Security Papers Ltd (SPL) was established in 1965. It became a joint venture company of Iran, Turkey and Pakistan, under the protocol of RCD - now ECO - in 1967.
The basic function of the Company was and still is; to manufacture banknote and other security paper for the State Bank of Pakistan, and for other government institutions.
The salient features of the Company have been highlighted as under:
=================================================
Year of Establishment 1965
Converted into a Public Ltd Company 1967
Listed on the Karachi Stock Exchange 1967
Commercial Production Started (PM -1) 1969
Commercial Production Started (PM -2) 2003
=================================================
Security Papers Ltd manufactures Banknote Paper and other security documents from 100% indigenous raw materials ie comber and textile cuttings of the highest quality. It has successfully been meeting the paper requirements of the Pakistan Security Printing Corporation (PSPC) for printing Banknotes, Prize Bonds, Non-judicial Stamp Paper, Share Certificates, etc and Watermarked Certificate/ degree papers for various educational institutions of Pakistan.
Security Papers have installed state of the art facility for the production of paper notes. The new machinery (PM-2) is fully automated and modern. Security Papers Limited has completely transformed into a state of the art technology from the manual systems. Security Papers have many achievements under their belt, which includes Corporate Excellence award 2009, ISO certifications 2009, Best Corporate Report Award 2008.
============================================================
COMPANY SNAPSHOT
============================================================
Symbol SEPL
Nature of the Business Developing papers for bank notes
Current Rate Rs 39.55
Turnover 612
Outstanding Shares 41149992
Market Capitalization 1627482183.6
EPS (FY'10) Rs 8.46
Price Earnings (FY'10) Rs 5.08
============================================================
Finance costs increased nearly 3 folds, adding to the decline in profitability.
PROFITABILITY (FY'08-FY'10)
Security Papers' profitability has been overall consistent from FY'08- FY'10. The company achieved healthy profit margins and returns on equity and assets in the past several years. Gross Profit margin stood high in FY'08 with 46%, however slightly decreased in FY'09 and FY'10 to 41% and 40% respectively; high energy and raw material costs led to decline. These were on account of energy crisis faced throughout the country and secondly because of devaluation of the currency, which led to higher import prices of raw materials.
Net Profit margin showed a consistent and an increase between FY'08- FY'10. The margin remained stable at 29% for FY'08 and FY'09, however increased in FY'10 to 30%. Declining gross margin was offset by decrease in 'Other Operating Charges' and increase in 'Other Operating Income'. The major contribution is the income received through the investment in the financial assets by Security Papers, where the markup on 'Special Savings Certificate' mounted Rs 128mn compared to Rs 36mn.
A stable trend was observed for both Return on Assets as well Return on Equity. The ratio remained at 10% and 11% respectively for FY'08-FY'10.
LIQUIDITY
Liquidity condition was safely monitored by Security Papers for FY'08- FY'10. The ratios were in a very strong position. The Current Ratio was kept well above 6x in the period FY'08- FY'10. The key category to be noted is the Investments, where the amount invested is over Rs 1bn in the short-term securities/financial assets. These assets range from Special Saving Certificate, Term Deposits of commercial banks, Treasury Bills, Investment in Pak-Brunei Company. Along with this healthy cash and bank balances are kept to meet the liquidity requirements. Most of the investments can be liquidated anytime in near future for expenditure purposes.
The similar condition can be observed for Quick Ratio, as the ratio is also well above 5x for FY'08-FY'10. This shows that, not heavy reliance is made on the inventory and liquidity condition can be catered easily through cash and marketable securities.
DEBT MANAGEMENT
Security Papers have kept its leverage position to its minimum. The debt ratios though are on a rising trend, however remains at very low levels. The only debt financing that is used in the financial lease on the equipment. The company has issued Ijarah Financing through the local banks. The asset would be acquired at the end of the term. Thereby the gearing ratios are observed to be at minimum. Debt to equity rose from 0.0022x to 0.0037x in FY'08-FY'10. Likewise the long term debt to equity also rose from 0.0017x to.0030x in FY'08-FY'10.
Considering the current situation, security papers are not faced with high interest charges as the debt financing remains very low, in this situation, the interest coverage tends to be high. We observe this for Security Papers as well the TIE ratio remained well over 200x in FY'10. The ratio was at its peak in FY'08 as it reached Rs 900, but fell to Rs 278 in FY'10. This shows a strong position for security papers to cover their interest charges.
ASSET MANAGEMENT RATIOS
The company continued its good performance as the Total Asset turnover remained consistent for FY'08- FY'10. The ratio remained at 32%, showing a considerable return on the assets employed.
One of the major concerns for security papers remains their cash conversion cycle. The company's Payable Turnover stayed at 27days in FY'08, showing early cash disbursement for trade payables. On the other hand, the receivable turnover takes 58days in FY'08 to collect cash from its debtors. Lastly, the inventory turnover takes 164days for converting it into sales. An overall affect can be observed as the operating cycle was 196 days in FY'08.
In FY'09, the operating cycle improved by 2days, which was due to decrease in Inventory Turnover to 146days and increase in Payable turnover to 42days. However the cycle increased in FY'10 as the Receivable turnover increased to 78days, along with Inventory Turnover to 163days resulting in operating cycle to reach 206days. Increasing operating cycle can be a concern for security papers, as the conversion of inventory to sales and then to cash needs to expedite to avoid liquidity constraints.
