Financial Statement Analysis

PRESENTATION 1
• It looks like things stabilized and turned around remarkably.
• In 1996, Timberland’s profitability was still slightly lower than
the industry average, but its productivity was improving
and its leverage was coming down.
• Timberland was moving more inventory, and not by
cutting prices. If anything, its gross margin indicates that it
was getting pricing power just as it was moving more
goods.
• In 1997, things were even better. The headline number is
quite remarkable as its ROE was almost twice the average
for the industry. And it was getting it from all the right
places.
• It was turning over inventory almost twice as much as it
was in 1994 and it was raising prices, as reflected by its
gross margin.
• The upward trend continued in 1998. Timberland was still
achieving ROEs that were twice the industry average, but
now the ROE was coming entirely from exactly the right
places. ROE was not coming from leverage or productivity.
• It was coming from profitability. So what happened? That
near- death experience prompted a move away from
family management and toward professional
management. That change accompanied Timberland
becoming the chosen brand for hip- hop artists, which led
to the remarkable turnaround in financial performance.
JDW Sugar Mills
 Founded in 1990 as a private limited company in Rahim Yar Khan, Jehangir Tareen's JDW
Sugar Mills Limited (PSX: JDWS) is by far the largest white sugar producer in the country, 2.3
times larger than the second largest mill by output (Hamza Sugar, 2018).
 As of MY18, combined output of company's three units accounts for close to 13.4 percent
of Pakistan's total sugar production. However, the group owns three additional units (detail
below), whose combined output takes group's share in domestic production to 1.26 million
tons or 19 percent of national sugar output. With a market capitalization north of Rs16
billion, JDW is the only sugar mill that consistently qualifies for the KSE100 index
composition.
 From the original Rahim Yar Khan unit, the company expanded and went on to acquire
two more units; JDW Unit 2 (formerly United Sugar Mills) in 2005, while JDW Unit 3 (formerly
Ghotki Sugar Mills) was put up in 2006. The three units put JDW's combined crushing
capacity at 44,000 TCD (tons of cane per day).
 The company has several subsidiaries, including Deharki Sugar Mills (Pvt.) Limited, Faruki
Pulp Mills Limited, Sadiqabad Power (Private) Limited, and Ghotki Power (Private) Limited.
AKT Sugar (formerly: Gulf Sugar (Pvt.) Limited) is a private-limited concern that was
acquired in 2018 by group sponsor Ali Tareen, and is located in Ghotki.
JDW Sugar Mills
 The group is also claimed to have acquired Imperial Sugar Mills' Khanewal unit recently;
however, independent confirmation of the same could not be made.
 The holding company, JDW Group, claims annual revenue of almost Rs50 billion as of
MY19 (MY18: Rs37 billion), and assets of Rs 48 billion (MY19: Rs57 billion). AKT Sugar and JK
Sugar mills are not directly owned subsidiaries of JDW holding.
 While sugar manufacturing is the core business, contributing 80 percent (MY18: 75
percent) of topline the company has also diversified its revenue stream to other related
segments, generating revenue from sale of electricity, molasses, and bagasse led by
corporate farming (2 percent), and co-generation divisions (9.2 percent); whereas
remainder is contributed by sale of by-products such as molasses, agri-inputs to growers,
and bagasse.
 In corporate farming, the company has established efficient and ecofriendly farms with
higher yields, building the capacity of its farmers and giving an improved cane supply. For
co-generation, the company has set up two bagasse-based, high-pressure co-generation
power plants with a total capacity of approximately 53 MW, both of which were
inaugurated in 2014.
 Like rest of the sugar mills in the sectors, JDW's marketing year starts in October and ends in
September 30th. This is in line with historic practices marking beginning of the
crushing/harvest season of sugarcane in the country.
JDW Sugar Mills
Pattern of shareholding
 Three directors/dependents own close to 43 percent of the company: these include ex-
Governor Punjab Mukhdoom Syed Ahmed Mahmud at 26.5 percent, followed by
Jahangir Tareen at 16.4 percent and Mrs. Tareen at 3.8 percent. All in all, over 48 percent
of JDWS stock is thus in the hands of the directors and their dependents.
