Security Papers Limited (PSX: SEPL) was established in 1965 as a private company. It was converted into a public limited company two years later, in 1967. The company manufactures banknote paper and other security documents that include prize bonds, Defense Savings Certificates, Non-Judicial Stamp Papers, passport papers, cheque book, certificate for educational boards and degree for universities.
Shareholding pattern
Security Papers Limited is primarily held by the associated companies, undertakings, and related parties with 60 percent of the company’s shares held under this category. Within this, Pakistan Security Printing Corporation (Private) Limited holds 40 percent of the shares. About 11 percent are held under public sector companies and corporations; in this, the key shareholder is the State Life Insurance Corporation of Pakistan. Around 10 percent is distributed with the general public while directors, CEO, their spouses, and minor children hold a negligible less than 1 percent of the shares of the company.
Historical operational performance
Initially Security Papers Limited saw its profit margins rising; they peaked in FY17 and fell subsequently only to rise again in FY20. Topline, on the other hand, saw a positive growth rate for a large part of the given years, with the exception of FY15.
In FY15, Security Papers witnessed a 4 percent decline in its topline due to low demand for other security paper. Production was also lower at 2,210 tons compared to last year’s 2,405 tons. Cost of production as a percentage of revenue, on the other hand, was lower allowing gross margins to improve, while operating margin was lifted by a significant rise in other income. Higher other income was generated through “better returns on investment of surplus funds”. With minimal changes in other factors, the effect of the former was reflected in the bottomline and net margins.
The company saw commendable growth in revenue during FY16, at nearly 21 percent. There was significant growth in both production and sales volume, with the former standing at 2,657 tons and latter 2,658 tons. Most of this incline was brought about by banknote paper, the core business of Security Papers, while other security paper divisions also performed well. Cost of production as a percentage of revenue was also lower than last year, improving gross margins. Cost of production was reduced by controlling production wastages and working closely with the manufacturers of cotton comber; a by-product of cotton yarn spinning industry. Along with this, finance cost also reduced due to a reduction in long term finance, thereby increasing profit margins year on year.
In FY17, sales revenue continued to grow, although at a relatively lower rate than that seen in the last year, at 10 percent. Production was at the highest seen so far at 2,822 tons whereas sales volume was also comparatively higher at 2,858 tons. In addition, the company was also able to negotiate a price increase with its major customer, Pakistan Security Printing Corporation (Private) Limited. On the other hand, cost of production as a percentage of revenue was considerably lower year on year while other income rose notably to make up 18 percent of the revenue. This was generated through gain on redemption of Mutual Fund and dividend income on Mutual Fund. Thus, profit margins peaked during the year.
Topline again increased by almost 22 percent in FY18, leading sales revenue to cross the Rs3 billion mark. This was attributable to higher volumes sold to its major customer Pakistan Security Printing Corporation (Private) Limited, in addition to achieving better sale prices. Moreover, during the year, owing to rising demand, the company increased the pulping capacity for which it installed a set of Beater and Breaker Assemblies and Stainless-Steel Chests. There was a slight incline in cost of production that reduced gross margins marginally, while a significant drop in other income had an adverse effect on the net margin. Last year’s other income was abnormally high to a one-time event of a redemption of mutual fund which was absent this year.
Security Papers continued on its growth trajectory in terms of topline as it grew by a little over 15 percent in FY19. While sales revenue cross Rs 4 billion, sales volume increased to 3,726 tons and banknote paper sales alone grew by almost 20 percent with significant demand coming from Pakistan Security Printing Corporation (Private) Limited. With a reduction in cost of production as a percentage of revenue, gross margins improved, however, the same was not observed for net margin as the latter was marred by an escalation of other expenses that claimed almost 9 percent of the revenue. This came about due to unrealized loss remeasurement on mutual funds.
Recent results and outlook
Security Papers experienced the highest growth rate in FY20 at 22.5 percent. With sales revenue nearing the Rs 5 billion mark, sales volumes rose to 4,335 tons; banknote and prize bonds paper sales grew by close to 13 percent whereas other security paper saw a 90 percent increase. This increase was largely demand-driven. Despite higher sales, cost of production increased only marginally having a negligible impact on gross margins. Net margin, on the other hand, was lifted by an increase in other income coming from mark-up on Pakistan Investment Bonds and Treasury Bills.
Although Covid-19 has had major repercussions for the country’s economy, the company remains positive about the long-term outlook for banknotes and other Security Paper as it expects demand to grow.
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