Company Background:
Pakistan Tobacco Company Limited (PTC) was the first multinational to be incorporated in Pakistan, right after the partition of the Subcontinent in 1947. They are a subsidiary of the British American Tobacco Group (BAT) and take pride in the fact that they started off with a single warehouse near Karachi port and over the course of time, became one of the biggest FMCG companies in the country. PTC currently hold more than 75% of the total legitimate cigarette market share in the country and nearly 50% of total cigarette sales nationwide.
PTC is making a step-change in the development of standards to protect and support their New Categories ambition. They have created new benchmarks and set new records across the value chain - establishing Pakistan as an export hub for VELO & Tobacco Leafs in the APME region thus building A Better Tomorrow™ for BAT, their consumers and all their stakeholders. Furthermore, Exciting new initiatives such as expanding the plants, nurseries footprint, increasing the water-filtration plants network and many new projects are underway.
Risk Analysis:
1. Strategic Risks:
2. Financial Risk:
3. Operational Risks :
Pakistan Profile and PAKT:
Fortunately Pakistan profile is not so much effective on PAKT in general, below are few of them:
1. Currency Devaluation: due to the fact, PAKT is importing some of the raw material for it manufacturing. Currency devaluation is very.
2. Govt. tax structure: Since PAKT fall under health hazardous product category, so the taxes on these are very high compare to other sectors.
3. Raw Material: Main ingredient is produced in Pakistan. Also the farming location is not so far away from factory.
In fact below was mentioned in the annual report of 2020:
“On the cigarettes and cut-tobacco exports front, $31 Million in foreign direct inflows were generated to further augment the Company’s ambition of becoming the primary export hub for the region. Pakistan has also emerged as a front runner for setting up a shared services hub.”
Stock Valuation
Financial Analysis:
The “Growth Factors” are good except “Free Cash Flow per CFO.”
While reviewing Stability Ratios, it can be observed that margins are average, this is majorly due to COVID, high taxes & ban on product promotion. Even with the bans and restriction company is showing good margins. To mitigate the losses BAT is working on new categories of reduced risk producs-vapor and modern oral products.
Looking at current ratio, debt to equity ratio is in good but total debt is bad, this is due to expansion of production facility for new product – Velo. Looking the history of PTC the debt value in not too much so nothing to worry about. Inventory turnover was in bad, companies justification was: “due to a buildup of tobacco and raw material stock essential to support higher production in the first half of the next year. During 2019 however, the Company also undertook to build up stock levels of imported materials to act as a physical hedge against local currency devaluation which put strain on working capital and cash conversion cycle. The cash conversion cycle increased from 47 days to 153 days.” Finally CFO vs PAT is in good category which is a good sign for investors.
Valuation Analysis
Majority of Valuation ratios are bad due to less number of outstanding shares in the market. 94.7% of
companies share are with BAT (undertaking company of PTC). Stock is not that attractive due to high
tax values, which are expected to be increased in coming time. But in terms of dividend PTC is one of
the high dividend payed companies.
Free Cash Flow per CFO and Cash to Debt Ratio is bad due to expansion of plant for new product –
Velo. Otherwise company is having pretty good cash flow.
By looking at financial strength is not so bad but still due to aforementioned reasons company can be better in future.
Business Analysis:
Company is not been consistent with the sales due to high tax on product also due to availability of
cheaper option for the consumer in the material as mentioned by Chairman in the annual report:
“The legitimate tobacco industry remained under pressure due to the widening price differential
between duty not paid (DNP) brands and legitimate brands following the 93% increase in excise rates
in 2018 and 2019 that fueled illicit market share growth in 2020. The Government’s decision not to
change excise rates was a positive outcome from FY 2020-21 budget that provided consumer price
stability, but this was short-lived as key brands in the illicit sector reduced their selling prices by
25% post budget to Rs 30/pack. Enhanced enforcement support by the Government is key to ensure
fair competition within the tobacco industry and would prevent loss of further tax revenues towards the
national exchequer.”
Management Analysis:
Scoring:
Looking at the scoring it can be seen that company was investable during 2014 till 2018. Still the score
is not that good due to heavy tax charges and change of product line to safe there future. Until there
complete transaction from Tabaco product to less harmful product company will be showing low
numbers.
That been said if you are a long term investor this is the best time to buy this stock because once the
transaction is over COMPANY WILL COME BACK. Also company is very good for dividends:
Over screen shot shows that for a long period of time (say 2009 till Mar 2022) your investment would
have been increased by 102% annually.
Keeping above in view below is current 10 year graph of PAKT:
Value at Mar-2022, this situation is not only for PTC, whole Tabaco sector is in decline due to high taxation and no advertisement policy by Pakistan health sector.
Conclusion:
Strengths:
1. BAT is the undertaking company which is an international brand which means company’s future
is not very bad.
2. Company is changing its business with keeping future in mind for its sustainability in market
3. PTC is the leading company in its sector, which makes it more favorite for investors
4. PTC is trying to make become exporter of raw material in Asia region
Weakness:
1. Company is changing is product which is very risky and time taking process
2. High percentage of tax and no advertisement policy from government is very bad for PTC
Investment call::
1. At this moment: Yes but if you are going for long term investment, since studying the company,
we didn’t find anything disturbing which shows that company is good but due to govt. policies
share price is continuously going down.
2. Long term: for sure.
AUTHOR:
This article is prepared by Mr. Zahid Bin Zulfiqar Ali. He is a student of recently launched training from sarmaaya platform, i-e 'Fundamentals of Capital Market' which is organized and host by Ammar Yaseen.
