How SGF managed 3.5x increase in profits despite lower production

Strong Financial Performance in CY23 and 1QCY24

Service Global Footwear (SGF) has reported impressive financial results with a 3.5x increase in net earnings for CY23 and a 54% increase in 1QCY24. This remarkable growth was achieved despite a 4% decline in production volumes, driven mainly by higher realized export prices.

The decline in production volumes was linked to a slowdown in global demand for footwear products, particularly in the US and EU markets. However, SGF’s record-high revenue of Rs4.54 billion in 1QCY24, a 27% increase year-over-year, highlights the company’s resilience. This achievement came despite pressure on gross margins due to rising input costs and changes in export prices.

Contribution from SLM Investment

SGF’s investment in Service Long March (SLM) significantly boosted its profits. In CY23, SLM contributed Rs474 million to SGF’s profit before tax (PBT), accounting for 30% of the total. In 1QCY24, SLM’s contribution rose to Rs362 million, making up 66% of SGF’s PBT. This increase was a key factor in SGF’s 54% year-over-year earnings growth in the first quarter of 2024.

Future Outlook: Expanding Capacity

SGF management is focused on improving plant efficiency to maximize capacity utilization, which was at 88% in CY22 and 95% in CY23. They are also planning to expand through the establishment of a new plant to maintain volumetric growth. The company anticipates a 10% volumetric growth in CY24, translating into a 15%–20% revenue growth.

Additionally, SGF aims to complete a new plant within 12 months once approved, to facilitate the in-house production of localized parts and further localization through vendors.

Investment in Service Long March (SLM)

Services Industries Ltd (SRVI) and its subsidiary SGF have invested in SLM, Pakistan’s first all-steel radial tyre manufacturing facility for light trucks and buses. This US$300 million joint venture with China’s Chaoyang Long March Tyre Co. Ltd has shown promising results.

After a net loss in its first year (CY22), SLM posted a net profit of Rs2.5 billion in CY23 and Rs1.9 billion in 1QCY24. The plant, which aims for a production capacity of 2.4 million tyres annually, is currently completing its first phase. The second phase, expected by December 2024, will increase capacity to 1.3 million tyres.

Future Expansion

SLM has announced a Rs30 billion expansion plan to double its capacity, targeting export demand in the USA and EU. By CY25, tyre exports are expected to reach $100 million. SRVI and SGF have each approved up to Rs1.5 billion in further investments to support this expansion.

Disclaimer:

The information in this article is based on research by JS Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.