Service Global Footwear Limited (PSX: SGF) was incorporated in Pakistan as a public limited company in 2019. The company is engaged in the manufacturing, sale, marketing, import and export of footwear, leather and allied products. The company is a wholly owned subsidiary of Service Industries Limited.
Pattern of Shareholding
As of December 31, 2024, SGF has a total of 206.056 million shares outstanding which are held by 2428 shareholders.
Service Industries Limited has the majority stake of 79.37 percent in the company followed by local general public holding 8.56 percent shares. Modarabas & Mutual Funds account for 5.35 percent shares of SGF while foreign general public holds 2.61 percent shares.
Around 1.44 percent of the company’s shares are held by its Directors, CEO, their spouse and minor children. The remaining shares are held by other categories of shareholders.
Historical Performance (2021-24)
SGF’s topline followed an upward trajectory over the period under consideration. Conversely, its bottomline descended in 2021 and 2022 followed by a staggering rebound in 2023. In 2024, SGF’s bottomline dipped again.
The company’s margins shrank in 2021. In the subsequent year, gross and operating margins ticked up while net margin continued to decline. SGF’s margins registered a whopping growth in 2023 followed by a downtick in 2024. The detailed performance review of the period under consideration is given below.
In 2021, SGF’s topline inched up by 2.11 percent year-on-year to clock in at Rs.7040.16 million. Since, SGF specifically caters to export market; the outbreak of COVID-19 took a heavy toll on the sales volume of the company.
In 2021, 7.34 percent of the company’s total sales pertained to customers in Pakistan versus a share of 4.41 percent local sales recorded in 2020. The major export market for SGF was Germany accounting for 48.65 percent of the company’s sales in 2021 versus 51.93 percent sales made to Germany in the previous year.
Cost of sales of sales grew by 5 percent in 2021 on the back of elevated cost of local and imported raw materials and a massive hike in both inbound and export shipments. Gross profit slid by 9.61 percent in 2021 with GP margin falling down to 17.58 percent from GP margin of 19.86 percent recorded in 2020.
Distribution expense mounted by 30.47 percent in 2021 on account of hefty freight & insurance charges as well as sample, claims and product development expenses incurred during the year.
Administrative expense inched up by 7.82 percent in 2021 due to higher payroll expense as number of employees grew from 3849 in 2020 to 5226 in 2021. Other expense plunged by 25.42 percent in 2021 due to considerably lower provisioning done for WWF and WPPF.
Conversely, other income strengthened by 26.97 percent in 2021 due to higher interest income on loans granted to holding company, greater exchange gain as well as mark-up on TDRs. Operating profit shrank by 18.43 percent in 2021 with OP margin clocking in at 10.63 percent versus OP margin of 13.31 percent recorded in the previous year.
Finance cost mounted by 31.17 percent in 2021 due to increased running finances obtained during the year. Net profit tamed down by 43.11 percent to clock in at Rs.403.22 million in 2021 with EPS of Rs.2.10 versus EPS of Rs.8.25 recorded in 2020. NP margin fell from 10.28 percent in 2020 to 5.73 percent in 2021.
In 2022, SGF’s topline expanded by 66.94 percent to clock in at Rs.11,753.09 million. While local sales receded during the year, export sales witnessed great progress – especially to the European region. Germany accounted for 46.19 percent of the company’s sales in 2022.
Cost of sales hiked by 64.89 percent in 2022 due to massive inflation, enormous energy tariffs and higher prices of local and imported raw materials. Robust volumetric growth coupled with Pak Rupee depreciation resulted in 76.58 percent higher gross profit recorded in 2022 with GP margin climbing up to 18.60 percent.
Distribution expense multiplied by 63.76 percent in 2022 due to higher sales volume as well as elevated fuel charges which drove up freight and insurance expense incurred during the year. Moreover, samples, claims and product development charges also surged and played a significant role in driving up distribution expense in 2022.
Administrative expense hiked by 24.67 percent in 2022 due to higher payroll expense on account of inflation and increase in employee headcount to 5886. Higher profit related provisioning and allowance booked for ECL and doubtful advances to suppliers resulted in 31 percent spike in other expense in 2022.
On the other hand, other income enhanced by 29.48 percent in 2022 primarily on the back of higher interest income recognized on loan granted to holding company. SGF recorded 84.23 percent stronger operating profit in 2022 with OP margin inching up to 11.73 percent.
Finance cost surged by 153.82 percent in 2022 due to higher discount rate and increased borrowings to meet working capital requirements. SGF’s gearing ratio escalated to 48.86 percent in 2022 versus gearing ratio of 39.11 percent registered in 2021.
During 2022, SGF incurred a huge loss of Rs.224.07 million on investment in Service Long March Tyres (Private) Limited (SLM). This coupled with 104 percent higher tax expense incurred during the year resulted in 15.17 percent decline in net profit which clocked in at Rs.342.06 million in 2022 with EPS of Rs.1.67 and NP margin of 2.91 percent.
In 2023, SGF recorded year-on-year growth of 28.15 percent in its topline which clocked in at Rs.15,061.82 million. While local sales inched up by 9.44 percent, export sales rebounded by 27.64 percent in 2023. Sales to Europe comprised of 78.23 percent of the total sales of SGF in 2023.
Germany, alone, accounted for 40.39 percent of SGF’s sales mix in 2023. Staggering sales volume coupled with Pak Rupee depreciation resulted in 51 percent higher gross profit in 2023 with GP margin attaining its optimum level of 21.92 percent.
