Unity Foods Limited all set to issue Rs3bn Sukuk to fund working capital requirements

An unlikely spinning mill decided to switch gears three years ago, and enter the edible oil industry three years ago. It then grew at an astonishingly rapid pace that surprised just about everyone: from Rs2.8 billion in fiscal year 2018, its revenue shot up a shocking 407% to Rs14 billion in fiscal year 2019. 

And 2020 is proving no different. In fiscal year 2020, Unity Foods made Rs30 billion. And the first quarter of 2021 has beaten all previous annual results. 

According to a dense and detailed report issued on November 22 by AKD Research (the research department of brokerage house AKD Securities), Unity Foods is all set for further success. 

To that end: the company has strictly relied on raising equity over the last three years to cater to both oil refinery acquisition as well as working capital needs. But now, the company’s management has hinted towards a Sukuk issue of Rs2 billion, along with a green shoe option of Rs1 billion, to cater to working capital needs. 

What is all for? For the company’s aggressive future plans, particularly as management is forecasting  50-60% year-on-year growth in sales for fiscal year 2021. 

But first: what is Unity Foods? After the reverse merger with Taha Spinning Mills Limited in 2016, the company shifted to the business of refining and marketing of edible oil products, animal feed, meal and industrial fats. 

For a former spinning mill, Unity definitely understands the edible oil industry better than most. The introduction of stricter regulatory requirements on sales of edible oil has increased the demand for good quality, hygienic processed edible oil. Unity introduced two new brands, ‘Zauqeen’ and ‘Ehtemaam’, which both cater to the discount segment, and are both incredibly popular.

The company recently acquired a 69% stake in Sunridge Foods as part of its consumer staples strategy. Sunridge is a flour company started in 2015, which has a capacity to produce 36,000 metric tons of wheat flour per year at a plant at Port Qasim.

As of today, the company has two edible oil refinaries at SITE and Port Qasim Authority, while its crushing plants (Soybean and Canola) are in Kotri. Unity has over 450 distributors and five warehouses that supply to 47,000 retail outlets across Pakistan. 

Wilmar International, one of the world’s largest agro food companies, has sizeable stakes in the company. Its subsidiary Unity Wilmar Agro increased its shareholding to 16.41%, while Wilmar Pakistan Holding increased its holding to 7.06% this year. 

The company had already raised Rs4.5 billion through a right issue in 2020 for working capital needs. As per management, the capital structure, as apparent from the recent right share issue, may likely remain tilted towards equity. 

Now, to AKD’s rave assessment of Unity’s earnings: in the first quarter of fiscal year 2021, Unity posted 6.7 times higher consolidated earnings over last year, at Rs621 million. Unity’s venture into the wheat flour segment proved a profitable move, with Sunridge posting impressive gross margins of 23% in the first quarter of fiscal year 2021, with edible oil operating at gross margins of 8%-10%. 

In fact, the company’s management said that while Unity initially focused on bulk edible oil sales, the launch of various branded edible oil products as well as venturing aggressively in the higher margin wheat flour segment elevated the company’s gross margins.

Currently, edible oil accounts for 71% of Unity’s revenues. Bulk oil sales reached Rs13.9 billion in fiscal year 2020, yet in the first quarter of this fiscal year alone, bulk oil sales have already crossed Rs6 billion. A similar situation has played out in the company’s consumer pack oil sections: sales reached Rs7.6 billion in fiscal year 2020,  but crossed Rs2.17 billion in the first quarter of this year. Zauqeen accounted for 55% of consumer pack oil sales in the first quarter, with Dastak at 26%, Ehtimam at 15% and Lagan at 4% share.

Animal feed, which is by-product of the edible oil manufacturing process through seed crushing, contributed 18% to total sales in the first quarter. 

So, what’s next for the company? According to the research report, the company is likely to continue its aggressive expansion plans. 

This includes increasing its flour mill capacity from 130 tons per day to 175 tons per day, and eventually hitting 440 tons per day.  Unity also plans to start producing soap and related products, and establish an oil terminal facility. Then, it will enter into the margarine and shortening production. Unity has also already given a notice to the PSX for the due diligence of Reem Rice Mills, a premium basmati brand in Pakistan with access to local and international markets.

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