Safe Mix Concrete Limited

Safe Mix Concrete Limited (PSX: SMCPL) was incorporated in Pakistan as a private limited company in 2005 and was ultimately converted into a public limited company in 2007. The company is engaged in the manufacturing and sale of ready mix concrete, building blocks as well as construction of factories, prefabricated buildings and other construction sites. SMCPL is a company of Arif Habib Group and is the supplier of ready mix concrete for the group’s mega project – Naya Nazimabad.

Pattern of Shareholding

As of June 30, 2023, SMCPL has a total of 25 million shares outstanding which are held by 667 shareholders. Mr. Abdus Samad Habib, the CEO of SMCPL holds 35.84 percent shares of the company followed by Mr. Arif Habib holding 28.17 percent shares. Arif Habib Limited has a stake of 22.8 percent in the company while Banks, DFIs and NBFIs account for 2.24 percent shares of the company. Foreign general public holds 0.92 percent of the outstanding share capital of SMCPL. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

SMCPL’s topline tumbled in 2020 and 2021, however, posted robust growth in rest of the years under consideration. In 2019 and 2020, the company posted negative bottomline. SMCPL posted net profit in the subsequent years with the highest net profit registered in 2023. The margins which were also plunging until 2020 recovered in 2021 and reached their highest level in 2023. The detailed performance review of the period under consideration is given below.

In 2019, SMCPL’s topline grew by a massive 49 percent year-on-year despite 11 percent year-on-year descend in its volumetric sales. SMCPL’s sales volume slipped to 143,359 cubic meters of concrete mix in 2019 as the construction activity in the country reduced by 7.6 percent as against the growth of 9 percent in construction activity achieved in 2018. High cost of raw materials due to an increase in commodity prices, high fuel and energy charges as well as Pak Rupee depreciation pushed up the cost of sales by 56.89 percent year-on-year in 2019 resulting in 64.11 percent year-on-year fall in gross profit. GP margin significantly plummeted from 6.5 percent in 2018 to 1.6 percent in 2019. The company made efficient utilization of its transit mixer fleet, however, impairment loss of financial assets culminated into 453 percent surge in distribution expense in 2019. The company kept a strict check on its administrative expenses by curtailing its payroll expense, legal and professional fee as well as repair and maintenance charges. Yet, it failed to post any operating profit in 2019. SMCPL posted operating loss of Rs.25.23 million in 2019 as against the operating profit of Rs.15.70 in 2018. Finance cost grew by 23 percent year-on-year in 2019 on account of higher discount rate. Net loss for 2019 clocked in at Rs.29.77 with loss per share of Rs.1.19 as against the net profit of Rs.2.42 million and EPS of Rs.0.1 in 2018.

In 2020, SMCPL’s sales declined by 53.44 percent year-on-year as the company successfully completed a private sector project during the year and the major revenue from it was earned in the previous year. Furthermore, the slowdown of real-estate sector and the imposition of lockdown due to the outbreak of COVID-19 also resulted in reduced sales during the year. On account of low demand, the company utilized 4.5 percent of its available capacity and produced only 65.967 cubic meters in 2020 as against 9.7 percent capacity utilization in 2019. Lesser sales resulted in 51.19 percent year-on-year drop in cost of sales. SMCPL recorded gross loss of Rs.13 million in 2020. While SMCPL greatly reduced its advertising and sales promotion as well as sales commission related to Karachi Metropolitan Corporation, impairment loss of financial assets kept mounting, resulting in 4.54 percent year-on-year uptick in distribution expense in 2020. Administrative expenses ticked down by 16.27 percent year-on-year. Other income showed 5.42 percent year-on-year improvement in 2020 due to increase in pumping and grout charges received during the year. The company also incurred other expense of Rs.3.53 million due to loss on sale of fixed assets in 2020. Besides, the company also recognized an impairment loss of Rs.45 million on its batching plant due to greater than anticipated wear and tear. Operating loss magnified by 284.79 percent year-on-year in 2020 to clock in at Rs.97.07 million. Finance cost inched down by 6.98 percent year-on-year as the company trimmed down its loan book in 2020 and also because of a drop in discount rate during the year. Despite all the cost control measures, SMCPL’s net loss grew by 231.8 percent year-on-year in 2020 to clock in at Rs.98.78 million with loss per share of Rs.3.95. The accumulated loss of SMCPL reached Rs.174.37 million in 2020 as against Rs.76.58 in 2019. The constant accumulation of losses narrowed down the company’s equity.

2020 was followed by another year of sales decline whereby SMCPL’s topline petered out by 45.97 percent year-on-year. During 2021, the company not only reduced its production capacity from 1.47 million cubic meters to 0.876 million cubic meters but also utilized only 5.87 percent of the available capacity. Steps were being taken by the government for the promotion of housing sector in the country. While significant number of projects was launched in the northern wing of the country, the southern region still remained quiet. Cost of sales also reduced by 51.8 percent year-on-year mainly on account of the management’s focus on reducing its fixed overhead cost. This resulted in gross profit of Rs.17.63 million in 2021 as against gross loss in the past year. GP margin clocked in at 7.97 percent in 2021. The company didn’t incur any sales commission related to KMC in 2021. Impairment loss of financial assets also considerably reduced during the year resulting in a 99 percent year-on-year drop in distribution expense in 2021. Administrative expense also tumbled by 23.78 percent year-on-year in 2021 mainly on account of reduction in payroll expense. Other income dwindled by 42 percent year-on-year in 2021 due to lesser pumping and grout charges, curtailed deferred income and lesser profit on deposit accounts due to low discount rate. This resulted in operating profit of Rs.8.22 million in 2021 with OP margin of 3.7 percent. Although finance cost contracted by 25.88 percent year-on-year in 2021 due to monetary easing, however, it didn’t allow the positive operating profit to cascade down resulting in loss before tax of Rs.1.39 million in 2021. However, deferred taxation pushed the bottomline into profit zone. SMCPL recorded net profit of Rs.6.57 million in 2021. NP margin clocked in at 2.97 percent in 2021 while EPS stood at Rs.0.26.