 Mr. Tareen's son Ali Tareen also holds an additional 13.6 percent; however, does not hold
any official position in the company. Substantial shareholding of 7.4 percent is held by an
individual M/s Rana Nasim, whose related party status or relationship to sponsor family is
not disclosed (7.42 percent). Company executives also 8.8 percent. All figures quoted are
as at September 30, 2019.
 After netting off shareholding held with sponsor family and related parties, general
public/free float comes out at less than 10 percent; however, stock exchange lists free
float of fifteen percent which may include some of the shareholding by substantial
individual shareholders such as company executives.
 Five percent share is also held with a foreign company whose name is not disclosed.
Undisclosed joint-stock companies also hold close to four percent share. Share of banks
and financial institutions is negligible.
JDW Sugar Mills

Historical Performance
 Sugar milling industry recorded a difficult period between MY16 and MY18, when margins
suffered due to surplus in domestic market, export ban, low domestic retail price, and
exorbitant pricing of raw material sugarcane at Rs180 per 40kg.
 Given this level of support price and average national sucrose recovery rate of 10
percent, cost of sugarcane required for production of 1kg white sugar comes out at Rs45
(this has now increased to Rs47.5 per kg for MY20).
 Due to average carry forward stock (at the beginning of crushing season) of between 1.5
– 2 million tons for past three years, the industry claimed that ex-mill price of sugar hovered
between Rs45 – Rs50 per kg, which is insufficient to cover production costs and overheads.
As a result, most midsized mills with limited diversification of revenue streams suffered.
 However, given its diversified revenue stream, JDW has been able to keep its head above
water. The company has been on a growth momentum for past several years, with 5 years
sales CAGR at 10.9 percent between MY12 and MY17.
JDW Sugar Mills
Historical Performance
 One of the secrets to JDW's success has been high recovery rates and high yield. The
company claims that it has enjoyed high yield on cultivation due to two factors. One, over
the years, the company has increased investment in corporate farming, thus using
modern farming techniques such as precision agriculture to maximize output. Second,
since the scale of corporate farming is insufficient to meet demands of installed crushing
capacity, it procures gain from independent farmers and growers from land leased or on
share-cropping basis.
 The management claims that it is one of the few mills in the country that procures
sugarcane from farmers at minimum government set rate to incentivize farmers to invest in
efficient agricultural practices.
 As a result, historically, one of company's three units has delivered highest sucrose
recovery rate in Pakistan; well above the national average.
 MY19 saw very high recovery rates by company's Punjab based units: JDW 1 and JDW 2,
and 11.6 percent and 11.30 percent, respectively. However, weighted average sucrose
recovery rate was lower due to poor performance by JDW 3, at 10.60 percent. Whether
these were the highest recovery rates in the industry is unclear as industry report published
by Pakistan Sugar Mills Association is yet to be published for marketing year 2018-19.
JDW Sugar Mills
Historical Performance
 This is also because southern Punjab region has historically been more climatically
conducive for sugarcane crop, where recovery is more than two percent on average
compared to central Punjab and KP.
 JDW's sugar production maintained an upward trend till MY18 (although it dropped in
MY15 owing to unfavorable crop conditions caused by lack of rain and non-availability of
irrigated water). The company's hold on the domestic market remains strong; exports form
less than fifteen percent of JDW's sugar division sales historically; however, this share grew
to close to 50 percent during MY18 thanks to announcement of generous export quota by
the government at the time. Share of exports once again fell below 17 percent during
MY19 as supply-demand equilibrium was restored in the domestic market due to lower
national output during that season.
 A cursory look at JDW's segment sales confirms that the company has been earning most
of its money from sugar. However, the recent improvement in margins over the past
couple of years could be due to the activity seen in the electricity segment, which saw
two plants come online in 2014. Segment wise profitability analysis is not shared in financial
disclosures.
