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Service GlobalFootwear Q2 2026: Margin Recovery Holds Through Export De-Stocking, but SLM IPO Gain Lifts Profit

Service GlobalFootwear improved manufacturing margins despite weaker export sales, while a Rs958m SLM IPO dilution gain and a tax credit materially amplified Q2 profit.

Sep 18, 2026

Verdict

Service GlobalFootwear Limited’s second quarter and first half of 2026 show a much better core manufacturing margin profile than the headline sales decline suggests, but the near-doubling of Q2 profit after tax is not a clean measure of recurring earnings. Q2 revenue fell 13.5% year on year to Rs4.11 billion, yet gross profit rose 10.1% and gross margin expanded to 23.2% from 18.2%. The company’s own explanation is a richer product mix, better material yields and tighter conversion-cost control. However, Q2 profit after tax of Rs1.99 billion was lifted by a Rs958 million dilution gain embedded in the share of profit from associate Service Long March Tyres after its IPO, as well as a Rs237 million tax credit versus a Rs159 million tax expense a year earlier. The operating improvement is real; the headline earnings growth is materially flattered by non-recurring and unusually favorable below-the-line items.

Results at a glance

  • Q2 2026 revenue: Rs4.11bn, down 13.5% year on year; H1 revenue: Rs8.10bn, down 15.1%.
  • Q2 gross profit: Rs951m, up 10.1%; gross margin: 23.2% versus 18.2%. H1 gross margin improved to 20.6% from 16.7%.
  • Q2 profit from operations: Rs298m, up 9.2%; H1 profit from operations: Rs457m, down 7.4%.
  • Q2 finance cost: Rs92m, down 14.0%; H1 finance cost: Rs186m, down 27.6%.
  • Q2 share of associate profit: Rs1.55bn, up 53.7%; H1: Rs2.23bn, up 91.3%, including a disclosed Rs958m IPO-related dilution gain.
  • Q2 profit after tax: Rs1.99bn, up 95.0%; H1 profit after tax: Rs2.50bn, up 124.3%.
  • H1 net cash used in operating activities improved to Rs168m from Rs890m, but working capital still absorbed Rs599m.

Result basis and AlphaGen model outputs

This article uses Service GlobalFootwear Limited’s unconsolidated condensed interim financial statements for the half year ended June 30, 2026 as the primary reporting basis, because they provide the clearest view of the listed company and align with the issuer’s quarter-by-quarter disclosures. The report also contains consolidated statements; consolidated H1 profit after tax was Rs2.47 billion, close to the unconsolidated figure, so the central earnings-quality conclusion does not depend on the basis selected. The H1 statements are unaudited and were subject to an independent auditor review. The separate three-month Q2 statement of comprehensive income was not reviewed, as the review report explicitly states.

  • Alpha QoQ Score: 84.34
  • TTM Performance Score: 85.65
  • 3Y Business Perf Score: 80.74
  • Sector Leadership Score: 54.20

These four scores are AlphaGen model outputs, not company-reported figures.

What improved

The clearest positive is manufacturing profitability. Q2 gross profit increased to Rs951 million even though revenue declined by roughly Rs640 million. Gross margin expanded by almost five percentage points to 23.2%. H1 tells the same story: revenue fell 15.1%, but gross profit still increased 5.3% to Rs1.67 billion and gross margin improved to 20.6% from 16.7%. Management attributes this to a deliberate shift toward higher-value articles, improved material yields and disciplined conversion-cost control. The cost-of-sales note supports the direction of this explanation: Q2 raw material consumption, wages, stores and spares, packing material, and fuel and power were all lower year on year.

Financing also became less burdensome. H1 finance cost fell 27.6% to Rs186 million and Q2 finance cost fell 14.0% to Rs92 million. Management links this to lower average mark-up rates, treasury and borrowing management, shorter working-capital cycles and use of concessionary export financing. The broader rate backdrop is consistent with a cheaper funding environment than the prior-year comparison: the State Bank of Pakistan’s June 15, 2026 monetary policy statement kept the policy rate at 11.5%, well below the very tight conditions that prevailed earlier in the cycle.

