Established in 1954, Khyber Tobacco Company Limited is engaged in the manufacture and sale of cigarettes and re-drying of tobacco. The firm is among a handful of Pakistani tobacco firms operating in the formal space. The firm's registered office and its plant and machinery are situated in the district of Mardan, Khyber Pakhtunkhwa. KHTC has four main facilities: green leaf threshing, primary processing, cigarette making, and cigarette packing. The firm produces both leaf and blended tobacco products. Khyber Tobacco is listed on the Pakistan Stock Exchange under the moniker KHTC. Its last available shareholding pattern is produced below:
Product range The firm mainly sells three tobacco products: re-dried tobacco, cut tobacco, and tobacco cigarettes. The product range seems targeted towards low-end of the market. Majority share in KHTC top line has usually rotated between re-dried tobacco and cigarettes. Coming in different varieties, KHTC cigarettes are marketed under brands like Gold Street, Classic, Hero, Chance No 1, and Virtue.
In addition to catering domestic market, the firm has also an export market, albeit small, in regions like the Middle East, Asia, and Africa. But during FY16 and now during FY17, the firm's export turnover has seen sharp downfall. Exports were roughly Rs 51 million in FY16, just a quarter of what they were in FY15. No export revenues have been recognized so far in 9MFY17. The management has indicated fall in re-dried tobacco, a price-sensitive item abroad, as the reason behind this export plunge. Due to this, back in FY16, some 52 percent of gross turnover was brought in by local cigarette sales, 41 percent by local tobacco sales, and a measly 7 percent by tobacco exports (46% in FY14).
KHTC operates in a highly competitive environment. It holds less than one percent of the local cigarette market, as it sold 0.43 billion sticks in FY16. The dominant player, Pakistan Tobacco Company (PSX: PAKT) had sold 36 billion cigarette sticks in CY16, whereas its rival Philip Morris Pakistan (PSX: PMPKL), is expected to have sold 10 billion sticks last year. Overall, the industry volumes have drastically come down lately, thanks to the threat posed by sales of illicit cigarettes.
Recent financial performance Stagnation seems to have set in at KHTC in the past six years, as its top line hasn't impressed since FY13. The firm has managed to stay afloat on a profitable level despite that, but its FY16 full year profitability at Rs 70 million was lower than in FY11. In both nominal and real terns, the firm has underperformed relative to its earlier years.
It is apparent that the depleting export market has affected KHTC's prospects of showcasing real growth in recent years. The FY16 (gross) export proceeds were only nine percent of what the firm sold abroad in FY11. And now in 9MFY17, there are no export proceeds to talk about. The management has suggested there will be some export revenues in the last quarter this fiscal. The firm needs to improve its processing capacity for re-dried tobacco and other products, which require much-needed capital spending.
Local tobacco cigarette sales have come to the rescue over the years, helping the firm ride out the rough tide of export decline. As per market sources, a recent change of blend as well as upward price revisions have helped the firm boost its local revenues. To capitalize on that, KHTC must become operationally efficient, as roughly three quarter of its net sales were consumed by cost of sales in FY16, much the same as previous two years.
Latest financials The firm has shown remarkable turnaround deep into FY17. There were no export revenues for 9MFY17, but the top line has still surged by a whopping 76 percent year-on-year. It is the local sales, thanks to price increments, which are at work again. Having already beaten the FY16 profitability with a quarter still left, KHTC is set to close the year on a high after many years.
Stock performance KHTC is a very thinly-traded stock, with a daily trading volume averaging around 1000 shares in the last one year. The stock price has more than doubled in the year-to-date, closing at Rs 857 on May 29, 2017 26. The scrip has largely outperformed the broader index, but again there's little to read there given the low volumes of the stock traded on the bourse.
Outlook Local market is likely to continue providing healthy space for KHTC to grow its volumes. The firm took price revisions last year, but it didn't hurt as it operates in the affordable segment. While KHTC can take solace in its local sales, it must do something about the challenging export market, which is made even more difficult to tap given inefficient production processes, old ways of tobacco farming, and the firm's internal, limited tobacco-processing capacity.
It must be noted that the major players in the formal industry, PAKT and PSX, have seen their net turnover fall drastically in 1QCY17. Reason is that the two big players operate from the medium end to high end of the market, where FED-driven price increases make them price uncompetitive.
They stand most susceptible to illicit tobacco trade - which includes "smuggled, counterfeited, and duty-evasive" tobacco products - that floods the market with low-priced cigarettes. The government has recently introduced (in the FY18 budget) a third FED tier to tax tobacco products. It remains to be seen what this lower tax slab will do to KHTC volumes in the future.
KHTC: pattern of shareholding (as at June 30, 2016) No of Shares held % of total
Directors, CEO, and their spouse(s) and minor children 7 401,836 33.435%
Public sector companies and corporations 2 43,248 3.598%
Banks, DFIs, NBFIs, insurance co's, takaful, modarabas, 1 369 0.031%
General public (local) 763 753,468 62.693%
Others 3 2,920 0.24%
Total 776 1,201,841 100%
Source: Company accounts
KHTC: segment-wise production and sales volumes
Production Sales Production Sales
Cigarettes (mn sticks) 428.5 422.8 432.9 431.2
Re-dried tobacco (mn kgs) 3.003 2.124 2.071 1.596
Cut tobacco (mn kgs) 0.406 0.033 0.480 0.085
Source: Company accounts
KHTC: financial snapshot
Rs (mn) FY16 FY15 FY14 FY13 FY12 FY11
Net turnover 758 883 890 914 701 883
Gross profit 177 199 239 90 207 199
Operating profit 75 117 181 41 147 117
Profit after tax 70 101 142 22 135 101
Earning per share - Rs 58 84 118 18 112 79
Property, plant and equipment 342 372 376 337 284 17
Net current assets 476 381 282 184 222 92
Net cash flow from operating activities -19 -38 107 110 14 22
Cash & cash equivalents (year-end) 18 51 27 57 22 26
Share Capital 12 12 12 12 12 12
Shareholders' equity 624 547 445 294 249 105
Gross margin 23.3% 22.5% 26.8% 9.8% 29.5% 22.5%
Operating margin 9.9% 13.3% 20.3% 4.5% 20.9% 13.3%
Net margin 9.2% 11.5% 16.0% 2.4% 19.2% 11.5%
Return on equiy 11.2% 18.5% 32.0% 7.4% 54.1% 90.1%
Current ratio 2.51 2.08 2.48 1.59 1.82 1.68
Debt: equity 0.62 0.76 0.53 1.19 1.17 1.34
Source: Company accounts
KHTC: latest quarterly results
Rs (mn) 9MFY17 9MFY16 YoY
Net turnover 701 399 76%
Cost of sales 467 298 57%
Gross profit 234 101 132%
Profit/(loss) for the period 112 27 -313%
EPS (Rs) 93.13 22.56
Gross margin 33% 25% -
Net margin 16% 7% -
Source: Company accounts
Copyright Business Recorder, 2017