Singer has been around in the subcontinent for over a century. It was in 1877 when the first Singer sewing machine was put up for sale at a Singer store. Over the years, it has diversified its portfolio to encompass several brands across a range of household and industrial categories. With over 750 stores, Singer Pakistan has the largest retail network in South Asia and 140 shops in Pakistan alone. Waves story is a lot more recent. It traces its history back to 1970 when a local home appliance engineer invented the first deep freezer of Pakistan manually at home. This freezer was gifted to United Bakery in Lahore for testing purposes. In 1975, it started commercial production of deep freezers with the first office of Cool Industries being set up in 1983. Over the years, Cool Industries has introduced refrigerators, washing machines and other home appliances. In 2015, the tough competitive landscape and succession issues within the sponsor family created many bottlenecks and hurdles in the company's operations.
As a result, Waves Singer Pakistan Limited (PSX: WAVES) came into existence after the merger between Cool Industries (Pvt.) Limited (CIPL) and Singer Pakistan. The combined entity also owns subsidiary Electronics Marketing Company Pvt Limited which deals in buying and selling products of renowned brands to generate retailer margins. These products include a diverse range such as TVs, generators, and motor bikes. Together, their network of warehouses, service centers, dealers, and workshops consist of nearly 2,000 outlets in the country.
Since Singer was a listed company, and Cool Industries was a private limited company, the financials available prior to the merger are of Singer. Singer's performance was strong from 2010 to 2013, despite massive damages to its retail stores during 2010's floods. In 2014, however the company reported losses for the first time in recent history with 25 percent YoY decline. The main reason was a policy decision to reduce credit sales to improve cash flows. This strengthened Singer's collections and improved its cash sales by 19 percent but was unpopular among customers, putting significant pressure on the top-line.
Given the competitive environment Singer is operating in, along with competition from Chinese imports, Singer was forced to increase its marketing, selling and distribution budget which further decreased the bottom-line. These challenges continued on in 2015 but losses diminished somewhat.
In 2016, the company pulled itself out of losses by changes in strategies such as cost savings, efficient material planning, effective resource utilization, planned logistic activities, reduction in administrative expenses, and revaluation of investment assets. As a result its gross and net profit margins rose.
2017 was a happening year for the company. Singer merged with Waves in 2017 and also successfully launched glass door refrigerator models and inverter air conditioners under the Waves banner. Marketing investments were made in promoting the refrigerators by using Fahad Mustafa and TVCs. CY17 also saw the Electronic Marketing Company begin commercial operations. Another important milestone for the company was the merger with Linkwel Pvt Limited (LWL), a marketing company.
Following the merger, the company's top-line and bottom-line jumped several times as sales of both companies combined. Gross profit margin and net profit margins have declined however. Growth in sales volume of refrigerators through dealer's network did not achieve levels that the company expected despite additional discounts and credit. Intense competition and teething problems in setting up sales team network may have resulted in lower margins. It is pertinent to note that WAVES EPS has increased from 1.01 to 1.1 YoY. This reflects an improvement in profit after tax despite the large increase in share capital base due to merger with CIPL and LWL.
More recently, a fire broke out earlier this year at the production facility of Cool Industries and extensively damaged the factory. The fire started at the dispatch area causing damage to finished goods under dispatch as well as some in the production facility, related building area and work-in-progress pieces.
However, the company issued a statement that production will resume in a few weeks. It is likely that this event will impact this year's financials but since it has managed to overcome the more significant losses caused by 2010's floods, the fire's impact should not be material.
The thought behind the merger of the two entities is to take two smaller companies with similar business lines and turn it into one big company with economies of scale. Both Waves and Singer have established brand reputation and have been household names for decades. Waves slogan of "Naam hi kafi hai" is expected to increase the company's intangible asset base and give better marketing and advertising opportunities.
A number of factors are expected to expand WAVES market, such as better energy supply, GDP growth which leads to a rise in per capita income, and thus increase in purchase of consumer durables. Increase in urbanization and growth in middle-class families is also expected to drive growth. Factors such as high cost of electricity increases demand for energy-efficient air conditioners and hence the recent invertors line by WAVES. As per Euromonitor, Pakistan has amongst the lower household penetration rate of consumer durables in the region. This offers opportunity for future growth.
Another point in WAVES favour is the recent devaluation of the currency. Since the company faces strong competition from cheap Chinese imports, the slide of the rupee will enable it to grow its market share.
WAVES SINGER PAKISTAN LIMITED
Rs. mn 1QCY18 1QCY17 YoY
Net sales 2208 467 373%
Cost of sales 1570 283 455%
Gross profit 638 185 245%
Marketing, selling, and distribution costs (267) (106) 152%
Administrative expenses (100) (20) 400%
Other expenses (8) (2) 300%
Other income 4 29 -86%
Operating profit 267 85 214%
Earned carrying charges 25 11 127%
Finance costs (97) (34) 185%
Profit before tax 195 63 210%
Tax (39) (17) 129%
Profit after tax 156 46 239%
EPS 1.1 1.01 9%
Gross profit margin 29% 40% -27%
Net profit margin 7% 10% -28%
Source: Company accounts
Pattern of shareholding (as on December 31, 2017)
Category No. of shares %
Directors, CEO, their spouses and minor children 12,257,209 27
Associated companies 8,509,024 19
NIT, ICP, investment companies, modarbas & mutual funds 2,962,048 7
Joint stock companies 3,234,717 7
Other companies 30,013 0
General public-local 18,412,611 41
Shareholder holding 5% or more voting interest
Haroon Ahmad Khan 7,002,209 15
Poseidon Synergies (Pvt) Limited 8,509,024 19
Nighat Haroon Khan 2,900,000 6
Source: Company accounts