Cash generation before financing and tax outflows also improved. Cash generated from operations was Rs175 million in H1 2026 versus cash used in operations of Rs454 million a year earlier. Working-capital absorption narrowed to Rs599 million from Rs1.14 billion. Inventory released Rs235 million of cash during the half, whereas it had absorbed Rs250 million in the prior period. These improvements matter because they show that the manufacturing business was not simply producing accounting margin gains with an equally large deterioration in operating cash mechanics.

What weakened / needs attention

Sales remain the main weakness. Q2 revenue declined 13.5% and H1 revenue fell 15.1%, reversing the growth seen in full-year 2025. The geographic detail shows where the pressure was concentrated. In Q2, Europe revenue declined 4.8% to Rs3.58 billion, but North and South America revenue fell 67.0% to Rs267 million. Asia, Africa and Australia increased 71.6% to Rs230 million, but from a much smaller base. The company is overwhelmingly export-oriented: H1 export sales before discounts were Rs8.13 billion compared with local sales of only Rs76 million.

Management’s explanation is that repeated changes in United States tariff policy caused customers to pull inventory forward earlier, leaving H1 2026 as a de-stocking phase. It also cites soft discretionary demand in the United States and Europe. This explanation is directionally consistent with the company’s regional numbers and with the broader Pakistani footwear export picture: PBS data reported in July showed FY2026 footwear export value slightly lower year on year, with leather footwear exports down more than 5% even as some non-leather categories grew. The evidence therefore points to a sector demand and channel issue, not only a company-specific sales problem.

The second weakness is the composition of operating expenses. H1 distribution cost declined 14.2%, but administrative expense increased and other expenses jumped to Rs270 million from Rs46 million. In Q2 alone, other expenses were Rs197 million versus Rs41 million. The cash-flow reconciliation shows a Rs205 million exchange loss in H1, partly offset by a Rs63 million unrealized gain on forward contracts. Because the interim report does not provide a simple one-line bridge from all these movements to Q2 operating profit, the article does not assume that every element will repeat. The important point is that gross-margin improvement did not fully flow through to H1 operating profit, which fell 7.4%.

The associate contribution: strong economics, but a large one-off

Service Long March Tyres is the most important reason reported earnings expanded so sharply. SGF’s H1 share of profit from the associate was Rs2.23 billion versus Rs1.16 billion a year earlier. But the company explicitly discloses that the current-period figure includes a Rs958 million gain on dilution of its interest following Service Long March’s IPO. SGF’s equity interest declined to 17.38% from 18.30% as new shares were issued, while its share of the associate’s post-acquisition net assets increased because of the share premium created by the listing.

That distinction materially changes how Q2 should be read. Q2 profit after tax rose 95% to Rs1.99 billion. Mechanically removing only the disclosed Rs958 million dilution gain leaves roughly Rs1.03 billion, almost identical to the Rs1.02 billion reported in Q2 2025. This is not a company-defined adjusted earnings measure and it does not normalize tax or other items, but it demonstrates how much of the apparent Q2 earnings acceleration came from the IPO accounting event. At H1 level, removing only that gain leaves about Rs1.54 billion of profit after tax, still above the prior-year Rs1.12 billion, which suggests genuine improvement remained underneath the one-off.

The listing itself was a real capital-market event, not merely an accounting reclassification. PSX says Service Long March’s IPO raised Rs7.78 billion and the company listed on June 15, 2026. The recurring question for SGF is therefore not whether the Rs958 million gain repeats—it should not be treated as recurring—but whether Service Long March can continue generating enough underlying profit to support a meaningful equity-accounted contribution after the dilution.

Tax made Q2 look even stronger

A second below-the-line feature needs separate treatment. SGF recorded a tax credit of Rs237 million in Q2 2026, compared with a tax expense of Rs159 million in Q2 2025. For H1, taxation was a Rs45 million credit versus a Rs246 million expense. The interim report does not provide a sufficiently clear explanation for the cause of this favorable swing, so no cause is inferred here. Until a later filing clarifies whether the credit arose from timing, deferred tax or another item, it should be monitored rather than extrapolated as a normal quarterly benefit.

Balance sheet and cash conversion

The balance sheet became larger and more investment-heavy. Total assets rose to Rs23.54 billion at June 30 from Rs20.68 billion at December 31, while equity increased to Rs10.51 billion from Rs8.39 billion, helped by retained earnings and the associate-related gain. Long-term investments increased to Rs8.03 billion from Rs5.80 billion, principally reflecting the higher carrying value of Service Long March. SGF also reported Rs750 million of investment property, including construction in progress at Muridke.

