Synthetic Products Enterprises Limited

Synthetic Products Enterprises Limited (PSX: SPEL) was incorporated in Pakistan as a private limited company in 1982. The company changed its status into a public limited company in 2008. The principal activity of the company is the manufacturing and sale of plastic auto parts, plastic packaging for food and FMCG industry as well as moulds and dies.

Pattern of Shareholding

As of June 30, 2022, SPEL has a total of 199.736 million shares outstanding which are held by 2408 shareholders. Directors, CEO, their spouse and minor children are the major shareholder of SPEL with an ownership of 66.24 percent shares. Local general public account for 14.97 percent shares of the company followed by associated companies, undertakings and related parties holding 8.67 percent shares. Insurance companies have a stake of 2.98 percent in SPEL while Modarba and Mutual Funds have 2.86 percent shares. Foreign public hold 1.6 percent shares of SPEL. The remaining shares are held by other categories of shareholders with a stake of less than 1 percent in the company.

Performance Trail (2018-22)

Apart from a 10 percent year-on-year dip in 2020, the topline of SPEL has been making great strides in all the years under consideration. Conversely, the bottomline plunged only in 2019 despite a considerable growth in topline. The margins of the company that dipped in 2019 started recovering thereafter to boast their finest version in 2021 and then slumped again in 2022. A sneak into the financial statements will provide interesting insights to decipher the performance trail of SPEL.

In 2019, the topline of SPEL grew by 15 percent year-on-year on the back of growth momentum shown by the local sales. Conversely export sales witnessed a downtick in 2019. Pak Rupee devaluation rendered the raw materials costly for SPEL which took a toll on its gross profit. SPEL’s gross profit slid by 7 percent year-on-year in 2019 with its GP margin clocking in at 17 percent versus 21 percent in 2018. To counterbalance the rising cost of sales, the company restricted its operating expenses which only grew by 6 percent during the year despite inflationary pressure. Yet operating profit posted a plunge of 12 percent year-on-year in 2019 with OP margin standing at 11 percent versus 15 percent in 2018. Other expense provided a breather due to lesser WWF and WPFF during the year, however, other income behaved unfavorably and dipped by 20 percent year-on-year in 2019. Finance cost gave another major blow to the bottomline as it expanded by a whopping 64 percent year-on-year on the back of high discount rate as well as increased borrowings during the year. The result was a bottomline slide of 30 percent year-on- year in 2019 to clock in at Rs.241.19 million with an NP margin of 7 percent versus 11 percent in 2018. EPS stood at Rs. 2.73, 33 percent down from that of 2018.

In 2020, the local as well as the global economy was under the headwinds of COVID-19 which took its toll on the performance of SPEL in the last quarter. In the initial quarters of 2020, the government imposed ban on the purchase of vehicles for the non-filers of income tax and then imposed excise duty on the vehicles. This increased the prices of automobiles and affected SPEL’s sale to the auto sector. The FMCG and food packaging segment of SPEL performed quite well during the year, yet the topline plunged by 10 percent year-on-year in 2020. During the year, export sales grew by 27 percent year-on- year, however, the wretched local performance didn’t let it create any impact on the topline. Low offtake also reduced the cost of sales which helped in keeping the gross profit intact at Rs.573 million in 2020. GP margin grew to 18.5 percent in 2020. The company also controlled its operating expenses which plunged by 4 percent in 2020. This enabled a marginal 2 percent year-on-year growth in operating profit. OP margin clocked in at 13 percent in 2020. Other income and other charges also buttressed the bottomline. Other income boasted a 152 percent year-on-year growth owing to income on unwinding of long-term receivable. Other expense dropped on the back of lesser momentum of loss on the disposal of fixed assets. Financial cost also offered support to the bottomline as it slid by 3 percent year-on-year despite high discount rate in the initial quarters of 2020. While long-term loans grew as SPEL availed the refinance scheme initiated by SBP for the payment of wages and salaries, short-term borrowings dipped during the year. The bottomline was thus able to boast a 7 percent year-on-year growth to clock in at Rs. 258.82 million in 2020 with an EPS of Rs.2.92. NP margin also improved to 8.4 percent in 2020.

