Siemens (Pakistan) Engineering (PSX: SIEM) was incorporated in Pakistan as a public limited company in 1953. The principal activity of the company is the implementation of projects under contracts and also manufacturing, installation and sale of electronic and electrical capital goods. SIEM’s business portfolio includes smart infrastructure, digital industries, smart grid and smart buildings, power generation and distribution as well as automation and digitization, to name a few.
Pattern of Shareholding
As of September 30, 2022, SIEM has a total of 8.247 million shares outstanding which are held by 1461 shareholders. Siemens AG, Germany is the major shareholder of SIEM with a stake of 74.65 percent in the company. This is followed by NIT and ICP holding 12.64 percent of SIEM’s shares. About 4.48 percent of the company’s shares are held by general public. Adamjee Insurance Company Limited accounts for 1.80 percent of SIEM’s shares while banking companies hold 1.59 percent shares. The remaining shares of SIEM are held by other categories of shareholders.
Historical Performance (2018-22)
SIEM’s topline and bottomline which had been on the skids in 2019 and 2020 boasted a turnaround in 2021 whereby the company not only recovered from the net loss posted in 2020 but also strengthened its financial performance in the subsequent year. The margins which had been declining until 2020 also strengthened in 2021 to turn their highest ever levels in 2022. The detailed performance review of each of the years under consideration is given below.
In 2019, SIEM’s topline dropped by 15 percent year-on-year on the back of unfavorable macroeconomic conditions in Pakistan and also because some major projects in Afghanistan were completed in 2018. Cost of sales slid by 13 percent year-on-year in 2019, however, high per unit cost due to inflation and Pak Rupee depreciation and also because of high fixed overhead cost due to low capacity utilization, pushed down the gross profit by 24 percent year-on-year in 2019. GP also slumped from 16.9 percent in 2018 to 15 percent in 2019. Distribution expense inched down by 2 percent year-on-year in 2019 mainly on account of higher commission income earned during the year and reversal of allowance on deposits and other receivables. Administrative expense grew by 20 percent year-on-year in 2019 on the back of higher payroll expense despite a drop in the number of employees from 665 in 2018 to 602 in 2019. Other income nosedived by 81 percent year-on-year in 2019 which was the result of lower provisioning for WWF and WPPF and also because some liabilities which were no longer payable were reversed in 2018, created a high-base effect. Other expense also shrank by 46 percent year-on-year in 2019.
Despite a check on expenses, operating profit fell by 37 percent year-on-year in 2019 with OP margin sliding down to 8.6 percent from 11.7 percent in 2018. Net finance expense magnified by 444 percent year-on-year in 2019 due to higher discount rate. This culminated into a 39 percent year-on-year decline in net profit which clocked in at Rs.709.47 million in 2019 with an NP margin of 4.3 percent versus 5.9 percent in 2018. EPS also dwindled from Rs.140.56 in 2018 to Rs.86.03 in 2019.
2020 brought about a further 23 percent decline in SIEM’s topline. This was on account of COVID-19 which brought complete halt in economic activities for three months and slowed down the growth momentum for the rest of the year. Cost of sales shriveled by 16 percent year-on-year in 2020, yet couldn’t prevent the gross profit from slipping by 64 percent year-on-year in 2020. GP margin trimmed down to 6.95 percent in 2020 – the lowest among all the years under consideration. Distribution expense tapered off by 7 percent year-on-year in 2020 on account of reversal of loss allowance on trade receivables and also because of the discounting of long-term loans and trade receivables. Administrative expense didn’t give any respite in 2020 and grew by 7 percent year-on-year in 2020 due to higher payroll expense on account of inflation. This was despite the fact that the number of employees further reduced to 539 in 2020. Other income didn’t offer any support either and trimmed down by 46 percent year-on-year in 2020 due to lower gain on sale of property, plant and equipment and also because of no insurance claims during the year.
SIEM didn’t incur any other expense during the year as the company didn’t book any provisioning against WWF and WPPF in 2020. The company incurred an operating loss of Rs. 55.44 million in 2020. While the company availed SBP Refinance scheme for the payment of salaries and wages and also obtained lease liabilities which built up its long-term liabilities, short-term borrowings majorly reduced during 2020. This coupled with lower discount rate in the second half of 2020 (year ending September), resulted in a 26 percent year-on-year decline in net finance expense. SIEM posted a net loss of Rs.496.015 in 2020 with a loss per share of Rs.60.14.
