Shield Corporation Limited

Shield Corporation Limited (PSX: SCL) was incorporated in Pakistan as a public limited company in 1975. The company’s principal business activity is the manufacturing, trading, and sale of oral hygiene and baby care products. SCL caters to the needs of over 300 towns and cities of Pakistan. Besides, the company has a presence in Europe, Asia, and Africa.

Pattern of Shareholding

As of June 30, 2024, SCL has a total of 3.9 million shares outstanding which are held by 366 shareholders. Directors, CEO, their spouses, and minor children have the majority stake of 74.44 percent in the company followed by the local general public holding 25.24 percent shares of SCL. The remaining shares are held by other categories of shareholders.

Performance Trail (2019-24)

Except for a dip in 2020 and 2024, the topline of SCL has been riding an upward trajectory in all the years under consideration. Conversely, its bottom line eroded in 2019 and 2020. In 2020, the company posted a net loss. SCL’s bottom line boasted a massive turnaround in 2021, however, the fortune turned out to be momentary as the bottom line slid back in the consequent year. In 2023, SCL’s bottom line greatly recovered followed by posting a net loss in 2024. The company’s margins followed a similar trajectory as its bottom line. The detailed performance review of the period under consideration is given below.

In 2019, net sales of SCL grew by a marginal 5.95 percent year-on-year. Locally, both oral care and baby care segments recorded an increase in revenue, however, the export sales massively dropped during the year, especially in the oral care segment. Afghanistan, the main export destination of SCL witnessed a year-on-year drop of 80 percent in sales revenue. Moreover, there were no sales to Europe during the year. Cost of sales grew by 14.49 percent year-on-year in 2019 on the back of Pak Rupee depreciation which rendered imported raw materials expensive. Consequently, the GP margin of SCL dropped from 36.42 percent in 2018 to 31.30 percent in 2019. Gross Profit in absolute terms also slid by 8.95 percent year-on-year in 2019. Operating expenses slid by 15.65 percent during the year as the company spent less on advertising and promotion activities and focused more on trade promotion through discounts. Other income behaved favorably as the company made scrap sales during the year. Conversely, other expenses didn’t offer any support and grew by 50.28 percent year-on-year mainly on the back of loss on foreign exchange. Operating profit managed to post a marginal 8.8 percent year-on-year growth in 2019. OP margin slightly moved up from 6.96 percent in 2018 to 7.15 percent in 2019. What gave a major blow to the bottom line was a whopping 122.26 percent year-on-year rise in finance costs. This was on the back of a high discount rate and increased borrowings during the year. The debt-to-equity ratio of SCL rose from 22 percent in 2018 to 33.5 percent in 2019. The bottom line posted a major slump of 64.17 percent in 2019 to clock in at Rs.24.33 million. NP margin dropped to 1.37 percent in 2019 from 4 percent in 2018. EPS also dropped to Rs. 6.24 in 2019 from Rs.17.4 in the previous year.

In 2020, the world economy was marred by the global pandemic which also took its toll on the top line of SCL. The top line dropped by 3.95 percent year-on-year in 2020 as export sales of the company continued to shrink. During the year, the company only made export sales to Mozambique. Locally, the baby care segment posted an 18 percent year-on-year uptick, however, the oral care and hygiene segment remained tame. Gross profit also slid by 25.28 percent year-on-year as the high cost of raw and packaging materials as well as fuel and energy coupled with the Pak Rupee depreciation pushed costs up by 5.77 percent year-on-year in 2020. GP margin also nosedived to 24.35 percent in 2020. Operating expenses slid by 14.58 percent in 2020 as the company massively cut down its expenditure on advertisement and promotional activities. Other expenses dropped by 97.74 percent year-on-year in 2020 as provisions for WWF, WPFF, doubtful advances, slow-moving stores, and spares that were booked last year weren’t recorded in 2020. Moreover, loss on foreign exchange and disposal of fixed assets also dipped during 2020. Other income grew by 296.63 percent in 2020 on the back of the reversal of the aforementioned provisions coupled with scrap sales made during the year. Despite all the positive developments on the operational front, operating profit dropped by 35.91 percent year-on-year in 2020 while OP margin moved down to 4.77 percent in 2020. Finance cost also grew by a massive 142.54 percent in 2020 on the back of a high discount rate in the initial quarters of FY20 coupled with increased short-term and long-term borrowings during the year. Debt-to-equity ratio soared to 70.64 percent in 2020. This dragged the bottom line into the red zone with a net loss of Rs.18.45 million in 2020. Loss per share stood at Rs. 4.73 in 2020.

