Security Papers Profit Falls 40pc As Sales Slip And Margins Compress
Security Papers Reports Sharp Profit Decline in FY26 Security Papers Limited (SPL) ended the financial year 2025-26 with a significant decline in both sales and profitability as weaker volumes, higher production costs and lower other income weighed on its results. The company’s sales fell 7.2 per cent to Rs7.31 billion from Rs7.87 billion a year earlier. Profit after tax dropped 40 per cent to Rs907 million, while earnings per share declined to Rs15.31 from Rs25.72. The decline was also visible in margins. Gross margin narrowed to around 21.7 per cent from 28 per cent, while net margin fell to approximately 12.4 per cent from 19.4 per cent. Higher Costs Deepen the Impact of Lower Sales SPL’s cost of sales increased by around 1 per cent to Rs5.72 billion despite the decline in revenue. As a result, gross profit fell 28 per cent to Rs1.59 billion from Rs2.20 billion. The company had already shown signs of weaker operating momentum during the year. Sales volume for the nine months ended March 31 stood at 2,594 tons, compared with 2,839 tons during the same period last year. Administrative expenses also moved higher, increasing 5 per cent to Rs522 million. This meant that overhead costs did not decline in line with the weaker revenue base. Dependence on PSPC Remains a Key Risk A major factor behind SPL’s earnings performance is its dependence on a single large customer, Pakistan Security Printing Corporation (PSPC). PSPC takes the bulk of the company’s banknote paper, meaning changes in its procurement requirements can quickly affect SPL’s production volumes and financial results. The trade agreement between the two companies was renewed in April 2026, maintaining the commercial relationship. However, the renewal does not eliminate the concentration risk associated with relying heavily on one customer. SPL’s exposure is particularly important because its core products include watermarked paper used for banknotes, prize bonds, defence savings certificates, stamp papers, passports, cheque books, degrees and ballot papers. Other Income Also Loses Momentum Other income, which has provided meaningful support to SPL’s earnings in stronger years, declined 25 per cent to Rs688 million from Rs916 million. Other expenses provided some relief, falling 29 per cent to Rs146 million. However, the reduction was not enough to compensate for the decline in gross profit and other income. Finance costs also increased, doubling to Rs6.75 million from Rs3.36 million. Although the absolute amount remains relatively small, the increase added further pressure to the bottom line. Profit before tax consequently fell 34 per cent to Rs1.60 billion from Rs2.41 billion. The company’s tax expense declined 22 per cent to Rs691 million from Rs890 million, limiting the overall impact but not preventing a 40 per cent decline in net profit. PM-2 Upgrade Could Shape the Next Growth Cycle The Balancing, Modernisation and Replacement (BMR) project for Paper Machine-2 is now central to SPL’s next phase. The company is executing the upgrade with the objective of enabling the mill to produce banknote paper containing features required for the State Bank of Pakistan’s new currency series. Chairman Mohammad Aftab Manzoor has described the PM-2 project as an important milestone for improving the company’s efficiency and production capabilities. The project, however, also introduces a short-term operational risk. SPL has indicated that the upgrade could require an extended plant shutdown of between 15 and 30 days on technical grounds. Such a stoppage could interrupt production, delay customer orders and create financial losses. The timing of the shutdown will therefore be closely watched, particularly because the new currency series is expected to be an important source of future demand. Energy, Water and Supply Chains Remain Watchpoints SPL also faces broader operating risks linked to energy prices, imported spares and regional supply chains. Geopolitical tensions surrounding the US-Iran conflict could increase energy costs and disrupt supply routes, according to management. The company is coordinating with suppliers to keep critical raw materials and project-related work moving. Water availability is another operational constraint. During the year, SPL added a 500,000-gallon storage tank and new reverse-osmosis bores to strengthen its water security. The company also upgraded its cogeneration plant and installed 350 kW of solar capacity. These investments are intended to reduce reliance on external water supplies and grid electricity. Fire, pilferage and cyber disruption remain additional risks because the company operates a strategically important, single-site manufacturing facility. Dividend Payout Remains Intact Despite the sharp decline in earnings, the Board has recommended a final cash dividend of Rs9 per share, or 90 per cent, subject to shareholder approval. The proposed final payout is the same as last year’s final dividend. However, it is below the total FY25 payout of Rs11.50 per share, which included an interim dividend of Rs2.50. The company’s shares are scheduled to go ex-dividend on September 18, while payment is due on October 9. FY26 Reverses Two Years of Strong Performance The latest results mark a clear reversal from the company’s recent performance. In FY25, SPL’s sales increased 8 per cent to Rs7.87 billion, while profit after tax reached Rs1.52 billion. The company is now dealing with the opposite combination: weaker sales, higher production costs and reduced other income. The balance sheet continues to provide some financial support through its relatively strong cash position compared with debt. The bigger question for investors is whether customer demand can recover before the PM-2 shutdown affects production. What Investors Will Watch Next SPL’s annual general meeting is scheduled for September 25, and investors are likely to focus on three key issues. First is the order outlook from PSPC, particularly demand linked to the new currency series. Second is the timing, duration and cost of the PM-2 shutdown. Third is the trajectory of energy and input prices if regional supply routes remain under pressure. SPL retains a strategically important position as Pakistan’s domestic producer of security paper, helping reduce dependence on imports. But its FY26 results demonstrate that strategic importance alone cannot shield the company from margin pressure when its largest customer reduces orders. With sales down 7.2 per