SIEM’s fate seems to have turned around in 2021 as its topline posted a 12 percent year-on-year rise after two successive years of decline. The sales growth was mainly backed by energy transmission business which received new orders worth Rs.15 billion in 2021 versus Rs.5.6 billion in the previous year. Targeted measures of cost optimization resulted in a 172 percent year-on-year rise in gross profit with GP margin jumping up to 16.9 percent, the level last seen in 2018. Distribution expense grew by 21 percent year-on-year in 2021 which was the result of low commission income as well as high payroll expense incurred during the year. Administrative expense also posted a year-on-year rise of 10 percent in 2021. SIEM also booked an allowance for expected credit losses worth Rs.149.95 million in 2021 as against the reversal of Rs.13.99 million in the previous year. However, it was nullified by the gain on disposal of leasehold land and building during the year. SIEM also made other income of Rs.65.08 million during the year which was 4.4 times higher than what earned in 2020. This mainly comprised of liabilities no longer payable written back during the year. Unlike last year when the company incurred losses and didn’t book any provisioning for WWF and WPPF, the company booked a provisioning of Rs.85.3 million in 2021. SIEM recorded an operating profit of Rs.1360.13 million in 2021 with an OP margin of 9.5 percent. The lucky streak continued as the company earned a net finance income of Rs.29.92 in 2021, as against the rest of the years under consideration where it incurred a net finance expense. This was on account of a massive decline in borrowings coupled with low discount rate post COVID-19. SIEM posted a net profit of Rs.850.01 million in 2021 with an NP margin of 5.9 percent. EPS clocked in at Rs. 103.07 in 2021.
Despite geopolitical and macroeconomic impediments, in 2022, SIEM’s topline posted a staggering 50 percent year-on-year surge. Energy transmission business, once again, turned out to be the star performer with new order worth Rs.22.4 billion in 2022. The major wins of 2022 was energy transmission contract with K-Electric to build the KANUPP and SAP license, implementation and maintenance contract for NTDC. Cost of sales grew by 38 percent year-on-year mainly on account of Pak Rupee depreciation, fuel and power price hikes as well as inflationary pressure.
However, robust revenue translated into a 106 percent rise in gross profit with GP margin climbing up to 23.2 percent – the highest ever achieved by the company. A major hit to SIEM’s profitability in 2022 came from expected credit losses aggregating Rs.871.48 million recognized during the year due to geopolitical impediments in the energy transmission business. Distribution expense escalated by 21 percent year-on-year in 2021 which was primarily on account of a spike in higher payroll expense, receivables written off during the year, advertising and promotion as well as travelling charges. Administrative expense also registered an 8 percent hike on the back of payroll expense as the number of employees grew from 536 in 2021 to 576 in 2022. Other income shrank by 50 percent in 2022 as lesser amount of liabilities was written back during the year versus in 2021. 125 percent higher other expense incurred in 2022 was due to higher provisioning for WWF and WPPF. Operating profit boasted a 92 percent year-on-year growth with OP margin rising to 12.2 percent in 2022. SIEM incurred a net finance expense of Rs.22.97 million in 2022 which was the result of higher discount rate. The bottomline grew by 98 percent year-on-year in 2022 to clock in at Rs.1680.85 million with an NP margin of 7.8 percent. EPS grew to Rs.203.81 in 2022.
Recent Performance (Nine months period for the year ending September 2023)
SIEM’s topline grew by 8 percent year-on-year for the nine month period ended June 2023. While in the first half of the year, the sales grew by 25 percent year-on-year, a 20 percent drop in its topline in the third quarter diluted the growth momentum for the nine month period. Overall the company received new orders of Rs.22.6 billion during the nine month period out of which 63 percent were generated by the energy business.
Cost of sales slid by 6 percent year-on-year during the nine month period, resulting in a 47 percent year-on-year growth in gross profit with GP margin jumping up to 34.9 percent for the nine months of FY23 (year ending September) compared to 25.6 percent for the same period last year. Distribution expense grew by 18 percent year-on-year during the nine month period of FY23 while administrative expense posted a steep 62 percent hike. While the details of a momentous rise in administrative expense are not available, we can assume that it emanated from spike a payroll expense on account of human resource induction and market induced rise in salaries and wages. Allowance for expected credit losses posted a meager 4 percent fall during the period while other expense shrank by 61 percent year-on-year. Other income multiplied by around 5 times during the nine month period. Operating profit grew by 76 percent year-on-year during 9MFY23 with OP margin climbing up to 23.6 percent from 14.5 percent during the same period last year. Higher discount rate coupled with higher short-term borrowings culminated into over 14 times hike in finance cost during the period.
Net profit from continued operations grew by 90 percent year-on-year during 9MFY23 to clock in at Rs.2341.10 million with an NP margin of 16.2 percent versus 9.2 percent during the same period last year. EPS grew from Rs.149.29 during nine month ended June 2022 to Rs.283.87 during the nine month period of the 2023.
Future Outlook
After the period ended June 2023, SIEM signed a major contract in transmission solution business with NTDC which will create an impact of Rs.12.3 billion in the new order value. Hence, the company is expected to end the ongoing year on a buoyant note.
With the removal of import restrictions, the company seems all set to import modern machinery and equipment to execute its orders.
However, with the weaker local currency and expectations of a further rate hike, how the company undertakes capital investment and manages working capital while alleviating market risk is yet to be seen.