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Security Papers Limited (PSX: SEPL) was established as a joint venture company of Pakistan, Iran, and Turkey in 1967. The company is engaged in manufacturing banknotes and other security papers e.g. prize bonds, non-judicial stamp paper, passport paper, educational certificates, share certificates, etc. SEPL turned into a public limited company and listed itself on the Pakistan Stock Exchange in 1967. It started its commercial operations in 1969.

Pattern of Shareholding

As of June 2023, the company has an outstanding share volume of 59.256 million shares which are held by 2177 shareholders. Associated companies, undertakings, and related parties hold the highest portion of SEPL’s shareholding i.e. 60.03 percent. Within this category, Pakistan Security Printing Corporation (Pvt) Limited holds the highest number of shares i.e. 40.03 percent. The local and foreign general public have a stake of 11.75 percent each in the company followed by insurance companies owning 10.94 percent shares. Banks, DFIs, and NBFIs stood next with 7.24 percent of the company’s shares. Modarbas and Mutual funds account for 5.45 percent of SEPL’s outstanding shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-2023)

SEPL’s topline has been riding an upward journey since 2019. Quite strikingly, 2020, despite being the year where the local and international economy was crippled by the global pandemic, proved to be an encouraging period for SEPL as it was able to boast the highest sales and bottom line. In contrast to its unabated topline growth, SEPL’s bottom line slid in 2022. The company’s margins have been oscillating over the period under consideration. Gross margin which maxed out in 2019 started dipping thereafter to reach its lowest level in 2023. Operating and net margins rode an uphill journey to attain their optimum high values in 2021 only to slide back and touch their lowest levels in 2023. The detailed performance review of the period under consideration is given below.

In 2019, SEPL’s net sales grew by 15.42 percent year-on-year. This was on the back of a 12.8 percent growth in sales volume due to increased demand from the major customer of SEPL i.e. Pakistan Security Printing Corporation (Private) Limited (see the graph of sales volume versus net sales). Improved sales volume, cost efficiency achieved due to economies of scale, and increased product value resulted in a 22.58 percent year-on-year rise in gross profit in 2019 with GP margin climbing from 37.30 percent in 2018 to 39.62 percent in 2019. Administrative expenses declined by 1.77 percent year-on-year in 2019 on the back of reduced payroll expenses as the company streamlined its workforce from 387 employees in 2018 to 372 employees in 2019. Increased discount rates resulted in better profit rates on fixed-income securities and bank placements which drove up other income by 31.93 percent in 2019. However, a 23.04 percent year-on-year rise in other expenses due to unrealized loss on re-measurement on mutual funds as the value of the KSE-100 index fell, conveniently offset other income earned by SEPL in 2019. Nevertheless, operating profit rebounded by 30.49 percent in 2019 with OP margin rising up from 25.7 percent in 2018 to 29.05 percent in 2019. Finance costs slumped by 28.32 percent year-on-year in 2019 despite high discounts. This was due to reduced bank charges and no mark-up charged on WPPF in 2019. Net profit spiraled by 35.36 percent year-on-year in 2019 to clock in at Rs.772.03 million with EPS of Rs.13.03 versus EPS of Rs.9.63 in 2018. NP margin also mounted from 16.45 percent in 2018 to 19.29 percent in 2019.

During 2020, SEPL sold 4,335 tons of bank notes and security paper products which was 16.3 percent higher than the sales volume of 2019. Despite the shortage of cotton comber, the main raw material for the company, due to lower cotton production and supply chain bottlenecks owing to COVID-19, the company was able to perform remarkably well across all the bank denominations and security paper products. 22.48 percent year-on-year topline growth is also attributable to an increase in selling prices and better product mix in 2020. The cost of imported raw materials (security thread and chemicals) increased sharply owing to the Pak Rupee depreciation during the period, however, the company’s ability to reduce production losses kept the cost of production in check. As a result, gross profit grew by 19.62 percent year-on-year with a marginal downtick in the GP margin to clock in at 38.69 percent in 2020. Other income performed quite well during the year, posting a year-on-year growth of 105 percent mainly due to markup received on investment in government securities. Then there was a sharp drop in other expenses as there was no unrealized loss on the re-measurement of mutual funds as against the loss of over Rs.245 million in 2019. Consequently, operating profit multiplied by 55.37 percent in 2020. OP margin also took a sharp flight from 29.05 percent in 2019 to 36.85 percent in 2020. The company maintains a minimum leverage position and its capital structure mainly comprises of share capital and reserves. Consequently, the company flaunts a healthy interest coverage ratio of 595:1 as of 2020. Although finance cost increased during the year owing to markup on the finance lease, however, it still stands at less than 0.09 percent of sales. Net profit registered staggering growth of 65.31 percent in 2020 to clock in at Rs.1276.25 million with an NP margin of 26 percent and EPS of Rs.21.54

In 2021, SEPL topline grew by a paltry 2.05 percent year-on-year. While sale of banknotes and security paper products remained steady during the year, the sale of passport paper drastically dropped owing to travel restrictions imposed by various countries amidst COVID-19. Overall, the sales volume of SEPL tumbled by 4 percent year-on-year to clock in at 4163 tons in 2021. High cost of production owing to an increase in the prices of imported raw materials coupled with high freight cost and Pak Rupee depreciation seized the gross profit growth. GP margin inched down to 37.64 percent in 2021. Other income came to the rescue which grew by 63.87 percent year-on-year in 2021 owing to gain on re-measurement of mutual funds on account of monetary easing. Operating profit heightened by 10.37 percent in 2021. The unprecedented OP margin of 39.98 percent during the year speaks volumes of SEPL’s superior operational performance. Finance costs also took a plunge on account of the low discount rate during 2021. The bottom line grew by 14.28 percent year-on-year in 2021 to clock in at Rs. 1458.45 million with NP margin clocking in at 29.16 percent – a level never seen after 2017. EPS was recorded at Rs.24.61 in 2021.