2021 was the most privileged year for SCL as not only did its topline grow by 25.75 percent year-on-year, but the bottom line also recovered from net loss to boast the highest-ever net profit. While local sales showed stunning growth in 2021, export sales also witnessed some signs of recovery especially in Mozambique. The company also added Ireland to its export destination during the year. High sales volume, better sales mix, and revised pricing enabled the company to absorb the fixed overhead and post a year-on-year growth of 59.57 percent in its gross profit. GP margin also improved to 30.90 percent in 2021. Operating expenses grew by 7.1 percent in line with inflation, however, other expenses multiplied by over 5243 percent in 2021 on the back of provisions booked for WWF and WPFF coupled with a loss on disposal of fixed assets and impairment of fixed assets. This whopping rise in other expenses was partially offset by a favorable movement in other income on the back of scrap sales, grant income, and exchange gain. SCL’s operating profit posted a staggering year-on-year growth of 244 percent in 2021 with OP margin standing at its highest level of 13 percent. Finance costs were also under control due to low discount rates coupled with fewer borrowings during the year. The debt-to-equity ratio dropped to 52 percent in 2021. SCL posted a net profit of Rs. 155.11 million in 2021 with the highest-ever NP margin of 7.22 percent. EPS for the year was Rs. 39.77.

As the signs of COVID-19 began to fade, 2022 brought another list of challenges for the company and for the economy as a whole. Political instability, record high inflation, discount rate, and sharp depreciation of Pak Rupee, once again wreaked havoc on the profitability and margins of SCL. While the topline grew by 23.90 percent year-on-year on the back of volumetric growth as well as upward revision in price, the high cost of sales on the back of rising commodity prices and exchange rate fluctuations put pressure on the GP margin which slid to 23.98 percent in 2022. Gross profit also shrank by 3.85 percent in absolute terms in 2022. Operating expenses also grew by 43.89 percent in 2022 owing to inflationary pressure coupled with increased spending on advertising and promotion. Freight charges also expanded owing to an increase in offtake both in local and export markets. The company, once again started making sales to Afghanistan which were discontinued for quite some time. Other income provided support to the bottom line as it grew by 136.38 percent in 2022 on the back of rental income, scrap sales, and grant income. Other expenses also gave a breather and dipped by 13 percent in 2022. SCL couldn’t sustain its operating profit which dropped by 60.17 percent year-on-year with OP margin squeezing to 4.2 percent in 2022. Finance costs grew by 62 percent on the back of increased borrowings and a high discount rate. Debt-to-equity ratio clocked in at 119.82 percent in 2022. SCL’s bottom line also plunged by 88.55 percent year-on-year in 2022 to clock in at Rs.17.76 million with an NP margin of 0.67 percent. EPS massively dipped to Rs.4.55 in 2022.

In 2023, SCL recorded a massive year-on-year growth of 63.69 percent. This was on account of an enhancement in sales volume as well as price revision during the year. Both local and export sales boasted improvement during the year. The company exported its products to new destinations which it didn’t cater to in the previous year. These included Sudan, UAE, Yemen, Ghana, Ireland, etc. Cost of sales grew by 59.37 percent in 2023 due to commodity super cycle, Pak Rupee depreciation, elevated energy tariff, and high indigenous inflation. Despite that, upward price revision enabled the company to record 77.4 percent stronger gross profit in 2023 with the GP margin climbing up to 26 percent. Operating expenses mounted by 29.38 percent in 2023 due to higher payroll expenses, freight expenses as well as traveling & conveyance allowance incurred during the year. Other expenses escalated by 69.38 percent in 2023 due to hefty exchange loss incurred on purchases as well as higher allowance booked for WWF and WPPF. Other expense was greatly offset by 7.79 percent higher other income recognized during the year which was the result of higher rental income and grant income. Operating profit strengthened by 285.72 percent in 2023 with OP margin jumping up to 9.89 percent. Finance costs surged by 138.87 percent in 2023 due to a high discount rate coupled with increased short-term borrowings to meet working capital requirements. Despite increased borrowings, higher revenue reserve didn’t allow the debt-to-equity ratio to pick up during the year which stood at 84.9 percent in 2023. Net profit registered a whopping growth of 716 percent to clock in at Rs.144.96 million in 2023 with EPS of Rs.37.17 and NP margin of 3.33 percent.

