Verdict
Merit Packaging Limited’s FY2026 headline turnaround is real in accounting terms but weak in earnings quality. The company moved from a PKR 599.7 million loss to PKR 123.6 million profit after tax, yet a PKR 505.7 million gain on disposing of the Gravure division was larger than the entire reported profit. Excluding that gain, operating activities still produced an estimated PKR 166.9 million loss. The encouraging part is that this underlying operating loss was roughly half the prior year’s PKR 350.3 million loss, while finance cost, short-term borrowing and current liabilities all fell sharply.
The result therefore reads as a restructuring year rather than a completed operating recovery. Gross profit turned positive, overheads declined and leverage improved, but sales contracted, cash generated from operations fell heavily and net operating cash flow was negative. Investors should treat the disposal gain as non-recurring and focus next on whether the remaining packaging business can sustain positive gross margins and cross the operating break-even point without asset-sale support.
Results at a glance
The audited standalone financial statements cover the year ended June 30, 2026 and are presented in Pakistani rupees. The auditor issued an unmodified opinion. Revenue recognition was identified as a key audit matter, reflecting the significance and volume of sales transactions rather than a qualification of the accounts.
Net revenue was PKR 3.427 billion, down 35.1% from PKR 5.281 billion. Management attributes the decline mainly to the deliberate disposal of the Gravure division, so the contraction does not represent a simple like-for-like collapse in demand. The filing does not provide a clean price-volume-mix bridge for the continuing business, and capacity utilization is not disclosed because production varies across machines and product specifications.
Gross profit was PKR 59.6 million, reversing the previous year’s PKR 28.7 million gross loss. That lifted gross margin to 1.7% from negative 0.5%. The margin remains thin, but the change is meaningful: cost of sales fell faster than revenue. Management links the improvement to operating efficiencies, wastage controls and austerity measures. The filing does not quantify each initiative’s contribution, so that explanation should be read as management attribution rather than a separately verifiable decomposition.
Reported operating profit was PKR 338.8 million versus a PKR 350.3 million operating loss. However, other income surged to PKR 591.8 million from PKR 27.8 million and included the PKR 505.7 million disposal gain. Removing only that disclosed gain leaves an estimated operating loss of PKR 166.9 million. On the same basis, the underlying operating deficit narrowed by about PKR 183.4 million, or 52.4%, from the prior-year reported operating loss.
Finance charges fell 46.9% to PKR 97.2 million from PKR 183.1 million. Management cites lower use of running finance and lower KIBOR. Profit before taxation and levy was PKR 241.6 million. A PKR 48.2 million levy reduced profit before taxation to PKR 193.4 million, and PKR 69.8 million tax expense then produced profit after tax of PKR 123.6 million. Basic and diluted earnings per share were PKR 0.62, compared with a PKR 3.00 loss per share in FY2025. No dividend was declared because accumulated losses remain.
What improved
The biggest operational improvement was the swing at gross level. Merit generated nearly the same amount of gross profit on a substantially smaller revenue base, indicating that the retained business and cost controls performed better than the FY2025 aggregate. General and administrative expense declined 10.1% to PKR 192.7 million, while selling and distribution expense fell 27.7% to PKR 89.6 million. Including a PKR 6.5 million expected-credit-loss allowance, these three expense lines totaled PKR 288.8 million, 14.6% below the comparable PKR 338.3 million.
The balance sheet also became less dependent on short-term financing. Short-term borrowings fell 81.3% to PKR 157.6 million from PKR 841.3 million. Including the PKR 250.0 million subordinated loan and lease liabilities, interest-bearing obligations were approximately PKR 541.3 million, down about 47% year on year. Current liabilities dropped 47.3% to PKR 1.244 billion, and the current ratio improved to about 1.37 times from 0.86 times.
Working capital was leaner. Inventory declined 45.3% to PKR 298.5 million and trade receivables fell 6.4% to PKR 742.3 million. The cash-flow reconciliation shows an inventory release of PKR 247.1 million and a PKR 50.4 million release from receivables. Equity increased 5.4% to PKR 2.394 billion as profit and other comprehensive movements reduced accumulated losses to PKR 1.377 billion from PKR 1.767 billion.