After two years of lackluster sales, SMCPL’s topline posted a strong rebound of 139.44 percent on the back of higher sales volume as well as upward price revision. During the year, the company increased in capacity to 918,000 cubic meters and utilized 10.8 percent of its capacity owing to strong demand. High cost of raw materials, fuel and power charges and Pak Rupee depreciation pushed the cost of sales up by 104.4 percent in 2022. Yet gross profit multiplied by 544 percent in 2022 with GP margin clocking in at 21.44 percent. Higher sales commission as well as travel charges resulted in 350.86 percent hike in distribution expense in 2022. Administrative expense also surged by 83 percent year-on-year in 2022 owing to high inflation and induction of additional human resources during the year. Other income massively increased by 78.56 percent year-on-year in 2022 on account of higher grouting income as well write-off of liabilities no longer payable. Operating profit posted a staggering growth of 987.93 percent in 2022 with OP margin of 16.87 percent. Finance cost grew by 88 percent year-on-year in 2022 due to multiple rounds of monetary tightening during the year and also because the company undertook significant capital expenditure during the year to increase the transit mixers. SMCPL’s net profit enhanced by 607.64 percent in 2022 to clock in at Rs.46.456 million with NP margin of 8.77 percent. EPS climbed to Rs. 1.86 in 2022.

2023 was characterized by tamed construction activities in the country due to low PSDP spending, rise in construction cost and low purchasing power of consumers due to high inflation, unprecedented level of discount rate, political havoc and sluggish economic activity. Despite all the odds, SMCPL’s topline posted a stunning year-on-year growth of 170.34 percent in 2023. This was due to the fact the majority of SMCPL’s sales were made to its related parties which included Javedan Corporation Limited, Global Residency Reit, Rahat Residency Reit and Silk Islamic Development Reit. SMCPL achieved capacity utilization of 14.76 percent in 2023 by producing 135,534 cubic meters, up 36.94 percent year-on-year. Cost of materials surged by 166.90 percent year-on-year in 9MFY23, however, high volumetric sales and prices resulted in 182.92 percent year-on-year growth in gross profit with GP margin clocking in at 22.43 percent in 2023. Administrative expense multiplied by 55.53 percent year-on-year in 2023 due to high payroll expense driven by high inflation. Distribution expense escalated by 99.15 percent in 2023 due to elevated sales commission, advertising & promotion budget as well as travelling charges. Other expense considerably grew by 494 percent year-on-year in 2023 due to higher provisioning for WPPF and ECL. The company also wrote off assets, receivables and advances during the year which also contributed in driving up other expense. Other income slid by 20.83 percent in 2023 due to high-base effect as the company recorded write-back of liabilities, gain on final settlement with CDGK and write off of recovery of receivables in 2022. SMCPL’s operating profit grew by a massive 177.32 percent year-on-year in 2023 while OP margin clocking in at 17.31 percent – the highest level during the period under consideration. Finance cost grew by 126.45 percent year-on-year in 2023 due to high discount rate although the company paid off its entire short-term liabilities during the year and instead obtained loan from related parties. Net profit substantially grew by 187 percent in 2023 to clock in at Rs.133.37 million with EPS of Rs.5.33 and NP margin of 9.31 percent.

Recent Performance (9MFY24)

During 9MFY24, SMCPL’s net sales declined by 13.75 percent year-on-year. This was on account of slowdown of the ongoing projects due to unprecedented level of discount rate. Cost of sales slid by 11.86 percent during the period, translating into 19.63 percent lower gross profit recorded by the company during 9MFY24. GP margin also contracted from 24.38 percent during 9MFY23 to 22.71 percent during 9MFY24. Administrative expense multiplied by 15.55 percent during 9MFY24 mainly on account of high inflation which pushed up the payroll expense. Distribution expense also spiked by 39.32 percent during the period under consideration despite lower sales volume. This might be due to the implementation of axle load. Other expense slid by 35.19 percent during 9MFY24 due to lower provisioning. Conversely, other income improved by 149.95 percent during the period. SMCPL’s operating profit slumped by 22.32 percent during the period under consideration with OP margin clocking in at 17.62 percent versus OP margin of 19.56 percent recorded in 9MFY23. Finance cost surged by 42.38 percent during 9MFY24 due to high discount rate. SMCPL’s net profit tumbled by 32.62 percent year-on-year to clock in at Rs.86.277 million in 9MFY24 with EPS of Rs.3.45 versus EPS of Rs.5.12 recorded during the same period last year. NP margin also inched down from 11.67 percent in 9MFY23 to 9.11 percent in 9MFY24.

Future Outlook

In the midst of economic and political crisis, construction sector outlook seems gloomy. The rising capacities of cement facilities over the years coupled with lackluster demand has created idle capacities questioning the sustainability of high retention prices enjoyed by the cement companies for a long time.