After recording stunning growth in 2023, SCL’s topline dipped by 11.26 percent in 2024. This was due to a slump recorded in the sales volume of the company owing to a shift in the buying pattern of the company’s consumers on account of acute inflationary pressure. Both local and export sales weakened during the year. The company didn’t make any sales to Yemen, UAE, Sudan, Ireland and Afghanistan in 2024. Higher utility prices and high cost of raw materials coupled with overall inflationary pressure resulted in a 23.1 percent decline in SCL’s gross profit in 2024 with GP margin slipping to 22.52 percent. Operating expense multiplied by 39.35 percent in 2024 predominantly due to higher payroll expense, advertisement & promotion budget, freight expense as well as traveling & conveyance charges incurred during the year. Other expenses plunged by 80.83 percent in 2024 due to no provisioning done for WWF, WPPF, lesser provisioning done for slow-moving stores and spares as well as considerably lower exchange loss incurred during the year due to stability in Pak Rupee. Other income also eroded by 11.22 percent in 2024 due to lower scrap sales and no gain on foreign exchange recorded during the year. For the first time during the period under consideration, SCL recorded an operating loss of Rs.66.91 million in 2024. Finance cost mounted by 48.17 percent in 2024 due to heightened discount rate. The company recorded a net loss of Rs.362.68 million with a loss per share of Rs.92.99 in 2024.

Recent Performance (1QFY25)

During 1QFY25, SCL recorded a 42 percent year-on-year dip in its topline. However, q-o-q, net sales improved by 16.29 percent. While local sales still form the largest chunk of SCL’s sales mix, during the recent quarter, net local sales dipped by 44.88 percent year-on-year to clock in at Rs.682.371 million. Conversely, export sales strengthened by 846.144 percent year-on-year during 1QFY25 to clock in at Rs.37.543 million. A surge in export sales mainly came on the back of export proceeds from Afghanistan, Sudan, Madagascar, Uzbekistan, and the UK. These are the regions where the company made no sales during the same quarter last year. However, a rise in export sales couldn’t save SCL’s topline from declining during 1QFY25. Cost of sales slid by 37 percent during 1QFY25 resulting in a 54.15 percent plunge in gross profit. GP margin also eroded from 29.37 percent in 1QFY24 to 23.23 percent in 1QFY25. While administrative expenses largely remained intact during the quarter, the company kept a check on its selling & distribution expenses which plummeted by 31.18 percent in 1QFY25. Other expenses also tumbled by 94.71 percent during 1QFY25 and the company also booked a reversal of impairment on trade receivables. Other income dipped by 5.55 percent in 1QFY25. Despite all the cost control measures, SCL’s operating profit tapered off by 98.15 percent in 1QFY25 with OP margin clocking in at 0.3 percent versus OP margin of 9.32 percent recorded during the same period last year. The company was able to cut down its finance cost by 36.46 percent during the quarter due to a slide in the discount rate and loan granted by the company’s sponsors which enabled the company to discharge its external liabilities. SCL recorded a net loss of Rs.57.902 million in 1QFY25 versus a net profit of Rs.16.764 million recorded during 1QFY24. Loss per share stood at Rs.14.85 in 1QFY25 versus EPS of Rs.4.30 registered in 1QFY24.

Future Outlook

The company is making strides in its existing export markets and is also tapping new geographical locations. The company also has a sizeable share in the local market. To optimize its financial performance in both local and export markets, SCL is required to play with its sales mix and pricing strategy as well as raw material sourcing to strengthen in margins.