Limited Security Documents – BR Research


Security Papers Limited (PSX: SEPL) was established in 1965 as a private company. It was transformed into a limited company in 1967. The company manufactures banknote paper and other security papers such as award bonds, defense savings certificates, non-court stamp papers, passport papers and a checkbook, a certificate for school boards and a diploma or universities.

Ownership model

As of June 30, 2021, 60% of the shares are held in associated companies, companies and related parties. In this, the majority is owned by Pakistan Security Printing Corporation (Pvt.) Limited. About 10% of the shares are held by local general public, banks, DFIs, NBFIs and insurance companies. Directors, their spouses and their minor children own less than 1% of the shares, while the remaining 10% belong to the rest of the categories of shareholders.

Historical operating performance

With the exception of fiscal year 2015, the company has largely seen an increase in revenue. Over the past six years, gross margin has remained more or less stable, while operating and net margin increased in FY17, declined in the following two years, before following an upward trajectory to in FY21.

FY2018 revenue increased by nearly 22% to Rs 3.5 billion in value. This is due to the larger volume of banknote paper sold to its largest customer, Pakistan Security Printing Corporation (Pvt.) Limited. Added to this is the rise in selling prices and stronger demand. However, with an increase in input costs, the cost of production increased slightly to reduce the gross margin to 37.3% from 38.3% the previous year. However, the decline in net margin year over year was more pronounced as it was recorded at 21.3% for the year, compared to 33% in FY17, due to the absence of other significant revenue from a one-time mutual fund redemption event that was seen last year.

Revenue continued to grow in FY2019, growing by 15.4% to cross Rs 4 billion in value. This was attributed to a 12.8% increase in sales volumes, in addition to banknote paper which saw growth of nearly 20% due to demand from Pakistan Security Printing Corporation (Pvt.) Limited. The increase in revenues was also reflected in the gross margin which was recorded at nearly 40%, a record high. But net margin was lower at 19.3% as the revaluation of unrealized losses on mutual funds increased other expenses which consumed nearly 9% of revenue.

The company recorded the highest growth rate in the financial year 2020 at 22.5% to reach almost Rs 5 billion in value. Sales volumes increased by 16.3%, while each individual segment also recorded higher volumes due to strong demand. And this despite the economic slowdown in the first half, while the Covid-19 pandemic in the second half wreaked havoc in the majority sectors. With a marginal increase in production costs, the gross margin was lower at almost 39%. However, net margin, recorded at a significantly higher level of 26%, increased on the back of higher other income from higher Pakistan investment bonds and treasury bills. In terms of value, net income was at its highest level to date at Rs 1.3 billion.

The company has experienced double-digit revenue growth over the past five years. In FY21, revenue increased 2%. While sales volumes of banknote paper increased by 11%, other segments such as passport paper, educational diplomas and certificates, etc. saw their volumes decline due to the impact of Covid-19 and the resulting travel restrictions. With slightly higher production at over 62%, the gross margin was reduced to 37.6%. However, net margin received significant support from other revenues which helped the premiere reach a high of 29%, a level last exceeded in fiscal 2017. Bottomline, on the other hand, has peaked at Rs 1.4 billion. The other abnormally higher income came from the gain on the revaluation of the mutual fund.

Quarterly results and future outlook

The first quarter of FY22 saw revenue increase by more than 14% year-over-year, while sales volumes increased by 9.2%. In addition to rising production costs as a share of revenue, 1QFY22 recorded an unrealized capital loss of Rs 41 million due to weak capital market against an unrealized capital gain of Rs 167 million of rupees in 1QFY21 which reduced profitability for the period, as evidenced by a net margin of 19.2 percent compared to more than 36 percent in 1QFY21.

In the second quarter, revenue nearly doubled in value year-on-year, with sales volumes up 39%. Gross margin for 2QFY22 was significantly better as 2QFY21 witnessed lockups that impacted revenue for the period. However, it received considerable support from other incomes which were weaker at 2QFY22. Thus, the net margin for 2QFY22 was only slightly lower at 23.7% compared to 24.2% in 2QFY21.

In the third quarter, revenue was down 17% year-over-year as sales volumes were down for the quarter compared to the prior quarter i.e. 2QFY22, as well as year-over-year i.e. i.e. at 3QFY21. However, due to lower production costs, 3QFY22 recorded a higher gross margin at 37.7% compared to 35.7% in 3QFY21. But net margin was lower at 24.8% due to higher operating expenses as a share of revenue. Although there were marginal changes in gross margins, net margin was significantly impacted by notable changes in other income. Additionally, the external environment such as the domestic political scenario, the war between Ukraine and Russia which has pushed up global commodity prices and inflationary pressures continue to fuel uncertainty.


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