Eastern Merchants : Annual Report 2021/22

Eastern Merchants PLC

Annual Report 2021/22

Our Journey

Eastern Merchants PLC was founded in 1945 through the endeavours of two brothers, Sumane and Winton Karunaratne, with an initial working capital of USD 50 accompanied by an incredible will to succeed. The first modest office of this export business was located in Fort, within the Central Business District of Colombo. Their primary export was cinnamon bark oil, a commodity that was traditionally traded by their father and grandfather.

From its humble beginnings, Eastern Merchants has now developed into a major trading house. The level of integrity and dedication that the founders instilled is the standard of excellence still maintained by its employees today. The aspirations and ambitions of the founders have been realised through the Company's growing success, and in 1981, Eastern Merchants became a Public Quoted Company trading on the Colombo Stock Exchange.

In what is a new era in the development of Eastern Merchants, the grandsons of the Karunaratne brothers have now joined the Company to continue the legacy left by their grandfathers. Proud of its past and its commitment to loyalty and integrity, Eastern Merchants looks forward to continued expansion and progress in the years to come.

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Annual Report 2021/22

Eastern Merchants PLC

Financial Highlights

	2017/18	2018/19	2019/20	2020/21	2021/22
Performance Parameters
Sales (LKR Mn.)	1,378	1,560	2,235	2,031	3,356
Gross Profit (LKR Mn.)	66	157	226	315	445
Net Profit Before Taxation (LKR Mn.)	(24)	60	(34)	49	688
Net Profit After Taxation (LKR Mn.)	(20)	61	(39)	9	655
Total Comprehensive Income After Taxation (LKR Mn.)	(18)	226	(46)	8	730
Shareholders' Funds (LKR Mn.)	1,634	1,873	1,787	1,811	2,044
Earnings per Share (LKR)	(0.17)	0.58	(0.61)	0.07	5.59
Dividend per Share (LKR)	-	-	-	-	-
Price/Earnings Ratio (%)	-	6.72	-	84.29	1.62
Net Assets per Share (LKR)	13.87	15.74	15.35	15.43	17.41
Current Ratio (%)	5.49	1.07	1.05	1.14	1.72
Share Price
Highest Recorded (LKR)	8.40	6.00	7.00	6.20	9.70
Lowest Recorded (LKR)	5.10	3.70	2.90	2.90	5.70
Value as at Year End (LKR)	5.60	3.90	2.90	5.90	9.00

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Eastern Merchants PLC

Annual Report 2021/22

Chairman's Message

I am pleased to present the Annual Report of Eastern Merchants PLC, for the year ended 31 March 2022.

As a company that has been in business for over 77 years, Eastern Merchants is no stranger to difficult and turbulent times. The ongoing COVID-19 pandemic, the grave economic crisis in Sri Lanka and signs of a faltering global economy have created a very challenging set of circumstances for businesses and people alike. It has given us good reasons to focus on what matters the most; building resilience, strengthening relationships, and supporting each other.

According to the International Monetary Fund ("IMF") the global economy made a tentative recovery recording a growth of 6.1% for 2021 despite the continued effects of the pandemic. However, with the increasingly gloomy developments brought on by the war in Ukraine as well as the prolonged lockdowns and reducing economic activity in China, the IMF predicts economic growth to slow down sharply to around 3.2% in 2022. Record high inflation figures being registered around the world are also stoking fears of another global recession, which will no doubt further impact global growth prospects. At home, the economic outlook is not encouraging with soaring inflation, power disruptions and rationing of fuel. The macroeconomic stabilisation measures such as the removal of price controls and the sharp increase in electricity tariffs will increase the costs of doing business locally.