In 2021, the company initiated its new production facility in Karachi to cater to the demand recovery. The topline grew tremendously by 35 percent year-on-year in 2021 which was the result of an improved performance in both local and export markets across both business segments. Rising raw materials cost, fuel and electricity charges, salaries and wages as well as repair and maintenance of fixed assets pushed the cost of sales up by 30 percent in 2021, yet gross profit was able to boast a 57 percent improvement over last year. GP margin clocked in at 21.5 percent in 2019. Operating expenses also grew by 12 percent year-on-year in 2021 on the back of inflationary pressure as well as improved sales volume and instigation of a new production facility during the year. The operating income boasted a stunning 77 percent year-on-year growth in 2021 with OP margin hovering in the range of 17 percent. Finance cost stayed quiet on account of low discount rate during the year. While SPEL secured increased long-term borrowings to finance its various capital expenditures, short-term financing considerably reduced during the year which also provided impetus to a 37 percent slip in finance cost in 2021. The bottomline grew by a striking 78 percent year-on-year in 2021 to clock in at Rs.460.24 million with an NP margin of 11 percent. EPS dropped to Rs. 2.3 in 2021 as the company issued 4.5 percent right shares during the year to finance the setup of its new manufacturing facility.

2022 brought a list of new challenges for the company. The political and economic instability coupled with increase in the prices of raw materials and imposition of super tax wreaked havoc on the margins of the company. The topline achieved a significant 51 percent rise mainly coming on the back of a fabulous 78 percent growth in auto segment sales. Food and packing division also grew by 40 percent during the year. Inflation, high discount rate, Pak Rupee devaluation and increase in raw material prices soared the cost of sales, yet SPEL could attain a 38 percent year-on-year rise in its gross profit during 2022. GP margin, however, slid to 20 percent during the year. Operating expenses posted a massive jump of 37 percent during the year. The main culprits behind the elevated operating expense were the market induced increase in salaries, travelling expense and depreciation on fixed assets. The operating profit still continued to expand by 39 percent year-on-year in 2022. Other income grew on the back of scrap sales made during the year coupled with amortization of deferred grant and reversal of provisions for doubtful debts. Conversely, other expense didn’t buttress the bottomline as it grew on account of increased WWF and WPFF during the year. Finance cost gave a major hit to the bottomline as it magnified by 123 percent during the year due to prevailing record high discount rate coupled with a drastic rise in both short-term and long-term borrowings during the year. The imposition of super tax further eroded the bottomline growth which could rise by 17 percent during the year to clock in at Rs.538.93 million in 2022. NP margin dropped to 8.5 percent while EPS clocked in at Rs.2.7 during 2022.

Recent Performance (1HFY23)

During the period under review, the auto segment of SPEL again came under pressure owing to import restrictions. The company focused on its food and packaging segment to bag a 9 percent year-on-year growth in topline in 1HFY23. However, high cost of sales on the back of increased raw material prices, currency devaluation and exorbitant fuel and energy prices took its toll on the gross profit which slid by 6 percent year-on-year in 1HFY23. GP margin also plunged to 17 percent in 1HFY23 from 19.5 percent during the same period last year. Admin and selling expense also collectively grew by 11 percent during 1HFY23 which pushed the operating profit down by 12 percent year-on-year with OP margin clocking in at 12 percent vis-à-vis 15 percent in 1HFY23. Other charges provided some support as it shrank by 21 percent during the period. Other income also grew by 6 percent year-on-year to nullify the other expense. However, the huge finance cost weakened the bottomline which shrank by 22 percent year-on-year in 1HFY23 to clock in at Rs.200.48 with an NP margin of 6.6 percent versus 9 percent in 1HFY22. EPS clocked in at Rs.1 in 1HFY23 versus Rs.1.29 during the same period last year.

Future Outlook

With the lifted import restrictions, the automobile sector is expected to resume its operations which were on a standstill for quite some time. However, with rising prices and eroded purchasing power of consumers, how much the auto sector contributes to SPEL’s revenue is yet to be seen. Nevertheless, food and packaging sector will continue to muster sizeable revenue growth for the company; however, the margins will continue to stay in pressure owing to economic headwinds coupled with rising finance cost on the back of bigger borrowings over the years coupled with exorbitant discount rate.