Distribution expense mounted by 28.89 percent in 2023. The main growth propeller was samples, claims and product development charges incurred during the year.
Increase in postage & courier as well as salaries expense were the other factors which drove up the overall distribution expense in 2023. 28.25 percent escalation in administrative expense in 2023 was the result of increased payroll expense due to inflationary pressure while employee headcount slid to 5679 in 2023. Increased provisioning for WWF, WPPF and ECL culminated into 90.32 percent higher other expense in 2023.
Other income inched up by 12.92 percent in 2023 on account of exchange gain and scrap sales, the full impact of which was partially offset by lower interest income on loan to holding company and lower interest on TDRs and saving deposits. SGF’s operating profit picked up by 54.25 percent in 2023 with OP margin clocking in at 14.13 percent – the highest during the period under consideration.
Finance cost surged by 115.70 percent in 2023 due to higher discount rate and increased utilization of working capital lines. SGF’s gearing ratio jumped up to 57.1 percent in 2023. In 2023, the company recorded share of profit worth of Rs.474.04 million on investment in SLM. This greatly buttressed the bottomline which boasted the highest ever growth of 245.44 percent to clock in at Rs.1181.607 million with EPS of Rs.5.75 and NP margin of 7.85 percent.
In 2024, SGF’s topline picked up by 15.47 percent to clock in at Rs.17,391.85 million. Both local and export sales rebounded during the year. However, high cost of sales on the back of exorbitant energy tariff, rise in minimum wages and higher freight cost due to red sea crisis resulted in 12.46 percent decline in gross profit in 2024 with GP margin falling to its lowest level of 16.62 percent.
Stable local currency also played an important role in squeezing SGF’s margins in 2024. Distribution expense surged by 13.95 percent in 2024 due to higher freight & insurance charges and increased salaries of sales force.
Administrative expense escalated by 15.71 percent in 2024 due to higher payroll expense. This was due to inflationary pressure as the company streamlined its workforce to 5662 employees in 2024. Other expense spiked by 24.59 percent in 2024 mainly on the back of allowance booked for ECL as well as exchange loss recorded during the year.
Decline in interest on loan advanced to holding company and no exchange gain recorded during the year resulted in 58.65 percent drop in other income in 2024. SGF recorded 54.37 percent thinner operating profit in 2024 with OP margin registering its lowest level of 5.58 percent. Finance cost tumbled by 33.80 percent in 2024 due to the onset of monetary easing in the latter half of the year.
Despite increase in external borrowings, SGF’s gearing ratio fell from 57.08 percent in 2023 to 56.45 percent in 2024 due to higher equity on the back of improved revenue reserve.
During the year, SGF recorded 179.12 percent increase in share of profit in Service Long March Tyres (SLM). This enabled the company to recorded pre-tax profit of Rs.1626.85 million in 2024, up 2.1 percent year-on-year.
However, imposition of super tax and the effect of deferred taxation drove SGF’s net profit by 6.46 percent to clock in at Rs.1105.237 million in 2024. This translated into EPS of Rs.5.34 and NP margin of 6.35 percent in 2024.
Recent Performance (1HCY25)
During the first half of CY25, SGF registered 15.14 percent uptick in its net sales which clocked in at Rs.9541.41 million. This was on the back of the company’s focus on expanding its international customer base by getting new customers and new regions on board.
Cost of sales surged by 14.89 percent in 1HCY25, however, with capacity enhancement, operational efficiency and price revisions, SGF was able to record GP margin of 16.65 percent in 1HCY25, slightly higher than the GP margin of 16.47 percent recorded in 1HCY24. In absolute terms, gross profit grew by 16.41 percent in 1HCY25. Improved export sales and tapping of new markets resulted in 31.70 percent spike in distribution expense in 1HCY25.
Administrative expense mounted by 18.32 percent in 1HCY25 on account of inflationary pressure as well as workforce expansion as the company invested in a new production line in the first quarter of CY25 aiming to improve its capacity by 30 percent by the end of the year. Other expense escalated by 102.24 percent in 1HCY25 seemingly due to higher profit related provisioning and exchange loss.
Conversely, other income dipped by 11.97 percent in 1HCY25 probably due to thinner interest income and no exchange loss recorded during the period. Despite shrinkage, other income was strong enough to offset other expense in 1HCY25. SGF’s operating profit dipped by 11.66 percent in 1HCY25 with OP margin clocking in at 5.18 percent versus OP margin of 6.75 percent recorded in 1HCY24.
Finance cost nosedived by 30.53 percent in 1HCY25 due to monetary easing and a considerable decline in short-term borrowings during the period. Share of profit from SLM grew by 96.68 percent to clock in at Rs.1164.96 million in 1HCY25.
In the absence of this income, SGF’s net profit in 1HCY25 would’ve been much lower than that recorded in the similar period of last year. SGF’s net profit picked up by 142.14 percent to clock in at Rs.1115.46 million in 1HCY25. This translated into EPS of Rs.5.37 in 1HCY25 versus EPS of Rs.2.23 recorded in 1HCY24. NP margin progressed from 5.56 percent in 1HCY24 to 11.69 percent in 1HCY25.
Future Outlook
The company is striving to expand its customer base and geographical footprint to counterbalance the impact of lower demand in Europe and the US.
The company is also enhancing its capacity to capitalize on the upcoming opportunities. On the cost front, the company is persistently increasing its solar power production to cut down its energy cost.
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