Sapphire Fibres Limited (PSX: SFL) was established in 1979 as a public limited company under the Companies Act, 1913 (now the Companies Act, 2017). It is a part of the larger Sapphire Group. The company deals with manufacturing and sale of yarn, fabric and garments. It has three production plants; one is located in Lahore, while two are in Shiekhpura.
More than 50 percent of the shares are held by the associated companies, undertaking and related parties. Within this category, Sapphire Holding Limited holds majority of the shares followed by Sapphire Agencies (Private) Limited. The directors, CEO, their spouses and minor children own a little over 26 percent of which Mr. Yousuf Abdullah, one of the directors of the company has the largest share. About 13 percent is distributed with the local general public while the remaining around 8 percent is with the remainder of the categories.
Historical operational performance
Over the years, the company has more often than not witnessed double digit growth in its topline. Profit margins, too, although have varied a lot but remained in the green largely.
In FY15, the company saw a negative growth for the second time since FY09, at around 10 percent. The lower sales were attributed to the subdued global demand for textile products. Gross margin could only increase marginally as cost of sales remained unchanged as a percentage of revenue. Operating margin saw a decline year on year as last year's operating margin was lifted unusually due to escalated ‘other income'. This arose from dividend income from associated companies, which was halved during FY15, thus lowering operating and net margins.
Lower sales continued during FY16 as demand failed to pick up. Lower selling prices also added to the woes as sales decreased by 6.5 percent. Although cost of sales reduced in absolute terms, with lower sales it made around 91 percent of the topline, bringing gross margins down. However, despite this operating and net margins improved notably as ‘other income' derived from dividend earnings from associated companies doubled along with gain on sale of investments. In fact, other income made 13 percent of the revenue and 85 percent of the operating profit, implying that other income has primarily kept the company's financials positive.
After two years of decline in topline, in FY17, Sapphire Fibres managed to grow its revenue by 16 percent, while the overall textile exports of the country grew by a marginal 0.4 percent. Pakistan has been facing increasing competition from its regional countries. The high cost of production also makes products from Pakistan unfavourable and unprofitable in the international market. During the year, the company made its new denim plant operational. However, given that the plant was operational but not operating at full capacity, therefore it added to costs; the latter made up 93 percent of the revenue thus lowering gross margins. Although ‘other income' was higher in absolute terms, it could not lift the bottomline.
In FY18, the textile sector saw some positive growth as exports grew by 9 percent. This was attributed to the Export Package announced by the government in addition to the devalued currency. However, currency devaluation by a large extent happened only in the last quarter of FY18. The company saw a growth of 23 percent in its topline. This coupled with lower costs as a percentage of revenue helped to raise gross margins. However, its effect could not be translated into the bottomline as other income, which had made nearly 13 percent of the revenue in FY17, was down to percent in FY18. Moreover, finance cost which largely increased due to markup on long term finances, further squeezed the net margins for the year.
Despite significant currency devaluation that was seen during FY19, textile exports of the country failed to pick up as they remained more or less around $13 billion. Reason being, the high cost of production compared to regional peer countries. Sapphire Fibres, on the other hand, experienced a 22 percent growth in its topline. Cost, as a percentage of revenue, reduced only slightly. However, the increase in revenue helped to improve gross margins. While most other factors remained unchanged, the higher revenue could not be reflected in the bottomline as other income reduced by 63 percent. Moreover, the elevated finance cost also further squeezed net margins which nearly halved year on year at 3.5 percent.
Quarterly results and future outlook
Since a significant currency devaluation happened in the second half of FY19, the year on year change in topline during 9MFY20 is considerable at 26 percent. However, with a corresponding increase in costs, gross margins remained more or less flat, whereas operating and net margins improved on the back of dividend income.
In the near future, that is, the last quarter of FY20, a notable decline in earnings is inevitable. With a long period of lockdown which halted revenue generation due to a pause in trade activities, whereas costs remained in place, the quarterly result is expected to be different. Although lock down has been eased in the country, full resumption of trade activities and return to normalcy cannot be determined.