Company Name: Security Papers Ltd
Ticker: SEPL
Reporting period: Year ended June 30, 2026 (FY2026)
Reporting basis: Company-only annual financial results; the official filing presents Security Papers Limited’s standalone statements, with figures in thousands of Pakistani rupees except per-share data.
Verdict: FY2026 was materially weaker. Lower customer-driven sales met a slightly higher cost base, compressing gross margin by 6.3 percentage points. Falling investment income then removed a second earnings support, taking profit after tax down 40.5%. Cash generation improved, but the company deployed far more cash into plant and equipment as it prepared for advanced banknote-paper specifications.
The headline result
Security Papers reported FY2026 revenue of Rs7.306 billion, down 7.2% from Rs7.871 billion in FY2025. Cost of sales increased 1.0% to Rs5.721 billion despite the lower topline. Gross profit consequently fell 28.1% to Rs1.585 billion, and gross margin dropped to 21.7% from 28.0%. (Official FY2026 results filing)
Profit before tax fell 33.8% to Rs1.598 billion from Rs2.414 billion. Profit after tax declined 40.5% to Rs907.2 million from Rs1.524 billion, while basic and diluted earnings per share fell to Rs15.31 from Rs25.72. Net margin contracted to 12.4% from 19.4%. (Official FY2026 results filing)
The economics are clear: the sales decline alone did not explain the profit contraction. Direct manufacturing costs did not fall with revenue, so gross profit absorbed a disproportionate hit. Other income also fell by almost one quarter, weakening the investment-income cushion that historically supplemented manufacturing earnings.
Current period versus prior year
- Revenue: Rs7.306 billion versus Rs7.871 billion; down 7.2%. Interpretation: demand and customer ordering were lower, reducing throughput over the fixed manufacturing base. (Official filing)
- Cost of sales: Rs5.721 billion versus Rs5.667 billion; up 1.0%. Interpretation: cost did not flex with lower sales, producing negative operating leverage. (Official filing)
- Gross profit: Rs1.585 billion versus Rs2.204 billion; down 28.1%. Gross margin: 21.7% versus 28.0%, a 6.3-point contraction. (Official filing)
- Administrative expense: Rs522.4 million versus Rs497.5 million; up 5.0%. Interpretation: overhead rose while revenue declined, further pressuring the profit conversion rate. (Official filing)
- Other income: Rs688.0 million versus Rs915.8 million; down 24.9%. Interpretation: lower returns on the investment portfolio reduced the non-manufacturing contribution. (Official filing)
- Profit before tax: Rs1.598 billion versus Rs2.414 billion; down 33.8%. Profit after tax: Rs907.2 million versus Rs1.524 billion; down 40.5%. (Official filing)
- EPS: Rs15.31 versus Rs25.72; down 40.5%, matching the profit decline because the issued share base was unchanged. (Official filing)
Why revenue and gross margin weakened
SEPL manufactures specialized paper for banknotes and non-banknote security documents. Its sales are unusually concentrated: the company’s June 2026 corporate briefing said banknote paper represented 90% of nine-month revenue and was sold to one customer, Pakistan Security Printing Corporation. Orders are made against customer indents rather than a broad retail demand curve. (June 2026 corporate briefing, pp. 30–31)
That structure makes volume lumpy. SEPL cannot manufacture its way around a lower customer indent without either building inventory or finding alternative security-paper demand. Lower volume also weakens absorption of plant labor, utilities, maintenance and depreciation. This explains how cost of sales can remain sticky even when revenue falls.
The nine-month briefing already showed the direction before the full-year release: sales tonnage was 2,594 tonnes versus 2,839 tonnes, and revenue was Rs5.316 billion versus Rs5.825 billion. Management said sales reflected customer demand, while cost of sales benefited from lower production and efficient procurement. Even so, nine-month gross profit had fallen to Rs1.166 billion from Rs1.599 billion. (June 2026 corporate briefing, pp. 26–27)
The fourth quarter did not reverse the annual pressure. Derived from the published annual and nine-month figures, Q4 revenue was roughly Rs1.991 billion and profit after tax about Rs276.5 million. These are AlphaGen calculations from official cumulative figures, not separately reported quarterly numbers.