JDW Sugar Mills
Analysis of subsidy
 A cursory analysis of peer annual accounts published on PSX reveal that MY19 proved to
be a year for recovery for the sugar sector. Mills such as Al-Noor Sugar, and Al-Abbas
Sugar have done well for themselves compared to last year by availing the subsidy on
export, in addition to recovery of sugar prices in domestic market beginning April 2019, as
surplus in the domestic market was diverted toward exports.
 Subsidy of Rs10.7 per kg was announced on export of up to two million tons of white sugar
in October 2017; on first come first basis. The export quota was extended by an additional
one million in 2019 with subsidy of Rs 5 per kg by Punjab government. This subsidy was
announced keeping in view millers' refusal to begin procurement of sugarcane for two
subsequent seasons from growers well into December.
 Millers refusal to procure sugarcane stemmed from carry forward stock of over two million
tons as reported by industry association, PSMA. Furthermore, millers noted that the
government set indicative price of sugarcane was artificially high at Rs180 per 40kg.
JDW Sugar Mills
Analysis of subsidy
 In addition, due to the high cost of production in the domestic market, as well as a surplus
of white sugar globally due to high levels of output by countries such as Brazil, domestic
sugar mills were unable to export competitively without government support. As millers
blame support price for their lack of competitiveness in export market, government had to
announce a subsidy in order to ensure that crushing began before widespread protest by
farmers broke out.
 Mills that were able to secure export orders, thus recorded a jump in revenue and
profitability over previous years. As peer SBP disclosures, JDW also secured orders for export
of close to 200,000 tons of sugar during MY18 resulting in subsidy entitlement of about Rs2
billion. In the following year, the company applied for export quota of close to 120,000
tons of sugar, half of which was against subsidy availed from Punjab government (Jan-Jun
2019).Although the company did enjoy subsidy on exports for six months of MY19, its effect
appears to be marginal due to lower per kilo quantum.
JDW Sugar Mills
Financial Performance
 As sugar price improved in both domestic and international market, especially beginning
June 2019, the company was able to command improved selling prices, which translated
into better profitability compared to MY18 season.
 However, both EBIT and PBT margins are still second lowest for the decade; this appears to
be a function of higher cost of production due to decline in supply of cane, and higher
interest cost. Higher cost of production stems from economies of scale, as a drop in output
means that fixed cost component increased per unit of output. Total crushing for the year
was lower by 33 percent, and while some respite was received due to recovery rate for
11.3 percent – highest in six years – cost of production leaped forward in tandem with
revenue due to low capacity utilization reflecting in poor economies of scale.
 Margins received further battering at the hands of increased interest expense, that grew
on the back of what appears to be an increase in average debt for the period – the
increase in debt servicing costs at the hands of higher discount rate. And were it not for a
reversal of tax liability, bottom line for the year may very well have been in red. However,
interest cover restored over 1x times, indicating that profitability may increase substantially
once discount rate falls.
JDW Sugar Mills
MY20 Outlook
 The industry dynamics are expected to receive a fillip during the ongoing MY20. On the one
hand, increased average selling prices for primary- and by- products sugar and molasses
means that revenue is on substantial recovery. During 1QMY20, topline grew by a massive 62
percent; however, the growth is expected to taper off in coming quarters.
 On the one hand, average cost of production will also see a massive rise during the year, as
raw material cost is expected to average close to Rs220 per 40kg compared to below Rs180
per 40kg in previous years. This is on the back of serious shortfall in raw material cane
availability, backed by increase in minimum support price of sugar by provincial governments.
 On the other hand, beginning February 2020, export of sugar has been banned; meaning
large scale players such as JDW will no longer be able to benefit from the reversal in
international sugar price trends. The increase in sales tax on sugar from 8 to 17 percent in the
last budget will also begin to show its full effect in the ongoing marketing year and may result in
demand compression from buyers in FMCG segment.
 However, as the discount rates are expected to stay stagnant till September, sugar sector's
working capital borrowing will continue at the higher markup till the end of current marketing
year; that will erode before-tax margins; even as core and operating margins continue their
strong recovery of 4pp as indicated in the financials for first quarter.