MARKET RATIOS
Security Papers have seen a reduction in their Earnings Per Share compared to previous years. The recent EPS on the other hand has been on an increasing trend. The EPS for FY'08 Rs 7.23, however for FY'09 and FY'10 the EPS grew to Rs 8.07 and Rs 8.46 respectively. This is mainly because of the increase in net income over the periods. P/E ratio has declined from Rs 10.6 in FY'08 to Rs 5.08 in FY'10. This is mainly due to the share prices on a decline since 2008, resulting in decreasing P/E ratio.
FUTURE OUTLOOK
The economy has started showing positive results. However, inflation continues to be a major challenge facing the business environment. Adding to this adverse impact of global recession and devaluation of local currency. Rising raw materials and energy costs are affecting company's profitability. The increase in cost of doing business on multiple accounts and energy crisis may squeeze margins and affect income and profitability.
To mitigate these risks, Security Papers have embarked on various measures. This includes installing state of art technology, replacing 40years old pulp machinery. Along with this various cost reduction programmes during the year. Security Papers is well determined to face future challenges through controlling waste and spoilage and improved operational performance.
State Bank of Pakistan is considering the use of Polymer Technology for printing bank notes. This would be one of the major issue for Security Papers, as their core business of cotton based raw materials would completely be taken off.
===========================================================================
FINANCIALS
===========================================================================
2008 2009 2010
===========================================================================
Assets
---------------------------------------------------------------------------
Non Current Assets
---------------------------------------------------------------------------
Property, Plant and Equipment 1,205,059 1,264,704 1,244,364
Long-term deposits 16,296 16,757 17,258
1,221,355 1,281,461 1,261,622
---------------------------------------------------------------------------
Current Assets
---------------------------------------------------------------------------
Stock, spares and loose tools 72,779 81,665 95,705
Stock in trade 273,409 261,420 357,767
Trade Debts- considered good 264,137 290,289 203,020
Advances, deposits, 32,625 33,284 22,693
prepayments and other receivables
Accrued mark-up 13,712 43,798 168,634
Loans and Receivables 770,041 1,250,045 -
Investments 388,267 136,173 1,474,768
Cash and Bank Balances 158,074 69,388 49,757
1,973,044 2,166,062 2,372,344
Total Assets 3,194,399 3,447,523 3,633,966
---------------------------------------------------------------------------
Liabilities
---------------------------------------------------------------------------
Current Liabilities
---------------------------------------------------------------------------
Current portion of liabilities
against subject to financial lease 1,334 1,644 2,077
Trade and other payables 165,549 197,025 222,728
Accrued Markup on
short term finance- secured 4 9 58
Taxation- net 143,561 138,338 142,158
310,448 337,016 367,021
---------------------------------------------------------------------------
Non- Current Liabilities
---------------------------------------------------------------------------
Liabilities against subject
to Finance Lease 4,848 6,685 9,435
Deferred taxation - net 91,630 133,931 146,825
96,478 140,616 156,260
Total Liabilities 406,926 477,632 523,281
Contigency and commitments
Net Assets 2,787,473 2,969,891 3,110,685
---------------------------------------------------------------------------
Finance by:
---------------------------------------------------------------------------
Authorised Share Capital
70,000,000 (2008: 70,000,000)
ordinary shares of Rs 10 each 700,000 700,000 700,000
Issued, subscribed and paid-up capital 342,916 411,499 411,499
General reserve 2,098,589 2,224,589 2,351,089
Unappropriated profit 297,559 332,256 348,097
Surplus on re-measurement of
investments classified
as' available for sale' 48,409 1,547 -
Shareholder's Equity 2,787,473 2,969,891 3,110,685
Income Statement
---------------------------------------------------------------------------
2008 2009 2010
---------------------------------------------------------------------------
Sales - net 1,024,221 1,129,070 1,152,511
Cost of sales (557,721) (668,808) (694,332)
Gross Profit 466,500 460,262 458,179
Administration and general expense (61,697) (75,528) (104,713)
other operating income 112,344 202,417 213,518
Other operating charges (39,168) (88,551) (43,214)
Impairment loss on
'available for sale' investment - (3,702) (1,638)
Operating Profit 477,979 494,898 522,132
Finance Cost (527) (1,787) (1,875)
Profit Before Taxation 477,452 493,111 520,257
Taxation- net (180,031) (161,056) (172,166)
Profit After Taxation 297,421 332,055 348,091
EPS 7.23 8.07 8.46
---------------------------------------------------------------------------
Ratios
---------------------------------------------------------------------------
Profitability 2008 2009 2010
---------------------------------------------------------------------------
Gross Profit 46% 41% 40%
Net Profit 29% 29% 30%
Return on Assets 9% 10% 10%
Return on Equity 11% 11% 11%
---------------------------------------------------------------------------
Liquidity 2008 2009 2010
---------------------------------------------------------------------------
Current Ratio 6.36 6.43 6.46
Quick Ratio 5.47 5.65 5.49
---------------------------------------------------------------------------
Asset Management 2008 2009 2010
---------------------------------------------------------------------------
Total Asset Turnover 32% 33% 32%
Inventory Turnover 164.00 146.00 163.00
Receivable turnover 58.00 90.00 78.00
Payable turnover 27.00 42.00 35.00
Operating Cycle 196.00 194.00 206.00
---------------------------------------------------------------------------
Debt Management 2008 2009 2010
---------------------------------------------------------------------------
Debt-to-equity 0.0022 0.0028 0.0037
Long term Debt-to-equity 0.0017 0.0023 0.0030
Leverage Ratio 1.15 1.16 1.17
Interest Coverage Ratio 906.98 276.94 278.47
---------------------------------------------------------------------------
Market Ratios 2008 2009 2010
---------------------------------------------------------------------------
EPS 7.23 8.07 8.46
Price- Earning Ratio 10.60 6.20 5.08
===========================================================================