Sonali Paper, too, makes more money from share business than core operation

Sonali Paper & Board Mills Ltd is yet another company that logged higher profits from equity investment compared to its core business in the first half of the current financial year.

On the back of the higher returns from the stock market investment, the paper manufacturer's profits after tax surged more than seven times to Tk 25.6 crore in the July to December period.

As a result, the share of the low paid-up capital-based company jumped almost four times to Tk 720 in the last six months. Its paid-up capital is Tk 21 crore, data from the Dhaka Stock Exchange (DSE) showed.

Profit before tax from Sonali Paper's stock market operation was Tk 17.84 crore, whereas Tk 17.75 crore came as profit before tax from its core operation, according to its financial statements.

When a company makes more money from its share market investment, then it is clear that its own business is in a tough situation, said a stockbroker.

"Making money is not a bad thing, but the stock market is relatively a risky place to keep funds. And a company's profits may turn into losses overnight."

"Therefore, the investors should be careful. They will be affected if they buy the company's shares considering the current income flow."

The stockbroker says small investors have a tendency to annualise such abnormal earnings of a company by multiplying it by four and then applying the price-earnings ratio to derive the so-called fair value.

"Gamblers cash in on the tendency to make money at the expenses of common investors," he said.

Sonali Paper share closed 3.67 per cent lower at Tk 675.30 on the DSE yesterday. On the last trading day of 2021, it rose to as high as Tk 957.

"There are a few companies that make money in the stock market," said Ali Imam, chief executive officer of Edge Asset Management.

He says in the financial report the return from the stock market must be cited as "non-recurring" income and it should be excluded while calculating the basic EPS (earnings per share).

"People will then be able to better value stocks in the market based on basic EPS."

Md Rashedul Hossain, company secretary of Sonali Paper, says: "Our core business was impacted and sales dropped because of the coronavirus pandemic as educational institutions have been largely closed. So, the management decided to invest in the stock market."

However, the company's financial statement shows that paper sales rose 48 per cent year-on-year to Tk 105 crore in the first half of the current financial year compared to the same period a year ago.

The sales were also up around 1 per cent year-on-year to Tk 141 crore in the last fiscal year of 2020-21.

As of March 31 of 2021, Sonali Paper had no investment in the stock market. On June 30 of last year, the company's share market investment was Tk 43.9 crore and it rose to Tk 45 crore on December 31, showed the financial report.

"The management will decide how long it will keep the fund invested in the market," said Hossain, adding that the business of paper is rebounding.

Sonali Paper is not the only listed company whose profits from equity investment surpassed that from the core business. 

For example, Fortune Shoes earned more money from its stock market investment than its main business of footwear selling during the period.