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Annual Report Analysis Of Keells Food Product Plc

Annual Report Analysis

Of Keells Food Product Plc

Company Introduction

Keells   is  presently  Sri   Lanka’s   market leader  in the  processed  meat  industry. Keells  Food  Products  PLC  (KFP)  started its  operations   in  the   year  1983,  and takes pride  in being  solely responsible for developing the Sri Lankan processed meats industry to its current heights. KFP has kept abreast of the industry through   strategic  investments  in  state of the  art food processing  technology, quality  control  systems  and  an aggressive Company-wide research and development orientation.

KFP world class sausages, meat balls, hams, bacons, cold meats and raw meats combine   gourmet   taste  and  nutrition while offering superior quality. The range offers convenience to meet  today’s demanding   lifestyles  of  consumers  all over the world. We serve certain markets in India, United Arab Emirates and Maldives and are currently in the process of strengthening  our presence  in these regional markets.

KFP sustained its market leadership position in the processed foods category through  a range of marketing strategies aimed at strengthening  its market share, whilst  connecting   more   closely  with the  consumer. The Company has been driving innovation and high brand recall in an effort to enhance the consumption of our products. Based on a combination of consumer feedback and research and development  efforts, we are constantly formulating new products that fulfil the expectations of our consumers.

Being the  pioneer in its industry, KFP  is focused  on  obtaining  the  best  quality raw materials and  services procured  at competitive  rates,  whilst ensuring  that such products and services are delivered to  the  Company in an environmentally and socially responsible manner.

KFP  engages  with its first tier suppliers in ensuring that they have safe working environments, workers being treated with respect and dignity, and that operations are carried out in an environmentally responsible manner. The Company’s first tiers of suppliers are expected to operate in full compliance  with the  laws, rules, and  regulations  which  are    applicable to  the  practices  of the  Company.  KFP strives to ensure that  fair and equitable prices are  made  available to  suppliers, while a rigorous engagement mechanism with suppliers helps to safeguard the Company and avoid a breakdown of the supply chain. To mitigate the risk of the cyclical behaviour patterns  exhibited by poultry vendors, the  Company stepped up efforts to develop a reliable base of chicken suppliers and intends to develop suppliers for Pork in the future.

While a  suitable  pricing  structure  was worked out  to provide suppliers with a stable livelihood, to purchase most of the raw  materials  locally which  stimulates local  economies,  regular  awareness  is also provided by way of continuous site visits by relevant management teams at which constructive feedback is given for improvements.   Suppliers are also further assessed for labour practices, Human Rights and environmental impacts, using the established Group-wide Supplier Assessment  Process  Criteria Developed by   the   Group   Sustainability  Division. The   Company  is  aware  that   changes in weather patterns can impact crop yields,  and  thereby  adversely affecting its overall operations to this end, it pro- actively engages  with its diverse farmer communities  to  adhere  to  agricultural practices that are environmentally sound and result in high yields. Training programs were conducted in collaboration with the Department  of Animal Health covering number of areas including the importance of timely vaccination and general animal hygiene standards.

The streamlined supply chain management process that we adopt enables  us to ensure the  quality of the produce that we purchase. Placing much emphasis  on  the  quality of the  crops, we  also  offer  our  grower  community the   relevant   technical   input   needed to  improve their yield and  conform  to KFP’s   quality  assurance   standards.   In the case of animal farmers, we strive to educate   them   on  the  critical aspects of animal husbandry, including animal health,  timely inoculations,  importance of timely vaccination and general animal hygiene  standards  with  guidance  from the  Department  of Animal Health. The overriding emphasis  placed  on  quality has prompted  our sustainable  sourcing partner for spices, the Kandy Vanilla Growers Association  (KVGA)   to  seek  a Good Manufacturing Practices (GMP) accreditation from the Sri Lanka Standards Institute  for  its  processing  facility and grinding mill at Raththota.

KFP also strengthened  existing relationships with the  KVGA  which has been   supplying  the   Company’s  spice and vegetable requirements. This farmer- outgrower  model  has  for  many  years been a source of stability for these farmer communities, while at the same time providing the Company with a guaranteed supply of high quality produce.

The  spices  procured  by  KFP  increased in volume as well as value from last year to this year and the total payout for the spices procured  for the  year was Rs.  48 million.  The Company also procured vegetables for a total value of Rs. 32 million during the year.