Working capital is improving in some respects but remains tight. Inventory fell 6.0% from year-end to Rs3.66 billion, while trade receivables rose 16.2% to Rs3.40 billion. Short-term borrowings increased 11.8% to Rs7.97 billion. Current assets of Rs11.12 billion were only slightly above current liabilities of Rs11.07 billion, leaving limited balance-sheet slack. The company’s closing cash balance fell to Rs238 million from Rs1.12 billion, although this should not be read in isolation because short-term investments rose to Rs1.10 billion from Rs95 million; cash plus those term-deposit investments was actually slightly higher than at year-end.

Net cash used in operating activities narrowed sharply to Rs168 million from Rs890 million, but it remained negative despite Rs2.50 billion of reported H1 profit. The main bridge is straightforward: the equity-accounted associate profit is largely non-cash at SGF level, working capital still consumed Rs599 million, finance cost and taxes were paid in cash, and trade receivables absorbed Rs683 million. This gap between reported earnings and cash is not automatically a red flag, but it is the key reason readers should distinguish associate accounting income from cash generated by the footwear operation.

Recurring versus non-recurring earnings

  • Recurring/operating: higher gross margin from product mix, material yields and conversion-cost discipline, subject to management sustaining those efficiencies.
  • Recurring but cyclical: lower finance cost if benchmark rates and concessionary export funding remain supportive; this can reverse if funding conditions tighten.
  • Recurring but external: the underlying share of Service Long March profit, which depends on the associate’s operating performance and SGF’s diluted ownership percentage.
  • Non-recurring: the Rs958m Service Long March IPO dilution gain recognized in H1 2026.
  • Uncertain persistence: the H1/Q2 tax credit, because the interim filing does not explain it clearly enough to treat it as structural.

Sector and policy context

The wider sector evidence fits a mixed rather than uniformly weak export environment. Government discussions with Pakistan’s leather and footwear industry in March highlighted significant installed footwear capacity and export potential, while industry representatives also raised competitiveness and regulatory issues. Full-year trade data later showed footwear export value broadly flat to slightly lower, with leather footwear weaker and other footwear categories stronger. That makes SGF’s 15% H1 sales decline more severe than the aggregate footwear export-value move, but its own regional disclosure shows the contraction was heavily concentrated in the Americas rather than evenly spread across all markets.

Financing policy has been more constructive for exporters. SBP’s June policy statement maintained the 11.5% rate, and SGF specifically cites concessional export refinance and long-term financing facilities as lowering the cost of working capital and investment. At the same time, management continues to flag energy costs, shipping times, refund and duty-drawback delays, competitor-currency moves and finished-leather availability as structural disadvantages. Those constraints mean better gross margin in H1 should be viewed as an execution achievement, not evidence that the export cost base has become easy.

What changed versus the recent pattern

The recent pattern has shifted in two important ways. First, FY2025 was a growth year: official PSX data show annual sales rising to Rs19.89 billion from Rs17.39 billion in 2024 and profit after tax rising to Rs1.94 billion from Rs1.11 billion. H1 2026 breaks that top-line trajectory, with sales falling even as manufacturing margins improve. Second, associate earnings have become even more influential in reported profit. In H1 2026, the Rs2.23 billion share of associate profit was almost five times the company’s Rs457 million profit from operations before finance cost. That makes Service Long March’s underlying performance and the quality of equity-accounted earnings central to understanding SGF.

What to monitor next

  • Revenue recovery: whether customer de-stocking actually eases and management’s expected improvement in order placements appears in Q3 and Q4 sales.
  • Americas exposure: whether the sharp Q2 fall in North and South America reverses, stabilizes or remains a structural drag.
  • Gross margin: whether the 20%+ H1 and 23%+ Q2 margins can hold as volumes recover and product mix changes.
  • Service Long March: underlying associate profit after removing the IPO dilution gain, plus the impact of SGF’s lower 17.38% ownership stake.
  • Tax line: whether the Q2 tax credit reverses or receives a clear explanation in subsequent reporting.
  • Cash conversion: receivable collection, operating cash flow and whether short-term borrowing can normalize as export orders and refunds move through the cycle.
  • Working-capital liquidity: the current-assets/current-liabilities balance and the mix between cash, term deposits and short-term debt.

Sources

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