Shield Corporation Limited

Shield Corporation Limited (PSX: SCL) was set up as a public limited company in 1975 under the Companies Act, 1913. It manufactures, trades and sells oral care, baby care products and hygiene products. Baby care product line makes the largest contribution to revenue. The company also sells in the international market, but local sales make a larger share in the total revenue pie.

Shareholding pattern

As at June 30, 2020, over 74 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, the major shareholders are Mrs. Kulsum Bano, chairman Mr. Ebrahim Qassim and the CEO, Mr. Mohammad Haroon Qassim. The local general public owns over 25 percent shares while the remaining less than 1 percent are categorized under “others”.

Historical operational performance

Shield Corporation Limited has mostly seen a rising topline with the exception of FY14, and again more recently in FY20. Profit margins have also largely remained stable throughout the years, with a slight decline observed after FY19.

During FY17, revenue grew by over 7 percent. This was slower than the topline growth rates seen in the earlier part of the decade. Local sales that made a prominent share in the revenue grew by 7 percent. The baby care category saw several product launches but the diaper category saw the highest growth in market sales, at 70 percent. Given the rise on focus on oral hygiene, the company also introduced new flavors in children’s toothpaste category. On the other hand, cost of sales reduced since the company was able to negotiate with supplier and vendors. This is reflected in the improved gross margin for the year at 34.5 percent. Administrative expense made a larger share in revenue due to salaries expense and depreciation. Lastly, the higher tax expense reduced the net margin marginally to 2.9 percent.

Revenue growth was even slower in FY18 at 1 percent. This can be partly attributed to the uncertainty revolving around the general elections, in addition to the company offering extra discounts for maintaining market share. The latter was adjusted for in sales revenue; excluding this, gross sales had increased by 6 percent. Negotiation with suppliers and vendors allowed cost of sales to reduce to over 63 percent of revenue, raising gross margin to over 36 percent. This also reflected in the bottomline with net margin recorded at 4 percent for the year, since operating expenses reduced. Advertisement expense, in particular, had reduced since the trade discounts were already accounted for in total revenue.

Revenue growth rate recovered in FY19 as it grew by nearly 6 percent, while gross sales saw a nearly 9 percent incline; the difference was due to the trade discounts offered. This meant that advertisement expense was lower. Local sales grew by 6.7 percent. But the higher revenue was combined with a more than corresponding rise in costs, which meant that gross margin reduced to over 31 percent. Cost of sales increased due to currency devaluation that made imported inputs expensive while the country also saw a general inflationary pressure post- general election. Finance cost also went up to its highest thus far, at Rs 42 million, due to high interest rates and an increase in short term borrowing. Thus, net margin reduced considerably to 1.35 percent for the year.

After growing for five consecutive years, albeit at varying rates, revenue in FY20 contracted by nearly 4 percent. Export sales nearly disappeared, reducing from over Rs 5 billion in FY19, to less than Rs 1 billion in FY20. In the local sales category, hygiene products disappeared entirely while oral care sales shrunk from Rs 749 million in FY19 to Rs 298 million in FY20. Given the unfavorable environment in the first half due to inflationary pressure, higher input prices due to currency devaluation, and the Covid-19 pandemic in the second half, gross margin fell to its lowest of 24.3 percent. This also trickled down to the bottomline that was further worsened by the high finance expense- a result of a high borrowing rate, and increase in short term and long-term financing. Thus, the company incurred a loss of Rs 18 million during the year.

Quarterly results and future outlook

The first quarter of FY21 saw revenue higher by 20 percent year on year as business resumed after the lock downs eased that were put in place to curb the spread of Covid-19. However, production cost also increased year on year, therefore profitability remained lower compared to the same period last year, at 4.1 percent.

The second quarter also saw revenue higher, by 29 percent year on year. But with a significant drop in costs as a percentage of revenue compared to that seen in the same period last year, profitability was notably higher at a bottomline of Rs 69 million versus a loss of Rs 6.5 million in 2QFY20. Third quarter also saw similar trend of better topline and lower costs, particularly the finance expense as well; the latter was due to a decline in borrowing rate. Given the existing risk associated with the presence of Covid-19, the company is focusing on promotional plans and a favorable sales mix to sustain profitability.