2022 was a rather difficult year for the company. During the year, SEPL’s topline registered a marginal 2.91 percent growth, while its bottom line contracted by 34.93 percent year-on-year with a considerable erosion of margins. The company achieved an offtake of 4176 tons which is merely 13 tons (or 0.3 percent) up from what it sold in 2021. Cost of sales hiked by 12.14 percent in 2022 due to elevated prices of cotton comber, security thread and chemicals which coupled with Pak Rupee depreciation and escalation in freight cost suppressed SEPL’s gross profit by 12.38 percent in 2022. GP margin slipped to 32.05 percent in 2022. 10.34 percent increase in administrative expenses in 2022 was the consequence of higher payroll expenses despite the contraction of its workforce from 317 employees in 2021 to 301 employees in 2022. Other income didn’t impress either and dropped by 36.62 percent year-on-year while other expenses multiplied by 73.97 percent in 2022 owing to loss on the measurement of mutual funds on account of subdued capital market. All these factors translated into 29.88 percent thinner operating profit recorded by SEPL in 2022 with OP margin sinking to 27.24 percent. Finance costs expanded due to high discount rates, bank charges, and workers’ profit participation fund, however, proportionately, it still stands at 0.9 percent of sales due to the equity-backed capital structure. Net profit crashed by 34.93 percent year-on-year in 2022 to clock in at Rs. 949 million with EPS of Rs. 16.02 and NP margin of 18.44 percent.

In 2023, SEPL’s topline registered a 12.58 percent year-on-year rise. This was despite a 3.1 percent year-on-year drop in sales volume which clocked in at 4048 tons. This clearly reflects that the topline appreciation was the result of an upward revision in prices.

However, a stronger topline couldn’t trick down to trigger any growth in gross profit which plummeted by 7.97 percent in 2023 on the back of rising international commodity prices owing to the Russia-Ukraine war, unprecedented levels of inflation, and Pak Rupee depreciation. GP margin stooped to its lowest level of 26.2 percent in 2023. Administrative expenses hiked by 12.68 percent in 2023 owing to an adjustment of the minimum wage rate. Number of employees fell from 301 in 2022 to 294 in 2023. Other expenses nosedived by 7.27 percent in 2023 as no loss was incurred on the re-measurement of investment in mutual funds. This offset hefty exchange loss and higher provisioning done for WWF and WPPF in 2023. Other income grew by a stupendous 81.39 percent in 2023 on account of improved profit rates on bank placements and fixed-income securities. Operating profit progressed by 10.58 percent year-on-year in 2023; however, OP margin inched down to 26.76 percent. Finance costs grew by 54.69 percent in 2023 due to increased discount rates. The imposition of super tax further diluted bottom line growth which was recorded at 1.94 percent year-on-year in 2023. Net profit stood at Rs.967.38 million in 2023 with EPS of Rs.16.33 and NP margin of 16.69 percent.

Recent Performance (1QFY24)

SEPL posted significantly improved performance in 1QFY24. Its sales volume was recorded at 1128 tons during 1QFY24, up 17.38 percent year-on-year. Higher sales volume coupled with improved pricing resulted in a tremendous topline growth of 46 percent year-on-year in 1QFY24. Product diversification by adding new customers, switching to local raw materials as well as operational efficiencies attained by the company resulted in a 72.11 percent appreciation in SEPL’s gross profit with GP margin climbing up to 28 percent in 1QFY24 versus 23.76 percent during the same period last year. SEPL revamped its investment portfolio during the period, resulting in a 61.11 percent spike in other income. SEPL’s other income during the period was strong enough to conveniently absorb its administrative expenses and other expenses which surged by 11.43 percent and 18.46 percent respectively during the period. As a result, operating profit picked up by 90.5 percent year-on-year in 1QFY24 with OP margin clocking in at 34.6 percent versus 26.53 percent during the same period last year. Finance cost surged by 84.55 percent during 1QFY24 due to a higher discount rate and slightly higher lease liabilities, however proportionately; it stood at a meager 0.14 percent of sales. Net profit progressed by 74.12 percent year-on-year in 1QFY24 to clock in at Rs.365.19 million with EPS of Rs.6.16 versus EPS of Rs.3.54 during the same period last year. NP margin also rallied from 17.72 percent in 1QFY23 to 21.13 percent in 1QFY24.

Future Outlook

With diversification and better product mix, improved prices, transfer to local raw materials, and operational efficiency achieved over time, SEPL’s margins are expected to stay strong. The company has also entered into a technical consultancy agreement with a leading European Security paper company and aims to benchmark it operational efficiencies. This will further improve SEPL’s financial performance. Moreover, with SBP’s decision to introduce new currency notes to counter the issue of counterfeit notes, SEPL’s business is likely to grow further.


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