Shield Corporation Limited (PSX: SCL) was incorporated in Pakistan as a public limited company in 1975. The company’s principal business activity is the manufacturing, trading and sale of oral hygiene and baby care products. SCL caters to the needs of over 300 towns and cities of Pakistan. Besides, the company has its presence in Europe, Asia and Africa.
Pattern of Shareholding
As of June 30, 2023, SCL has a total of 3.9 million shares outstanding which are held by 345 shareholders. Directors, CEO, their spouse and minor children have the majority stake of 74.45 percent in the company. Local general public holds 25.23 percent shares of SCL. The remaining shares are held by other categories of shareholders each accounting for less than 1 percent shares of the company.
Financial Performance(2019-23)
Except for a marginal dip in 2020, the topline of SCL has been riding an upward trajectory during the period under consideration. The bottomline eroded in 2019 and 2020 to post net loss in the latter year. SCL’s bottomline boasted a massive turnaround in 2021. However, the contentment turned out to be momentary as the net profit drastically fell in the subsequent year.2023 brought an extraordinary growth in the topline and bottomline of SCL. The company’s margins which by and large declined until 2020 staggeringly rebounded in 2021 followed by a slump in 2022. In 2023, SCL registered remarkable recovery in its margins. The detailed analysis of the period under consideration is given below.
In 2019, net sales of SCL grew by a marginal 6 percent year-on-year. Locally, both oral care and baby care segments recorded an increase in revenue, however, the export sales massively dropped during the year especially in the oral care segment. Afghanistan,which is the main export destination of SCL witnessed a year-on-year drop of 80 percent in its sales revenue. Moreover, there were no sales to Europe during the year. The cost of sales grew by 14 percent year-on-year in 2019 on the back of Pak Rupee depreciation which rendered the imported raw materials expensive. Consequently, the GP margin of SCL dropped from 36.42 percent in 2018 to 31.30 percent in 2019. Gross Profit also slid by 9 percent year-on-year in 2019. SCL’s distribution expenses also plunged during the year as the company spent fewer amounts on advertising and promotion activities and focused more on trade promotion through discounts. Administrative expense picked up by 8 percent year-on-year in 2019 on account of higher payroll expense, depreciation as well as legal & professional charges. Other income also behaved favorably as the company made scrap sales during the year. Conversely, other expense didn’t offer any support as it grew by 50 percent year-on-year mainly on the back of loss on foreign exchange. Operating profit managed to post a marginal 9 percent year-on-year growth in 2019. OP margin inched up from 6.96 percent in 2018 to 7.15 percent in 2019. What gave a major blow to the bottomline was a whopping 122 percent year-on-year rise in finance cost on the back of high discount rate and increased borrowings during the year. The gearing ratio of SCL rose from 42.6 percent in 2018 to 56.9 percent in 2019. The bottomline posted a major slump of 64 percent in 2019 to clock in at Rs.24.33 million. NP margin dropped to 1.37 percent in 2019 from 4.04 percent in 2018. EPS also dropped to Rs. 6.24 in 2019 from Rs.17.24 in the previous year.
In 2020, the local as well as global economy was marred by the novel pandemic which also took its toll on the topline of SCL. The topline dropped by 4 percent year-on-year in 2020 as the export sales of the company continued to shrink. During the year, the company only made export sales to Mozambique. Locally, the baby care segment posted 18 percent year-on-year uptick, however, oral care and hygiene segment remained tamed. Gross profit slid by 25 percent year-on-year as high cost of raw and packaging material as well as elevated fuel and energy cost coupled with Pak Rupee depreciation pushed the cost up by 6 percent year-on-year in 2020. GP margin nosedived to 24.35 percent in 2020 as the company was unable to pass on the impact of cost hike to its consumers due to reduced purchasing power on account of inflation. Operating expenses were quite in check as the company massively cut down its expenditure of advertisement and promotional activities. Other expenses also dropped by 98 percent year-on-year in 2020 as the provisions against WWF, WPFF, doubtful advances, slow moving stores and spares which were booked last year wasn’t there in 2020. Moreover, loss on foreign exchange and disposal of fixed assets also dipped during 2020. Other income grew by 297 percent on the back of reversal of aforementioned provisions coupled with scrap sales made during the year. Despite all the positive developments on the operational front, the operating profit dropped by 36 percent year-on-year in 2020 while OP margin moved down to 4.77 percent in 2020. Finance cost grew by a massive 143 percent in 2020 on the back of high discount rate in the initial quarters of FY20 coupled with increased short-term and long-term borrowings during the year. SCL’s gearing ratio soared to 60.83 percent in 2020. Increased financial charges dragged the bottomline into red zone with net loss of Rs.18.45 million in 2020. Loss per share stood at Rs. 4.73 in 2020.