Global fluctuation in commodity prices, including that of rubber, together with the continued disruption to global logistics presented many challenges to our trading business. Although the local agricultural sector recorded a slight recovery and growth of 2% in 2021 compared to 2020, the rubber sector continued to contract with declining output, further exacerbated by adverse weather conditions. The Government's ill-informed decision to prohibit the import of chemical fertiliser and pesticides is undoubtedly a contributing factor to the 1.7% decline in the rubber output along with other crops such as vegetables (-2.5%) and fruits (-7.5%). The full effect of this prohibition will be seen in FY 2022/23.

Despite the chaos and tough business conditions, your Company has acted with agility and responsibility to overcome challenges and deliver value. The Group recorded a revenue of LKR 3.3 Bn. and a consolidated net profit after tax of LKR 655 Mn. for the year. A significant share of the profit is due to the sale of our warehouse complex based in Sapugaskanda. Adjusting for this, the Group profit is around LKR 125 Mn.

Our strength in supply chain has also enabled us to procure and ensure continuous supply of raw materials to our rubber goods manufacturing arm, Microcells (Pvt) Ltd. ("MCL"), enabling us to continue production and meet the commitments to our customers in a timely manner. The demand for MCL products eased off a little from the high experienced in FY 2020/21 due to COVID-19. However, MCL net profit increased by 46%.

At Eastern Merchants we have always valued and placed great emphasis on our relationships. The strength of our relationships have enabled us to navigate these difficult times in a much smoother manner. We have grown our supply base and have reached new markets for many of the agricultural commodities traded. I am happy to note that the strong growth in the export volumes of our fresh fruit and vegetables business has especially exceeded our initial expectations by recording a revenue of LKR 54 Mn. in a relatively short period of time.

As exporters, we are keenly aware of the responsibility we have towards the country at this critical juncture. To this end, we have taken every step to ensure that our business model is strong and continues to generate valuable foreign currency for Sri Lanka. We have invested in people and technologies, rationalised our assets and have put in careful thought and deliberation into planning our expansion activities, so that we continue to grow no matter how problematic the conditions are.

I remain optimistic for the year ahead and am thankful to our team, who have shown the courage to change and grow through some of the most difficult times we have seen. I am also grateful to all our partners, suppliers and clients for the continued friendship and support.

J B L de Silva

Chairman

30 August 2022

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Annual Report 2021/22

Eastern Merchants PLC

Management Discussion and Analysis

The following discussion and analysis should be read in conjunction with the Audited Consolidated Financial Statements of the Group for the year ended 31 March 2022.

External Outlook

As we get deeper into 2022, Sri Lanka's economic woes due to fiscal and external imbalances continue to worsen. The Sri Lankan economy contracted by 1.6% and headline inflation measured by the Colombo Consumer Price Index ("CCPI") reached 18% in the first quarter of 2022 compared to that of the previous year. According to the Central Bank of Sri Lanka ("CBSL") Business Confidence Survey in the second quarter of 2022, businesses conditions deteriorated significantly in comparison to the previous year due to several supply side constraints including fuel and power shortages, as well as lower liquidity of foreign exchange in the banking system. The prevailing high interest rate climate discourages investments, however due to skyrocketing input prices, many businesses are expected to be pushed to borrow for operational purposes at high costs, reducing overall financial profitability.

In its recent report the IMF has revised its global economic outlook downwards. The IMF Managing Director recently stated that economic uncertainty levels are exceptionally high owing to the war in Ukraine, the continuing pandemic related disruptions and renewed bottlenecks in the global supply chain. Global financial conditions have tightened and will continue to do so as global inflation is expected to reach 7.5% due food, fuel, and supply chain issues. However, the landmark agreement signed by Russia and Ukraine enabling the safe transportation of grains and food stuff from Ukrainian ports may help in relieving some of the inflationary pressures.

As an exporter, the global economic outlook has a massive impact on the demand for our products and our profitability. We could expect demand for all our products to decline if high inflation persists in the world's leading economies and the global economy plunges into recession. On the positive side, we are experiencing declines in the prices of some raw materials used in our manufacturing activities at Microcells (Pvt) Ltd. ("MCL"). This combined with the steep depreciation of the Sri Lankan rupee and declining international freight costs should provide some protection to our margins. All in all, we expect the net impact of all these factors to translate into thinner margins across the Group in the year ahead.

