We reiterate our buy stance on Service Global Footwear Limited (SGF) with a Dec’24 target price of PKR 76.4/share, offering an upside of 39% from current levels. Our liking for the stock is based on the following:
- Export market growth is based on increased demand and dollarized revenue.
- A robust consumer base provides pricing power, enabling the company to navigate rising raw material costs.
- Stable gross margins attributed to local procurement of raw materials.
- Anticipated massive contribution from SLM (Service Long March Tyres) due to increasing production capacity and growing demand locally and internationally.
- Tax exemption and TERF-based loan for SLM due to Greenfield investment.
We project the company to generate a 5-year forward earnings CAGR of 73.2%. Hence, we recommend a ‘BUY’ on the script. Currently, the stock is trading at CY24F / CY25F PER of 6.2x / 3.8x.
Pinnacle in footwear exports: SGF’s leading role in Pakistan
As a leading footwear exporter, SGF has made significant strides in Pakistan’s export sector. In FY23, the country experienced a substantial 14% YoY growth in footwear exports, reaching USD 179mn. With a significant 32% market share in footwear exports, SGF is well-positioned to benefit from the increasing demand for footwear. The company has achieved significant milestones quickly, particularly evident in the improved overall performance. The company’s top line has substantially improved, attributed to the PKR’s devaluation, elevated footwear prices, and augmented volumetric sales. In CY22, SGF reported a revenue of PKR 11.8bn, with export sales constituting 98% of the total revenue. In the coming five years, revenue is expected to grow at a 5-year CAGR of 28%This impressive core revenue growth shows strong consumer confidence in SGF’s product offerings.
SGF’s competitive edge in pricing
The company has consistently maintained a robust gross margin of approximately 20%. However, in CY22, the gross margins dipped to 18.6% due to increased raw material prices, inflationary pressures and delayed impact of pricing lag. However, during 9MCY23, the company’s gross margins rebounded significantly, reaching 22.1%. We anticipate that SGF’s gross margins will likely stabilize at 22% in CY24. This is attributed to the company’s effective pricing strategies and a strong customer base, enabling it to offset cost pressures and maintain stable margins. Notably, over 90% of the company’s leather requirement is sourced locally, covering about 47% of the total raw material cost. This localization strategy safeguards against PKR devaluation, contributing to the company’s resilience in managing costs.
Service long march’s (SLM) role in shaping profit margins
Commercial vehicles, designed for extended travel and prolonged operational hours, face increased tire wear and tear, necessitating frequent replacements of TBR (Truck and Bus Radial) tires. Traditionally in Pakistan, the demand for TBR tires has been met through imports and the illegal smuggling of tires. However, SLM has pioneered a significant shift by becoming the first company to locally manufacture TBR tires within Pakistan, boasting an annual capacity of 740k units, which is expected to reach the capacity of 2.4mn units by FY28. The company is presently operating at 58% capacity utilization; however, this is expected to reach 85% in FY24 and FY25, fulfilling the demand from both local and international markets. Additionally, the restrictions on smuggled vehicles have amplified demand for SLM, foreseeably contributing to a notable increase in the company’s overall revenue.
Courtesy – AHL Research