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Security Papers Limited (PSX: SEPL) was established in 1965 as a private company. It was converted into a public limited company in 1967. The company makes Banknote paper, and other security documents such as Prize Bonds, Defense Savings Certificates, Non-Judicial Stamp Papers, passport papers, and cheque book, certificate for educational boards and degree or universities.

Shareholding pattern

As at June 30, 2021, 60 percent shares are held under the associated companies, undertakings and related parties. Within this, majority are owned by Pakistan Security Printing Corporation (Pvt.) Limited. About 10 percent shares are owned by the local general public, banks, DFIs, NBFIs, and insurance companies. The directors, their spouses and minor children own less than 1 percent shares, while the remaining close to 10 percent shares are with the rest of the shareholder categories.

Historical operational performance

Except in FY15, the company has largely witnessed a growing topline. In the last six years, gross margin has remained more or less stable, whereas operating and net margin grew in FY17, declined in the following two years, before following an upward trajectory until FY21.

Topline in FY18 grew by almost 22 percent to reach Rs 3.5 billion in value terms. This is due to the biggest volume of banknote paper sold to its most prominent customer, Pakistan Security Printing Corporation (Pvt.) Limited. Coupled with this was the rise in selling prices and a higher demand. However, with an increase in input costs, production cost rose marginally to reduce gross margin to 37.3 percent compared to 38.3 percent in the previous year. But, the decline in net margin year on year was more pronounced as it was recorded at 21.3 percent for the year, versus 33 percent in FY17, due to the absence of significant other income from a one-time event of mutual fund redemption that was seen last year.

Revenue continued to grow in FY19, by 15.4 percent to cross Rs 4 billion in value terms. This was attributed to a 12.8 percent rise in sales volumes, in addition to bank note paper witnessing a growth of nearly 20 percent due to demand coming from Pakistan Security Printing Corporation (Pvt.) Limited. The higher revenue also reflected in the gross margin that was recorded at an almost 40 percent- an all-time high. But net margin was lower at 19.3 percent as unrealized loss remeasurement on mutual funds increased other expenses that consumed almost 9 percent of revenue.

The company registered the largest growth rate in FY20 at 22.5 percent to reach close to Rs 5 billion in value terms. Sales volumes were higher by 16.3 percent, whereas each individual segment also witnessed higher volumes due to high demand. This was despite the economic slowdown in the first half of the year, while Covid-19 pandemic in the second half wreaked havoc for majority sectors. With a marginal rise in production cost, gross margin was lower at close to 39 percent. However, net margin, recorded at a considerably higher 26 percent, grew on the back of higher other income that came from mark-up on Pakistan Investment Bonds and Treasury Bills. In value terms, bottomline stood at its highest thus far of Rs 1.3 billion.

The company had been seeing double-digit growth in revenue for the last five years. In FY21, topline grew by a marginal 2 percent. While sales volumes of bank note paper grew by 11 percent, other segments such as passport paper, educational degrees and certificate, etc. saw a decrease in volumes as the impact of Covid-19, and the resultant travel restrictions. With production slightly higher at over 62 percent, gross margin reduced to 37.6 percent. However, net margin received significant support from other income that allowed the former to reach a high of 29 percent- a level last surpassed in FY17. Bottomline, on the other hand, peaked at Rs 1.4 billion. The abnormally higher other income came from gain on remeasurement of mutual fund.

Quarterly results and future outlook

The first quarter of FY22 saw revenue higher by over 14 percent year on year, while sales volumes were higher by 9.2 percent. In addition to higher production cost as a share in revenue, 1QFY22 saw unrealized capital loss of Rs 41 million due to subdued capital market versus unrealized capital gain of Rs 167 million in 1QFY21 that reduced profitability for the period as evidenced by a net margin of 19.2 percent compared to over 36 percent in 1QFY21.

In the second quarter, revenue was almost double in value terms year on year with sales volumes higher by 39 percent. Gross margin for 2QFY22 was significantly better because 2QFY21 had witnessed lockdowns that impacted revenue for the period. However, it received considerable support from other income that was lower in 2QFY22. Thus, net margin for 2QFY22 was only slightly lower at 23.7 percent compared to 24.2 percent in 2QFY21.

The third quarter saw revenue lower by 17 percent year on year as sales volumes declined for the quarter compared to both, the previous quarter, that is 2QFY22, as well as year on year, that is, 3QFY21. However, due to lower production cost, 3QFY22 saw higher gross margin at 37.7 percent versus 35.7 percent in 3QFY21. But net margin was lower at 24.8 percent due to higher operating expenses as a share in revenue. While there have been marginal changes in gross margins, net margin has been significantly impacted by noticeable changes in other income. Moreover, the external environment such as the domestic political scenario, Ukraine-Russia war that raised global commodity prices and inflationary pressures continue to fuel uncertainty.


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