1)    Horizontal Analysis(Refer theExcel)

Income Statement
Horizontal Analysis	2012 % Change	2013 % Change	2014 % Change	2015% Change
Revenue	7.67	(5.64)	3.76	14.82
Cost of sales	7.05	(1.58)	2.03	5.43
Gross profit	9.66	(18.41)	10.31	47.76
Other operating income	(68.17)	(37.04)	9.63	13.42
Selling and distribution expenses	4.28	(6.26)	(4.37)	3.77
Administrative expenses	7.82	16.25	10.48	(2.30)
Voluntary retirement scheme expense
Impairment of Foreign Investment
Other operating expenses	(33.32)	30.09	5.25	12.83
Operating profit/(loss)	632.65	(64.35)	(145.38)	(1,235.01)
Finance costs	(48.42)	248.60	35.32	(45.01)
Finance income		1,967.75	(25.31)	(78.29)
Net finance income		(1,389.78)	(57.31)	(133.97)
Profit/(loss) before tax	1,619.52	(35.90)	(107.35)	(3,998.06)
Tax (expense)/reversal	(21.76)	(52.30)	(151.05)	(664.55)
Profit for the year	(336.49)	(29.44)	(95.70)	6,543.81

2)    Vertical Analysis (Refer the excel)

Income Statement
Vertical Analysis	2011	2012	2012	2013	2013	2014	2014	2015
Revenue	100%	100%	100%	100%	100%	100%	100%	100%
Cost of sales	(76.31)	(75.88)	(75.88)	(79.14)	(79.14)	(77.82)	(77.82)	(71.46)
Gross profit	23.69	29.84	24.12	78.80	20.86	57.19	22.18	71.49
Other operating income	0.31	(9.22)	0.20	2.01	0.22	0.52	0.21	0.20
Selling and distribution expenses	(11.01)	(6.15)	(10.66)	(11.85)	(10.59)	12.31	(9.76)	(2.49)
Administrative expenses	(4.03)	(4.03)	(4.04)	(4.04)	(4.98)	(4.98)	(5.30)	(5.30)
Voluntary retirement scheme expense
Impairment of Foreign Investment
Other operating expenses	-3%	-2%	-2%	-3%	-3%	-3%	-3%	-2%
Operating profit/(loss)	1.16	7.91	7.91	2.99	2.99	(1.31)	(1.31)	12.92
Finance costs
Finance income
Net finance income

3)   Ratio Analysis (Refer the excel)

3.1 liquidity & Efficiency

liquidity &  Efficiency
Current Ratio	Current Assets/CurrentLiabilities	1.44	1.91	2.33	2.27	2.65
Acid-test Ratio	Quick Assets /Current Liabilities	0.72	0.99	1.89	1.6	1.99
Accounts Receivable  Turnover	Sales on Account /  Account  Receivable	10.31	10.75	10.91	9.87	9.76
Merchandise Turnover	Cost of Goods Sold /Average Inventory	11.06	12.12	13.71	17.91	16.69
Total Asset Turnover	Revenues/Average Total Assets	5.60	5.73	1.77	2.18	2.26

3.2 Solvency Ratio

Solvency
Debt Ratio	Total Liabilities/Total Assets	0.59	0.45	0.36	0.26	0.27
Equity Ratio	Total Shareholders’ Equity/Total Assets	0.41	0.55	0.64	0.74	0.73
Times Interest Earned	Net Income before Interest Expense and Income Taxes/Interest Expense	1.72	24.37	2.49	(0.84)	17.25

3.3 Profitability Ration

Profitability
Profit  Margin	Net Income/Net Sales	(0.11)	0.23	0.20	0.01	0.35
Gross Margin	Net Sales - Cost of Sales/Net Sales	0.24	0.24	0.21	0.22	0.29
Return on Total Assets	Net Income /Average Total Assets	(0.14)	0.32	0.07	0.00	0.23

Marcket
Price-Earnings Ratio	Market Price Per Share  /Earnings Per Share	41.99	6.87	16	2,750	11
Dividend Yield	Annual Dividends Per Share/Market Price Per Share	N/A	N/A	N/A	4	5

4) Financial Review

4.1. Revenue

The Revenue of the Company increased by  15% to  Rs.  2,618 million (Rs.  2,280 million in 2013/14) on the back of both volume growth as well as an increase in the average selling price per kilo.  Volume growth   was   seen   across   the   entire product  portfolio with several products achieving double  digit growth.   From a channel perspective too it was pleasing to note that all channels performing up to expectation. The increase in the average selling price per kilo was achieved through an effective change in the sales mix.