Operating profitability and the investment-income effect
SEPL does not show a separately labeled operating-profit subtotal in the results filing. Subtracting administrative expense from gross profit gives a core surplus of about Rs1.063 billion in FY2026 versus Rs1.706 billion a year earlier—a decline of roughly 37.7%. This is an analytical subtotal, not a company-reported line item. It highlights the deterioration before investment income.
Other income of Rs688.0 million was still equivalent to 43% of profit before tax, so investment returns remained material. But the contribution fell Rs227.8 million year on year. In the June briefing, management attributed the nine-month decline in other income to the policy-rate fall from 22% in mid-FY2025 to 10.5% by March 2026. (June 2026 corporate briefing, p. 27)
This creates a two-engine earnings model. The first engine is the spread on security-paper production; the second is income earned on a large portfolio of long- and short-term investments. FY2026 weakened both. Lower interest rates reduce portfolio yield, while capital expenditure also moves funds from income-producing securities into plant that must earn its return operationally.
Finance cost remained small in absolute terms, though it doubled to Rs6.7 million from Rs3.4 million. Other expenses fell 28.8% to Rs146.0 million. Those improvements were insufficient to offset the gross-profit and other-income declines. (Official FY2026 results filing)
Balance sheet: investment assets become operating assets
Property, plant and equipment rose to Rs4.467 billion at June 2026 from Rs1.999 billion a year earlier, an increase of Rs2.468 billion. Long-term investments declined to Rs2.480 billion from Rs3.808 billion, while short-term investments were broadly stable at Rs2.803 billion versus Rs2.722 billion. (Official FY2026 financial position)
The balance-sheet movement is strategically important. SEPL converted part of its financial-asset base into productive capacity. This lowers future interest income relative to a no-capex scenario, but it can strengthen the core franchise if the upgraded paper machine wins and executes new banknote specifications at attractive utilization.
The company’s June briefing identified a €8.2 million upgrade of paper machine PM-2 and a Rs205 million mould-embossing-machine upgrade. Management said the broader plant project was intended to produce banknote paper with advanced security features aligned with the new currency-note series announced by the State Bank of Pakistan. (June 2026 corporate briefing, pp. 18 and 24)
Current assets became less collection-heavy. Trade debts fell 58.3% to Rs541.5 million from Rs1.300 billion. Inventory declined 16.5% to Rs719.1 million, while other receivables and advances rose sharply to Rs545.2 million from Rs51.9 million. Without the detailed annual notes, the exact composition of that increase cannot be established from the results filing, so it should be monitored rather than assigned a cause.
Trade and other payables increased to Rs1.689 billion from Rs1.233 billion. Total equity rose 4.2% to Rs9.379 billion, supported by retained FY2026 profit after dividends and reserve transfers. The balance sheet remained unleveraged in the published statement, with no conventional borrowings shown.
Cash flow: stronger operations, much heavier capex
Net cash generated from operating activities increased 43.7% to Rs1.240 billion from Rs862.4 million. Cash generated before tax and other payments rose to Rs2.151 billion from Rs1.756 billion. The fall in receivables and inventory helped cash conversion even though accounting profit declined. (Official FY2026 cash-flow statement)
Capital expenditure accelerated to Rs2.764 billion from Rs425.7 million. Net investing cash outflow was Rs1.185 billion, compared with a Rs120.4 million inflow in FY2025. The company funded much of this through operating cash and investment maturities rather than reported debt. (Official FY2026 cash-flow statement)
Cash and cash equivalents ended at Rs770.3 million versus Rs1.153 billion. This measure includes liquid investments used in the cash-flow reconciliation, so it differs from the Rs170.0 million cash-and-bank line on the statement of financial position. The distinction matters: liquidity is larger than the bank balance alone, but part of it sits in investment instruments.
