Security Paper Limited

Security Paper Limited (PSX: SEPL) was established in 1965 and became a public limited company in 1967, listed on the stock exchange. Its products include security paper for banknotes essentially. Other security paper includes Prize Bonds, Defence Savings Certificates, Non-Judicial Stamp Papers, passport papers, cheque book, certificate for educational boards and degree for universities. The Government of Pakistan has classified SEPL as 'category 1A (KPID) Key Point Installation due to the nature of the company's operations.

SEPL is the only supplier of banknote paper in the country. Hence its volume of sales and utilized capacity depends on demand for currency notes. SEPL's key inputs of production are quality cotton comber, security thread and imported chemicals and water.

Shareholding

A key shareholder of Security Paper Limited are associated companies, undertaking and related parties, of which majority of the shares are owned by Pakistan Security Printing Corporation (Pvt) Limited, about 40 percent. Public sector companies hold around 11 percent of the shares in the company. Of this State Life Insurance Corporation of Pakistan holds the most. The rest of the 29 percent are distributed between the remaining categories as depicted in the table.

Historical performance

The increase in top-line in FY14 by 20 percent is due to an increase in volumes and selling price, both; of this, 16 percent was derived from the business of banknote paper. The company was able to negotiate a higher selling price with its key customer, Pakistan Security Printing Corporation (Pvt.) Limited.

In addition, their sales volume increased to 2399 tons as compared to 2126 tons in FY13, allowing for greater capacity utilisation at nearly 98 percent. Moreover, demand also grew for other security paper further contributing Rs151 million to the net sales value. Collectively, a higher price and greater demand allowed for rising margins.

Lower demand for other security papers in FY15 caused a decline in sales revenue by 4.25 percent whereas in volumetric terms sales reduced from 2399 tons in FY14 to 2237 tons. Despite this, the company was able to command an increase in profit margins due to increasing efficiency in operations and a higher selling price in addition to income generated from other sources, primarily investment in Pakistan Investment Bonds and gain on redemption of mutual fund.

Security Paper Limited completed installation of two projects in FY15, Dry Cleaning Unit (DCU) and Thread Unwind System (TUS) which allowed for improvement in the quality of paper and control thread related defects. The increased capacity and fall in production due to lower demand may have caused a reduction in capacity utilization for the period.

FY16 saw some recovery. Sales revenue increased by almost 21 percent while volumes increased from 2237 tons in FY15 to 2658 tons in FY16. Both the divisions of banknote paper and other security paper performed well allowing for enhanced capacity utilization. This may have been in response to improved quality of their product and greater customer satisfaction. Costs reduced owing to greater efficiency and higher sales volume allowing for better absorption of costs. Moreover in an attempt to upgrade itself, among other projects, Security Paper installed Rag Digester and Hemp Breaker which resulted in better output.

Security Paper Limited continued its trend of profitability into FY17. Its top-line increased by 10 percent due, whereas sales volume went up from 2658 tons in FY16 to 2858 tons in FY17, operating at nearly 97 percent capacity. Specifically, bank note paper sales grew by 14 percent mainly due to increased volumes.

Despite rising costs in absolute terms due to increase in uncertainty in price of cotton comber which is a key part of banknote paper, along with rising cost of raw materials, they were able to increase margins due to effective costs controls. For instance, Security Paper Limited adopts energy saving systems and continuously identifies areas where energy can be saved. Moreover, the company undertook 'business process re-engineering' which helped it to reduce enterprise costs and process redundancies.

Apart from its cost reduction measures, Security Paper Limited expanded its product portfolio by adding machine readable Passport Paper to it. Additionally, it also produced Cheque paper; it delivered its first supply of Cheque Paper to its customer in FY17.

FY18 saw a significant increase in top-line by approximately 22 percent; this was attributable to better sales volume and enhanced product mix in addition to continued efforts to obtain operational efficiency. Sales volume increased from 2858 tons in FY17 to 3303 tons in FY18, with a major contribution by Banknote paper- sale of the latter growing by nearly 20 percent. Although cost of raw material continued to increase, the costs of production increased marginally as a percentage of sales due to stringent cost control measures in place. Despite the highest sales recorded in the past five years, profitability was adversely affected due to decline in income generated from capital gains and dividend income from investments.

Top-line continued its upward trend in FY19 despite the uncertain economic environment; it increased by 15 percent, whereas sales volume increased from 3273 tons in FY18 to 3719 tons in FY19. Of this Banknote paper sales grew by almost 20 percent. It was mainly due to increase in demand from customers. Rising inflation and falling currency value contributed to higher costs of production and imported materials such as security thread and chemicals. Moreover, profitability was also affected by 'other charges' of which a major component is 'unrealised loss re-measurement on mutual funds' causing net profit margin to reduce.

Latest quarterly performance

Although top-line increased by 17 percent in 1QFY20 in value terms and 18 percent in volumetric terms, year-on-year, it was mostly offset by a high production cost. Rupee depreciation and inflation continued to challenge the business environment. However, since Security Paper Limited is the only supplier of good quality banknote paper, it has been able to stay afloat and profitable.

Outlook

Amidst inflationary pressure, weaker currency and higher price demanded by local suppliers of raw material, the company was able to continuously increase top-line and negotiate higher selling price with customers while simultaneously focusing on cost reduction and efficient operational measures to maintain profitability. In addition, being the sole supplier of quality banknote paper gives them an added advantage, ensuring consistent demand for their product.

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SEPL: Shareholding pattern as at June 30, 2019
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Categories of shareholders                                    %
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Associated companies, undertakings and related parties    60.03
Mutual funds                                               4.45
Directors, their spouses and minor children                0.02
Public sector companies and corporations                  11.04
Banks, DFIs, NBFIs, insurance companies,
takaful, modaraba and pension funds                        9.93
General public                                            10.69
Others                                                     3.84
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Total                                                       100
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Source: Company accounts