Financial Performance for 2021/22

Sales

The Group revenue has increased by 65% when compared to FY 2020/21. This is largely due to the recovery in sales experienced with the easing of COVID restrictions around

the world post 2020. High contract values due to high prices also contributed towards the increased sales revenue. Our Singaporean subsidiary Eastern Merchants Commodities (Pte) Ltd. doubled its revenue over the past year due to increase in sales volumes.

Sales (LKR Mn.)

				3,356
1,378	1,560	2,235	2,031	605.86
FY 17/18	FY 18/19	FY 19/20	FY 20/21	FY 21/22

Gross Profit

The Group gross profit and the GP margin has grown over the last five years owing to prudent trading practices as well as stringent cost control and sourcing initiatives. The GP has grown by 42% year on year.

Gross Profit (LKR Mn.)

				445
			315	605.86
		226
	157
66
FY 17/18	FY 18/19	FY 19/20	FY 20/21	FY 21/22

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Eastern Merchants PLC

Annual Report 2021/22

Management Discussion and Analysis

Net Profit

The net profit grew significantly over the past financial year, recording a 72 times growth year on year. The majority of the profit is due to the sale of the Sapugaskanda Stores Complex. Adjusting for this one-off impact, the net profit for the Group is LKR 125 Mn., which represents a growth of over 14 times in profitability. Cost management and the rupee depreciation have also contributed towards this growth.

Net Profit After Tax (LKR Mn.)

				655
	61
			9
-20		39
		-
FY 17/18	FY 18/19	FY 19/20	FY 20/21	FY 21/22

Current Ratio

The Group's current ratio has remained largely consistent throughout the years, but it has now improved further to a healthy level of 1.7. The Group has improved its liquidity position over the last year due to the sale of a major asset.

Current Ratio (Times)

5.49
	1.07	1.05	1.06	1.70
FY 17/18	FY 18/19	FY 19/20	FY 20/21	FY 21/22

Operational Overview

Commodity Trading

Our primary commodity traded is natural rubber, however we also trade and export Ceylon cinnamon, coco fibre, desiccated coconut, fresh fruit, and vegetables. The revenue split for the commodities traded by the Group is given below:

Trading Basket of Goods

Cinnamon - 3%	2% - Fibre
	5% - Fresh Produce
90% - Rubber

Sri Lanka is home to a thriving rubber products manufacturing industry and is responsible for supplying around 25% of the world's pneumatic and solid tires. According to the Export Development Board ("EDB"), 70% of the natural rubber produced in Sri Lanka is consumed locally. This leaves little natural rubber for export purposes and often our local prices are much higher compared to other global producers. With ever decreasing yields in our plantations, which have been recently hampered by erratic weather patterns and disease, our export volumes continue to decline. However, at Eastern Merchants we have been able to build up and maintain an impressive customer base over the years, and with our strong brand name in the rubber world, we are still able to find buyers for our Sri Lankan rubber even at higher prices. We consistently look for new ways of doing business and new products to offer our customers.

Given the supply constraints of Sri Lankan natural rubber, we have invested a lot of time and energy in building up a wide supply network across many rubber producing countries, including several frontier markets such as Liberia, Ivory Coast and Ghana. The rubber sourced from these foreign origins are of good quality and is significantly cheaper than Sri Lanka. We now import a lot of this foreign origin rubber into Sri Lanka for the local rubber industries to consume, and also ship directly to our global customer base located outside Sri Lanka.

The fresh produce export business that we ramped up during the 2021/22 financial year has grown much faster than originally anticipated, and has doubled in volume and revenue during the year. Currently we are shipping out a mix of king coconut, tapioca, red papaya, and green papaya.

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