Security Papers Limited (SEPL) is in the business of manufacturing of Banknote Paper and other security papers such as Prize Bonds, Defence Savings Certificate, Non-Judicial Stamp paper, Child Registration Certificate, certificate paper for educational boards and degree paper for universities. SEPL was established in 1965 as a private company. In 1967 it was converted into a public limited and was listed on Karachi Stock Exchange now known as Pakistan Stock Exchange.
The company started its production in 1969 as a joint venture company of Iran, Turkey and Pakistan, under Regional Cooperation for Development (RCD) now known as Economic Cooperation Organisation (ECO). The commercial production of the old paper machine PM-1 was started in 1969.
The production process of the company involves the input of locally produce cotton comber, textile waste and water as raw material. The Pakistan Security Printing Corporation (Pvt) Limited (PSPC) is the primary customer of SEPL.
SEPL's production facilities now consist of new state of the art paper machine PM-2 of German origin, which started commercial production in 2003. The machine is producing high quality specialised paper of international standard for a variety of security documents with custom made security features. Over the years SEPL has gradually enhanced the paper production capacity which has increased from 2,000 tons to 2,500 tons extended up to a maximum of 3,000 tons per annum. Security Papers have many achievements under its belt including Corporate Excellence Award 2009, ISO certifications 2009, Best Corporate Report Award 2008. Pakistan Security Printing Corporation (Pvt) Limited (PSPC) is also the associated company of SEPL. In 2016, the company has also started to print passport paper.
Historical performance
During the period from FY11-15, SEPL has witnessed an average annual growth rate of 13.22 percent. The company achieved decent profit margins and returns on equity and assets in the past several years. Gross profit margin stood at 26 percent in FY11. However, its highest point was in FY12 when it touched 33 percent. Gross margin declined slightly in FY13 and FY14, but jumped back to 32 percent in FY15.
Liquidity condition was safely monitored by Security Papers for the period under discussion. The relevant ratios were in a strong position. In terms of asset management, the company continued its good performance as the total asset turnover remained consistent for FY11-15. The ratio remained at on a higher end, showing a considerable return on the assets employed.
FY11
The company's production during FY11 was decreased by 185 tons or by 11.66 percent mainly due to plant upgrade. The sales volume during the financial year clocked in 1,622 tons as against to 1,587 tons in FY10. The increase of 2.2 percent was mainly due to additional sales orders. However, during the year SEPL had to face higher prices of cotton comber, which is the primary ingredient of bank note paper. Due to this, the company faced higher core cost and decline in gross profit. The rising cost of raw material also affected the earrings which dropped by 9.48 percent year-on-year.
FY12 and FY13
In FY12, the company had successfully negotiated sales price increase with Pakistan Security Printing Corporation (Pvt) Limited. The sales volume is also improved by 15 percent year-on-year on the back of higher sale of non-judicial papers. The cost of production in FY12 was kept at an optimum level by controlling production wastage. The reinforcement of cost effective measure, higher sales volume and increase in selling price has improved the gross profit margin in FY12.
In FY13, despite showing an improvement of 18.20 percent year-on-year in net sales, the margins remained under pressure due to rising cost of energy and production overheads. The profit of the company came down from Rs 320.23 million from Rs 378.10 million.
FY14 and FY15
Once again in FY14, the company successfully negotiated sales price increase with its biggest client Pakistan Security Printing Corporation (Pvt) Limited. The net sales revenue in FY14 was higher mainly due to higher sales volume of the banknote and other security papers. During the year, the firm generated an amount of Rs 519.62 million from its operating activities, and Rs 165.16 million was received on account of mark-up on investment. The production decreased in FY15 and so did the sales owing to the low demand for security paper. The increase in selling price in FY14 helped the gross profit for FY15 as well. Thanks to the better return on investment, other operating income also increased. These better return on investment filled the gap of lower sale and raised the profit after tax by 23 percent year-on-year.
Stock performance
Although SEPL started the year on a high note, it started dipping by August 2015 and continued to underperform the KSE-100 till November. However, from December the stock began to outperform the benchmark index for the remaining part of the year. The difference increased manifold during the July 2016, and if the stock continues in the same trend, it will beat the KSE-100 by an even higher margin.
Performance in FY16
The recently ended financial year 2016, has been a healthy year for the company. SEPL reported a 25 percent year-on-year growth in its bottom line. The aggregate production of the company stood at 2,657 tons as against 2,210 tons in FY15. SEPL also achieved a total sales volume of 2,658 tons as oppose to 2,237 tons last year. Sales revenue clocked in at Rs 2584 million as against Rs 2,141 million in FY15. During the year, the core business of banking notes has performed particularly very well, and SEPL sold all denomination of Bank Note Paper. The sale of other security papers also performed well during the period. The company has seen its gross profit grow by 30 percent year -on-year on the back of higher sales volume, operational efficiencies and better absorption of production overheads due to higher sales volume.
Outlook
Going forward, the profitability of Security Papers Limited (SEPL) depends on raw material prices since SEPL operates in a buyer's market and has little pricing power. But Security Papers have embarked on various measures which include installing state of the art technology, along with its various cost reduction programmes during the year. All these measures will help the Security Papers to face future challenges through controlling waste and spoilage and improved operational performance.
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