Dividend and corporate actions
The board recommended a final cash dividend of Rs9.00 per share, or 90%, for FY2026. The filing says the entitlement is for shareholders on the register on September 18, 2026, with books closed from September 19 to September 25, 2026. The dividend is subject to shareholder approval and is not recognized in the June 2026 financial statements. (Official results and dividend notice)
FY2025 paid Rs11.50 per share in total—Rs2.50 interim and Rs9.00 final—whereas the FY2026 results filing reports only the Rs9.00 final distribution. The lower annual cash return is consistent with weaker earnings and the unusually large plant-upgrade program.
A separate material development was renewal of the trade agreement between SEPL and Pakistan Security Printing Corporation. Because this is the dominant customer relationship, contract continuity is more consequential than an ordinary customer renewal, although it does not guarantee any specific order volume. (Official PSX material-information filing)
AlphaGen model readings
The following four readings are AlphaGen model outputs, not company-reported financial figures:
- Alpha QoQ Score: 49.16.
- TTM Performance Score: 4.5.
- 3Y Business Perf Score: 28.41.
- Sector Leadership Score: 50.9473.
These readings should be considered alongside the audited financial evidence. They are analytical indicators and do not constitute investment advice.
Recurring versus non-recurring drivers
The revenue concentration, manufacturing margin and administrative cost base are recurring. Customer indents, product specifications, raw-material prices, gas and utility costs, plant reliability and utilization therefore deserve the greatest weight in assessing sustainable earnings.
Investment income is recurring in the sense that SEPL maintains a substantial portfolio, but its level is interest-rate sensitive and can decline as funds are redeployed into plant. It should not be valued as though FY2025’s high-rate income were permanent. The FY2026 capex surge is exceptional in size; depreciation and project benefits, however, will affect future recurring results.
The published annual results do not disclose a revaluation gain, associate contribution or major one-off tax credit. Tax expense fell 22.4%, less than the decline in pre-tax profit, lifting the effective tax rate to about 43.2% from 36.9%. Detailed tax-note reconciliation will require the full annual report.
Risks and what to monitor next
- Customer concentration: order volumes and denomination mix from Pakistan Security Printing Corporation remain the central revenue variable. (Corporate briefing)
- PM-2 execution: watch project completion, downtime, commissioning, product qualification and the utilization of upgraded capacity. (Corporate briefing)
- New currency series: advanced security specifications can create strategic demand, but timing and final order quantities are outside SEPL’s control. (Corporate briefing)
- Margin recovery: revenue growth must exceed the direct-cost response for gross margin to rebuild from 21.7%. (Official results)
- Investment income: policy rates, portfolio size and the mix between operating assets and securities will shape the second earnings engine. (Official results)
- Working capital: monitor the large rise in advances and other receivables, alongside payables and customer collections. (Official financial position)
- Dividend capacity: compare future distributions with free cash flow after the upgrade program, not with accounting earnings alone. (Official cash-flow statement)
The next decisive evidence will be the full FY2026 annual report and FY2027 quarterly disclosures. Readers should look for order volumes, tonnage, plant-upgrade progress, depreciation, detailed other-income composition, tax reconciliation and whether the large capital deployment restores core margins.
Sources
- Security Papers Limited, financial results for the year ended June 30, 2026, announced July 30, 2026. (Official PSX PDF)
- Pakistan Stock Exchange, SEPL company profile, announcements and standardized financials. (Official PSX page)
- Security Papers Limited, Corporate Briefing Session presented June 12, 2026. (Official PSX PDF)
- Security Papers Limited, renewal of trade agreement with Pakistan Security Printing Corporation. (Official PSX PDF)
- Security Papers Limited, notice of final FY2026 cash dividend. (Official PSX PDF)