2021 was the most privileged year for SCL as not only did its topline grew by 26 percent year-on-year, the bottomline also recovered from net loss to boast the highest-ever net profit. While local sales showed a stunning growth in 2021, export sales also witnessed some signs of recovery especially in Mozambique. The company also added Ireland to its export destination during the year. High sales volume, better sales mix and revised pricing enabled the company to absorb the fixed overhead and post a year-on-year growth of 60 percent in the gross profit. GP margin also improved to 30.90 percent in 2021. Distribution expense grew on the back of high freight charges, advertisement & promotion as well as payroll expense. However, administrative expense plunged by 24 percent year-on-year due to reduced payroll expense despite the fact that SCL expanded its workforce from 94 employees in 2020 to 114 employees in 2021. Other expense multiplied by 5243 percent on the back of provisions booked for WWF and WPFF coupled with loss on disposal of fixed assets and impairment of fixed assets recorded during the year. This whopping rise in other expense was partially offset by a favorable movement in other income on the back of scrap sales, grant income and exchange gain. SCL’s operating profit posted a staggering year-on-year growth of 244 percent in 2021 with OP margin rising up to 13.06 percent – the highest among all the years under consideration. Finance cost was also under control due to low discount rate coupled with lesser borrowings during the year. Gearing ratio dropped to 53.01 percent in 2021. SCL posted net profit of Rs. 155.11 million in 2021 with the highest-ever NP margin of 7.22 percent. EPS for the year was Rs. 39.77.
While the company heaved a sigh of relief as the signs of COVID-19 began to fade, 2022 brought another list of challenges. Political instability, record-high inflation and discount rate and sharp depreciation of Pak Rupee, once again wreaked havoc on the profitability and margins of SCL. SCL’s topline grew by 24 percent year-on-year on the back of volumetric growth as well as upward revision in price. During the year, SCL made considerable improvement in export sales as it resumed its sales to Afghanistan. However, high cost of sales on the back of rising commodity prices and exchange rate fluctuation put pressure on the GP margin which slid to 23.98 percent in 2022. Gross profit also shrank by 4 percent in 2022. Operating expenses grew owing to inflationary pressure coupled with increased spending on payroll expense, advertising and promotion. Freight charges also expanded owing to increase in off-take both in local and export markets. Other income provided support to the bottomline as it grew by 136 percent on the back of rental income, scrap sales and grant income. Other expense also gave a breather due to lesser loss incurred on the disposal of fixed assets as well as no fixed asset impairment booked during the year. Yet, SCL couldn’t sustain its operating profit which dropped by 60 percent year-on-year with OP margin squeezing to 4.2 percent in 2022. Finance cost grew by 62 percent on the back of increased borrowings and high discount rate. The gearing ratio spiraled to 69.65 percent in 2022. SCL’s bottomline also plunged by 89 percent year-on-year in 2022 to clock in at Rs.17.76 million with NP margin of 0.67 percent. EPS massively dipped to Rs.4.55 in 2022.
In 2023, SCL posted a stunning 64 percent year-on-year growth in its topline which was the consequence of both volumetric growth and upward price revisions. Increased pricing is also evident in the company’s GP margin climbing up to 26 percent in 2023 from 24 percent in the previous year. Gross profit also improved by 77 percent in 2023. Distribution expense hiked by 31 percent year-on-year in 2023 due to increased payroll expense, traveling & conveyance as well as freight charges incurred during the year. Administrative expenses also escalated by 16 percent during the year. 69 percent higher operating expense incurred during the year was the result of higher profit-related provisioning and exchange loss on purchases. Gain on foreign exchange and rental income drove up other income by 8 percent in 2023. Operating profit rebounded by a massive 286 percent in 2023 with OP margin hovering around 10 percent. Finance cost multiplied by 139 percent in 2023 on account of higher discount rates and increased short-term borrowings. Net profit clocked in at Rs.144.96 million, up 716 percent year-on-year with EPS of Rs.37.17 and NP margin of 3.3 percent.
Recent Performance (1QFY24)
With 33 percent year-on-year growth, the topline of SCL continued its upward journey in 1QFY24. Increased off-take coupled with a revised pricing strategy and sales mix resulted in 60 percent rise in gross profit in 1QFY24 despite inflationary pressure. GP margin also picked up from 24.4 percent in 1QFY23 to 29.4 percent in 1QFY24. Inflationary pressure drove up the operating expenses during the period. other expenses also magnified supposedly on behalf of higher profit-related provisioning. Other income slid by 23 percent year-on-year in 1QFY24. Operating profit grew by 97 percent in 1QFY24 with OP margin clocking in at 9.3 percent versus 6.3 percent in 1QFY23. Finance cost grew by a massive 88 percent in 1QFY24 as the company utilized more external finances coupled with the unprecedented level of discount rate level during the period. SCL’s net profit grew by 756 percent year-on-year to clock in at Rs.16.76 million in 1QFY24 with NP margin clocking in at 1.3 percent versus 0.2 percent during the same period last year. EPS grew to Rs. 4.3 in 1QFY24 from Rs.0.5 in 1QFY23.
Future Outlook
While economic challenges are likely to persist, the company is making strides to improve its sales volume and market share both in the local and export markets. The company has recently introduced its range of baby toiletries and along with expanding its oral care portfolio by adding more variants.SCL’s ability to pass on the impact of cost hike to its consumers off-late is resulting in improved margins and profitability.
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