Security Papers Limited

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 2022, the company has an outstanding share volume of 59.255 million shares which are held by 2287 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. over 23 million. The local general public has a stake of 11.8 percent in the company followed by insurance companies owning 11.09 percent shares. Banks, DFIs, and NBFIs stood at the next position with 7.24 percent of the company’s shares. Modarbas and Mutual funds account for 5.4 percent of SEPL’s outstanding share capital. Directors, CEO, their spouse,s and minor children hold 0.03 percent of SEPL’s shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-2022)

SEPL’s topline has been riding an upward journey since 2018; however, the magnitude of growth significantly drops after 2020. 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 growth since 2018 i.e. 22 percent and 65 percent respectively.

The details of the company’s operations during 2020 show that it sold 12.68 percent more banknotes and prize bond papers to its major customer i.e. Pakistan Security Printing Corporation. During 2020, SEPL produced 4377 tons of banknotes and security paper products which were 17.7 percent higher than the production 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. High topline growth is also attributable to an increase in selling prices and a better product mix during 2020. The cost of imported raw materials (security thread and chemicals) increased sharply owing to the Pak Rupee devaluation during the period, however, the company’s ability to reduce production losses kept the cost of production in check. As a result, the gross profit grew by 20 percent year-on-year with a marginal downtick in the GP margin. Other income performed quite well during the year, posting year-on-year growth of 105 percent mainly due to the markup received on the 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. OP margin, hence took a sharp flight from 29 percent in 2019 to 36.85 percent in 2020. The company maintains a minimum leverage position and its capital structure mainly comprises 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. The NP margin of SEPL clocked in at 26 percent as against 19.29 percent in 2019.

The subsequent years experienced stunted topline growth of only 2 percent and 3 percent year-on-year in 2021 and 2022 respectively. However, in 2021, the company achieved unparalleled margins.

In 2021, while the sale of banknotes and security paper products remained steady, the sale of passport paper drastically dropped owing to travel restrictions imposed by various countries amidst Covid-19. High cost of production owing to an increase in the prices of imported raw materials coupled with high freight cost and the Pak Rupee devaluation seized the gross profit growth. However, other income came to the rescue which grew by 64 percent year-on-year in 2021 owing to gains on the re-measurement of mutual funds. The unprecedented OP margin of 40 percent during the year speaks volumes of its superior operational performance. Finance costs also took a plunge on account of the low discount rate during 2021. The bottom line grew by 14 percent year-on-year in 2021 with the NP margin clocking in at 29 percent – a level that was never seen after 2017.

2022 was a rather difficult year for the company as its bottom line contracted by 35 percent year-on-year with a considerable drop in margins. The company achieved an offtake of 4176 tons which is merely 13 tons up from what it sold in 2021. Other income didn’t impress either and dropped by 37 percent year-on-year owing to loss on the measurement of mutual funds on account of the subdued capital market. Finance costs expanded due to high discount rate, bank charges, and workers’ profit participation fund, however, proportionately, it still stands at 0.9 percent of sales due to equity-backed capital structure. NP margin for the year stood at 18.44 percent –the lowest level of 5 years.

Recent Performance (6MFY23)

The tightening of margins which started in 2022, continued during 6MFY23 with both sales and the bottom line losing their ground. The growth arrest was a result of the low demand for banknote papers. The high cost of local and imported raw materials resulted in a sharp plunge in the GP margin from 35 percent in 6MFY22 to 21 percent in 6MFY23. Other income and other expenses behaved favorably but couldn’t control the freefall of OP margin from 30 percent in 6MFY22 to 22 percent in 6MFY23. The bottom line dropped by a massive 40.5 percent in 6MFY23 with the NP margin clocking in at 13 percent as against 22 percent in the same period of last year.

Future Outlook

While the prices of raw materials are anticipated to show no respite in the coming times, the margins will remain under pressure. However, as the company has expanded its product line to include Ballot papers amidst the talks of fresh elections, the sales volume might see a getaway. Whether or not the demand for ballot papers offsets the muted sales on the banknote paper front and gives some respite to the bottom line is yet to be seen.