What weakened or needs attention
The continuing operation has not yet demonstrated durable profitability. Even after the gross-margin recovery, recurring operating expenses exceeded gross profit by a wide margin. The estimated PKR 166.9 million operating loss after removing the Gravure gain is a much better outcome than FY2025, but it still shows that the retained revenue base has not crossed break-even.
Cash conversion was the clearest weakness. Cash generated from operations fell to PKR 25.3 million from PKR 311.6 million. After PKR 150.0 million of taxes and PKR 81.3 million of finance charges, net cash used in operating activities was PKR 206.0 million, compared with PKR 28.9 million generated in FY2025. After PKR 28.5 million of capital expenditure, operating cash flow less capital expenditure was negative PKR 234.5 million.
The working-capital release from inventory and receivables did not translate into stronger operating cash because trade and other payables decreased by PKR 367.6 million. That is balance-sheet repair, but it consumed cash. The year-end cash and bank balance was PKR 10.3 million; after running-finance balances, cash and cash equivalents were negative PKR 147.3 million. The reported profit therefore should not be read as equivalent to cash earnings.
Raw-material conditions remain a risk. Management says pulp and paperboard costs increased during the first half of FY2026 and expects prices to remain firm or rise, while local selling prices remain competitive. The filing does not disclose a quantified price-volume-cost sensitivity, so the practical test is whether the company can preserve its newly positive gross margin as input costs change.
The disposal and earnings quality
Merit sold the Gravure division to Kompass (Private) Limited for PKR 1.0 billion and recognized a PKR 505.7 million gain. The proceeds were fully received during FY2026. This transaction explains both the large investing cash inflow and much of the year’s debt reduction. Net investing cash flow was positive PKR 980.2 million, dominated by the disposal proceeds, while financing cash outflow was PKR 82.8 million.
The transaction improved liquidity and simplified the operating portfolio, but it cannot recur every year. Excluding the disposal gain does not attempt to create a complete alternative earnings measure: other income also included items such as scrap sales and a liability no longer payable. It is simply the most transparent way to show why reported profit and recurring operations tell different stories.
Total assets fell 20.0% to PKR 4.015 billion, reflecting the disposal and broader working-capital reduction. The smaller asset base is not automatically negative if it can earn adequate margins, but FY2026 does not yet establish that outcome. The benefit of reduced leverage will increasingly depend on the retained business generating operating cash rather than on further asset sales.
What to monitor next
First, watch gross margin. A margin above zero is a necessary step, but 1.7% leaves little room for input-cost or pricing pressure. Second, watch whether the estimated underlying operating loss continues to narrow after the Gravure division is absent for a full comparable year. Third, track finance cost and short-term borrowing: the FY2026 reduction should provide a lasting benefit if running-finance needs remain controlled.
Fourth, operating cash flow must reconnect with reported earnings. Inventory and receivables have already declined, so future cash improvement cannot rely indefinitely on working-capital liquidation. A smaller payable outflow, sustainable customer collections and positive operating profit would be more durable sources. Fifth, monitor whether management converts its stated customer-retention, acquisition and supplier-engagement priorities into a quantified price-volume mix and a stronger retained revenue base.
The company’s current annual report was transmitted on October 15, 2026. PSX records show earlier annual-report transmissions on October 6, 7 and 8 as revoked, so this analysis uses the October 15 filing and the audited financial statements it contains. There was no dividend for FY2026.
AlphaGen model scores
These are AlphaGen model outputs, not company-reported figures: Alpha QoQ Score 66.26; TTM Performance Score 84.46; 3Y Business Perf Score 57.96; Sector Leadership Score 34.68. The scores should be read alongside the filing-based evidence above, particularly the non-recurring disposal gain and negative operating cash flow.
Evidence limitations
The audited filing establishes the result, balance sheet, cash flow, disposal and management’s stated drivers. It does not disclose a continuing-business price-volume-mix bridge, a product-level margin split or comparable capacity utilization. Those gaps do not prevent a defensible assessment of the earnings, but they limit attribution of the revenue decline and gross-margin improvement beyond management’s stated explanations.
Primary sources
Merit Packaging Limited — Annual Report 2026 (current PSX filing, October 15, 2026)
Pakistan Stock Exchange — MERIT company announcements and filings