4.2 Dividends

A First  and  Final  Dividend of Rs.2/- per share  for  the  financial year  2013/2014 (Rs. 2/- 2012/13 ) was paid on the 17th of June 2014. An Interim Dividend of Rs.3/- per share for the financial year 2014/2015 (Nil 2013/14) was paid on the 10th of December 2014. The Board of Directors has now approved a Final  Dividend of Rs.7/-  per  share for 2014/15 to be paid on the 29th of May 2015 to those shareholders on the register as of the 19th May 2015. In  accordance with Sri Lanka Accounting and Reporting Standards 10, events after the reporting period,  the  declared  dividend  has  not been  recognised as a liability as at 31st March 2015. As  required  by  section  56  (2) of  the Companies Act, No. 7 of 2007, the  Board of   Directors   has confirmed   that  the Company  satisfies the  solvency test  in accordance with section 57 of Companies Act, No. 7 of 2007 and a certificate has been obtained from the auditors, prior to declaring all dividends. Dividend per share has been  computed for all periods based  on the  number  of shares in issue at the time of the dividend payout. The  dividends  are  paid  out  of taxable profits  of  the   Company  and   will be subjected to a 10% withholding tax.

4.3 Gross Profit

Gross   profit   of   the    Company   was Rs. 747 million representing a 48% increase over the Rs. 506 million recorded in the previous year. This improvement  was as a result of a combination  of increased revenue, and  effective management of raw material costs and related production overheads. The Company was able to increase its Gross Profit Margin to  29% from the 22% in the previous year

4.4 Other Operating Income

Other  income  increased  marginally to Rs. 5.6 million from the previous year of Rs.

4.9 million.

4.5 Administration Expenses

Administration cost decreased  by 2% to Rs. 118 million from Rs. 121 million in the

Previous year,  as a result of the reduction in staff transport cost due to Ja-Ela facility operations   moving into an one shift operation post the VRS

4.6 Profit from Operating Activities

The Company posted  a Profit Before Tax of Rs. 331 million as compared  to a loss of Rs. 8.5 million in the previous year. The previous year results were impacted  by the cost of the VRS which amounted to Rs. 139 million. However even after excluding the impact of the VRS from the previous year’s results the  Profit from  Operating Activities improved significantly to post a growth of 154%.

At the consolidated level the Profit Before Tax was also Rs. 331 million compared to the Loss of Rs. 11.9 million in the previous year.

4.7 Liquidity

The  Company’s  key sources  of finance for the year under review were cash generated  from operations and the surplus funds brought  forward from the previous year. The Company ensured the adequacy of liquidity to service debt and meet future requirements of working capital and capital expenditure.

The Company operates its own treasury function assisted by the Treasury Division of the Parent Company John Keells Holdings  PLC   based   on   the   policies and  plans approved  by the  Board. Our Treasury  manages  a  variety of  market risks,  including  the  effects  of  changes in foreign exchange  rates, interest rates and liquidity. Further details of the management of  these  risks are  given in Note 12 to the  Financial Statements. The role of the Treasury is to ensure that appropriate financing is available for all value-creating investments. Additionally, the Treasury delivers financial services to  allow the  Company  to  manage  its financial transactions and exposures in an efficient, timely and low-cost manner. Cash generated from operations inclusive   of    working capital changes was a positive figure of Rs. 399.7 million in comparison to a negative figure of Rs. 237.1 million in the previous year,  the significant increase in operating  profits resulted in this growth.

The Gearing Ratio at  of the  Company declined  to 12.5% against 15.9% in the previous year.

The Company’s key sources  of finance, for the foreseeable future are likely to be cash generated  from operations, with an effective combination  of long-term and short-term borrowings. Therefore it is expected that the said sources of finance will provide sufficient liquidity to service debt and meet future working capital and capital expenditure requirements.

4.8 Shareholder Value

The     Company’s     strategic     priorities are primarily focused on delivering shareholder value through the achievement of sustainable, capital efficient and long term profitability growth. The basic Earnings per Share (EPS) for the Group was at Rs. 10.25  (Rs. 0.02 - 2013/14). The  Group’s  net   assets  per   share  at book value stood at Rs. 66.62 (Rs. 60.77 - 2013/14) whilst for the Company it stood at Rs. 66.57  (Rs. 60.72  - 2013/14). The  Company’s  share  price  which  was Rs.  55 at the  beginning  of the  financial year increased  to  Rs.  108.30 as at  31st March 2015 moving within a range of Rs. 52.00 to Rs. 119.80 during the year.

The market capitalisation of the Company was Rs. 2,762 million (Rs. 1,403 million in 2013/14) as at the  end  of the  financial year.. Return on Equity (ROE) for the Company was  16.1% (0.25 %  -  2013/14)  whilst Return on  Capital Employed (ROCE)  for the Company was 18.2% (negative 1.6% -2013/14)