Part of the prolific Sapphire Group in Pakistan, Sapphire Fibres Limited (PSX: SFL) is a KSE-100 textile composite player. The firm was incorporated as a public limited company in Pakistan in 1979. Today, with a market cap of around Rs 20 billion, it is among the top five textile companies on the Pakistan Stock Exchange.

Sapphire Fibres is a vertically integrated composite textile unit, principally engaged in manufacturing cotton yarn, fabrics, and garments. Its subsidiary, Sapphire Electric Company Limited, was incorporated in Pakistan as a public unlisted company in 2005. Sapphire Fibres has holds 68 percent share capital of the subsidiary. The principal activity of the subsidiary is to operate a combined cycle power station that has a net capacity of 212MW.

Pattern of shareholding & Stock performance

After a mostly lackluster 2016, SFL stock skyrocketed around October, following the announcement of Rs 14 per share dividend - the company's annual cash dividend that was last seen in FY15. Since then, the stock has been above the KSE100, though it has started declining over the past couple of weeks.

The pattern of shareholding reveals that the stock is mostly within the hands of Sapphire itself; over half the SFL float is in the hands of associated companies comprised of the Group's own Sapphire Agencies, Sapphire Holding, Sapphire Power, Amer Tex (pvt) Limited, Reliance Cotton, and Neelum Textile. The next largest chunk (approximately a third) is with the company's Directors, CEO, etc. The general public - both local and foreign - together makes up just eight percent of the shareholders.

Prior Performance

After sales peaked in FY14 on increased domestic yarn sales and garment exports, the company's revenue has all been downhill - the five-year sales CAGR amounts to -0.53 percent. Meanwhile, Sapphire Fibres' bottom-line has always received a generous helping hand from its other income, which is mostly in the form of dividend income from its subsidiaries/associated companies (Sapphire Electric Company Limited). For the most recent fiscal year ended, the other income actually prevented a net loss.

Around three-fourths of Sapphire Fibres' revenue comes from yarn, while 16 percent comes from garments (as of FY16). Moreover, the company appears to be largely export-oriented, with over 80 percent of revenues coming from abroad. This has been a fatal combination; the graph illustrates how yarn exports (60% of net revenue) have been declining over the

years like clockwork. The company is also having trouble increasing its garment exports. Although the domestic market has seen higher sales in both yarn and garments, it has not been enough to make up for the declining exports.

Times have been tough for the company due to volatility in cotton prices as well as a high cost of doing business, hurting exports. Although there has been some increase in production levels of the garment and fabric segments vis-à-vis a fall in spinning, their productive capacities remain quite weak, at just 64 percent and 50 percent, respectively.

As per the company's reports, the low production has been due to less demand. The stitching unit has been closed for at least the past six years, owing to "sluggish sale in the international markets, power shortage in the country and higher fuel

cost," which forced management to temporarily close the stitching unit. On a more positive note, however, Sapphire Fibres has recently commissioned a new denim plant, which began commercial operations in FY16.

Recent Performance

Interestingly enough, for the first quarter of FY17, Sapphire Fibres has seen a nine percent rebound in its sales year-on-year. However, the firm's costs have escalated in greater proportion, yielding a 26 percent fall in gross profit.

The higher sales - and subsequently, higher costs - may be the result of the newly commissioned denim plant. Once again, the other income (mostly from the subsidiary Sapphire Electric) stepped in to save the company; other income increased by 17 percent YoY to Rs 193 million, resulting in a net profit of Rs 108 million. On a year-on-year basis, the bottom-line was down 42 percent.

Outlook

The textile industry has seen a continuous decline in exports owing to high cost of doing business, unfavourable exchange rate, and a drop in the global demand for yarn (especially China).

All these particulars are hitting Sapphire Fibres pretty hard, which is principally a yarn exporter. However, the government will soon be announcing the Textile Package to provide some relief to the industry.