available information. Tri-Pack Films Limited is a joint venture between Mitsubishi Corporation of Japan and the Packages Limited. Registered office of the company is situated in Karachi, head office is in Islamabad and the plant is located in Hattar Industrial Estate, NWFP.
With a huge operational capacity to produce finished Biaxially Oriented Polypropylene (BOPP), the project is the largest in Pakistan. BOPP as a packaging material is widely used in the consumer goods industry. Iffat Zehra Mankani, head of equity research at Capital One Equities Limited says: “The five end users viz, savoury snacks, confectionery, baked goods, dried foods and adhesive tape accounted for two-thirds of demand for BOPP film in the world in 2002.” Salient feature of investment in Tri-Pack stock is the world-wide rising demand of BOPP films.
The demand was projected to grow by an average of 7.7 per cent per annum while expansion in Asian demand was to account for 57 per cent of the growth in the world in next five years. As for domestic demand, the total size of the market was bigger than the current capacity and the gap of approximately 30 per cent was being bridged by imported BOPP. To keep up with the demand, Tri- Pack has been increasing production capacity and added another line of BOPP film in 2001, which raised the installed capacity from 5,400 to 10,800 tons, annually.
Earlier this week, the company unveiled financial figures for the first half of the year ended June 30, 2003. These showed 3 per cent increase in after-tax profit to Rs111 million for the latest half term, from Rs108 million in the corresponding period of the previous year. Net sales grew by 24 per cent to Rs743 million, from Rs597 million. Financial charges stood reduced by almost a half to Rs18 million, from Rs32 million.
While things seem to be going well for the company, there are two threats looming large on the horizon. One, the commercial production having started on June 1, 1995, the company has now exhausted the eight-year income tax shelter enjoyed for its location in Hattar.
Tanvir Abid, head of research at Jahangir Siddiqui & Co. Ltd explains further: “Tri-Pack Films was exempt from payment of income tax on earnings from the old production capacity till June 2003. Furthermore, the company was also entitled to a 10 per cent tax credit (estimated at Rs65 million) on the value of the expansion machinery of BOPP Film Line 2”.
The analyst points out that starting from the second half of the current year, the company’s taxation liability was expected to sharply increase on the application of corporate tax rate at 35 per cent.
The second challenge would be the increased competition in domestic market in the intermediate term. Another domestic manufacturer—MacPack Films—has finalized its plans to augment its production capacity five-fold to 15,000 tons of BOPP by 2005.
Analyst Ms. Mankani holds a ‘neutral’ view on Tri-Pack on the back of expected growth in demand of BOPP films, decreasing financial charges and its concentration on producing an optimum product mix. But some other analysts expect the company’s earnings to slow down mainly on the drag of higher tax liability. The earning per share being Rs3.71 for the half year, on an annualised earnings of Rs7.42, the Tri-Pack stock is trading on price-to-earnings (p/e) multiple of 10.8 and the yield works out to just around 4 per cent.