Service Global Footwear Limited

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, 2023, SGF has a total of 205.918 million shares outstanding which are held by 2731 shareholders. Service Industries Limited has the majority stake of 79.43 percent in the company followed by the local general public holding 9.51 percent of its shares. Modarabas & Mutual Funds account for 3.71 percent of shares of SGF while the foreign general public holds 2.61 percent of shares. Around 1.43 percent of the company’s shares are held by its Directors, CEO, their spouse, and minor children and 1.17 percent by Banks, DFIs, and NBFIs. Joint stock companies own 1.11 percent shares of SGF. The remaining shares are held by other categories of shareholders.

Historical Performance (2021-23)

SGF’s topline has grown over the period under consideration. Conversely, its bottomline descended in 2021 and 2022 followed by a staggering rebound in 2023. The company’s margins fell in 2021. In 2022, gross and operating margins ticked up, however, net margin continued to decline. SGF’s margins registered a whopping growth in 2023. 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. Since SGF specifically caters to the 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 sales pertain to customers in Pakistan versus 4.41 percent of 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. The cost of sales grew by 5 percent in 2011 on the back of elevated costs 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 19.86 percent 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 expenses inched up by 7.86 percent in 2021 due to high payroll expenses as a number of employees grew from 3849 in 2020 to 5226 in 2021. Other expenses plunged by 25.42 percent in 2021 due to considerably lower provisioning made for WWF and WPPF. Conversely, other income strengthened by 26.97 percent in 2021 due to higher interest income on loans granted to holding companies, greater exchange gain as well as markup 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 finance 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. While local sales receded during the year, export sales witnessed great progress – especially in the European region. Germany accounted for 46.19 percent of the company’s sales in 2022. The 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 18.6 percent. Distribution expense multiplied by 63.76 percent in 2022 due to higher sales volume as well as fuel charges which drove up freight and insurance expenses incurred during the year. Moreover, samples, claims, and product development charges also surged and played a significant role in driving up distribution expenses in 2022. Administrative expenses hiked by 24.67 percent in 2022 due to higher payroll expenses on account of inflation and an increase in employee headcount to 5886. Higher profit-related provisioning and allowance booked for ECL and doubtful advances to suppliers resulted in a 31 percent spike in other expenses in 2022. On the other hand, other income increased by 29.48 percent in 2022 primarily on the back of higher interest income earned on loans granted to the holding company. SGF recorded 89.43 percent stronger operating profit in 2022 with OP margin inching up to 11.73 percent. Finance costs surged by 153.82 percent in 2022 due to higher discount rates and increased borrowings to meet working capital requirements. SGF’s gearing ratio escalated to 48.86 percent in 2022 versus 39.11 percent 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 a 104 percent higher tax expense incurred during the year resulted in a 15.17 percent decline in net profit which clocked in at Rs.342.06 million in 2022 with EPS of Rs.1.67 and an NP margin of 2.91 percent.

In 2023, SGF recorded year-on-year topline growth of 28.15 percent. 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 the SGF sales mix in 2023. Staggering sales volume coupled with Pak Rupee depreciation resulted in 51 percent higher gross profit in 2023 with GP margin touching its highest 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. An increase in postage & courier as well as salaries expenses also 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 in 90.32 percent higher other expenses 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 loans to holding companies 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 costs surged by 115.7 percent in 2023 due to higher discount rates and increased utilization of working capital lines. SGF’s gearing ratio jumped up to 57.1 percent in 2023. In 2023, the company recorded a share of profit worth Rs.474.04 million on investment in SLM. This greatly buttressed the bottom line 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.

Recent Performance (1HCY24)

While the 1QCY24 proved to be encouraging for SGF with 26.6 percent growth in net sales, sluggish sales volume and stronger Pak Rupee in the 2QCY24 resulted in an abridged 11.78 percent topline growth in 1HCY24. Lower sales volumes were the consequence of weaker demand in Europe and the US - the two main export destinations of SGF. Unprecedented levels of inflation and energy tariffs coupled with increased prices of local and imported raw materials resulted in an 18.99 percent spike in the cost of sales in 1HCY24. As a consequence, gross profit slid by 14.55 percent in 1HCY24 with GP margin falling down to 16.47 percent versus GP margin of 21.53 percent recorded during the same period last year. Distribution and administrative expenses inched up by 7.72 percent and 18.13 percent respectively during 1HCY24. In the absence of vigorous demand, high operating expenses appear to be the effect of inflationary pressure. Other expenses slid by 42.66 percent in 1HCY24 possibly due to curtailed profit-related provisioning. Other income also declined by 65.47 percent during the period apparently due to lower exchange gain on the back of relatively stronger local currency. SGF recorded a 51.41 percent slide in its operating profit in 1HCY24 with OP margin shrinking to 6.75 percent versus OP margin of 15.53 percent recorded during the same period last year. Finance cost also tapered off by 26.8 percent in 1HCY24 due to curtailed external borrowings on the back of reduced capacity utilization. A notable development during the period was the share of gain worth Rs.592.32 million recorded by SGF on its investment in SLM. This shored up SGF’s bottom line which would’ve otherwise posted a year-on-year decline. Tax expense for the period grew by 26.62 percent due to a change in the tax regime for exporters from minimum taxation to normal taxation. SGF’s net profit grew by 5.82 percent in 1HCY24 to clock in at Rs.460.68 million with EPS of Rs.2.23 versus EPS of Rs.2.11 recorded during the same period last year. NP margin slightly dropped from 5.87 percent in 1HCY23 to 5.56 percent in 1HCY24.

Future Outlook

During 1QCY24, SGF made an additional investment of Rs.286 million in SLM to expand its production capacity. This is expected to yield remarkable results in the coming quarter and greatly buttress SGF’s bottom line. Furthermore, the company is also striving to expand its customer base and geographical footprint to counterbalance the impact of meager demand in Europe and the US.