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Service Global Footwear Limited – IPO Subscribe between Rs38-44

Karachi, April 06, 2021: Service Global Footwear Limited (SGFL) is offering 41 million shares with a floor price of Rs38 (Rs1.6 billion) and a cap of Rs53.2 (Rs2.1 billion). The market capitalization of the company after the IPO would be Rs7.8 billion-10.9 billion (US$50-71 million). The company is raising capital to take an equity stake of 18.9 percent in Service Long March Tyres Private Limited (SLM), which will commence operations from Aug 2021.

Pakistan Stock Exchange (PSX) is set to witness the second IPO of 2021, of which book building is scheduled on Apr 7-8, 2021.

Production of new variant of tyres: The recent geopolitical developments where exports of tyres from China to EU and USA are facing anti-dumping and countervailing duties has opened up space for countries like Pakistan to cater to those markets.

Capitalizing on this opportunity, Service Group in partnership with Chinese manufacturers is setting up a new production facility of TBR tyres in Pakistan. Pakistan also consumes 1.4 million tyres annually, which is being fulfilled through imports and the grey market.

Tax benefits for being categorized as a greenfield investment: SLM is the first project that has been granted the status of Greenfield Industrial Undertaking and Sole Enterprise Special Economic Zone, which has allowed the company to avail (1) tax exemption for 10 years, (2) one-time exemption from sales tax, income tax and customs duty on import of plant and machinery and (3) exemption of Sindh Revenue Board (SRB) tax on construction services rendered by the contractors.

Expansion of existing footwear business: During last five years, company has operated at an average capacity utilization of around 88 percent. To further expand this, SGFL has acquired a land of 51 Kanals for the development of state of the art modern production unit, which will enable company to meet forthcoming demand and maintain market share. The new plant will add annual capacity of 1.2 million pairs taking total capacity to 4.8 million pairs and will come online by 2024.

Valuations: Based on comparable P/E multiple of 12.4x, we recommend investors to subscribe up till Rs44. At this price, the stock provides a potential return of 16 percent from our fair value of Rs51/share over a period of one year.

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