Pakistan Hotels Developers Limited

Pakistan Hotels Developers Limited (PSX: PHDL) was established in 1979 as a private limited company under the Companies Act, 1913 (now Companies Act, 2017). In 1981, it was converted into a public limited company. As the name suggests, the company operates in the hospitality industry. It owns and operates Regent Plaza Hotel and Convention Centre, Karachi.

Shareholding pattern

As at June 30, 2021, close to 56 percent shares are held by the relatives of directors. Within this category, Mr. Masroor F. Baweja, Mrs. Samina Mansoor Baweja, Mr. Amir F. Baweja and Mr. Zaheer Baweja are major shareholders. The directors own over 33 percent shares within which Mr. Zubair Baweja, Mr. Muzaffar F. Baweja and Mr. S. Mahmood Baweja are major shareholders. Individuals own over 10 percent shares while the remaining less than 1 percent share is under the category of “others”.

Historical operational performance

The company has mostly experienced a growing topline with the exception of FY17, FY20 and FY21, while the profit margins in the last six years have followed a downward trajectory.

After a major fire incident in FY17 that paralysed the company’s operations for a significant period, it was only in the second month of FY18 that the company resumed operations with 50 guest rooms, out of the total capacity. Net revenue for the year stood at Rs 417 million after growing by 19 percent. While cost of sales fell to 46 percent of revenue, that elevated gross margin to 54.2 percent, net margin was down to a negative almost 4 percent. This was due to an escalation in administrative expenses that was due to over Rs 58 million compensations made to the affectees of the fire incident.

In FY19, revenue increased by 15 percent to reach Rs 480 million in value terms. This was a result of an increase in occupancy and associated food and beverage sales as operations resumed to normal after the fire incident. However, gross margin declined to 52.5 percent due to an increase in salaries and wages, guest supplies, and heat and power prices that increased the overall cost of sales as a share in revenue. But the significant decline in administrative expenses contributed to a positive net margin for the year that was recorded at nearly 6 percent with bottomline at Rs 28 million.

In FY20, topline witnessed an almost 32 percent contraction as the outbreak of Covid-19 spelled disaster for the hospitality industry, not just for Pakistan, but globally. With travel restrictions in place, the airline and hotel industry were hit massively as is evident from the slump in average occupancy. As a result, gross margin declined to 36 percent, while net margin was less than half a million in value terms.

The repercussions of the pandemic continued in FY21 as topline contracted further by 23.5 percent. The lockdowns and restrictions on large indoor gatherings, functions and restaurants along with minimal travel adversely impacted the revenue of the business as occupancy remained low. Sales for food and beverages also decreased. But with costs in place, the company incurred the biggest loss seen since FY13, at Rs 47 million.

Quarterly results and future outlook

Revenue in the first quarter of FY22 more than doubled year on year but this was largely due to abnormally low topline in the same period last year that in turn was a result of lockdowns and minimal travel associated with Covid-19 pandemic. But a year later, with the roll out of Covid-19 vaccinations and resumption of travel, business activities had normalized to a great extent. While costs continued to exceed revenue, the loss incurred was lower at Rs 14.3 million compared to almost Rs 26 million in 1QFY21.

The second quarter also saw revenue more than doubling year on year. This was again attributed to increase in travel and lesser restrictions on gatherings and restaurants dining. Moreover, the company undertook rehabilitation work in restaurants and guestrooms during the period that is scheduled to be completed by the end of the year. With curtailment in costs and finance expenses, along with support from other income, the company earned a net profit of Rs 53 million compared to Rs 7 million in the corresponding period last year.

The third quarter also saw similar trend as topline almost doubled year on year in value terms as restrictions on gatherings and travel was largely eliminated. Combined with this was the decline in costs as a share in revenue and finance expenses. Moreover, other income contributed an additional Rs 1.2 million in 3QFY22 compared to Rs 77,000 in 3QFY21 that supported bottomline. Thus, the latter was recorded at almost Rs 35 million, compared to a loss of Rs 7 million in the same period last year.

The company has earned a net profit of Rs 74 million cumulatively during 9MFY22 that is the highest seen since FY17. Given the resumption of business activities to a normal, the company expects the trend to continue. However, the uncertainty regarding profitability stands as inflationary pressures continue to raise that can impact cost of sales and dampen profit margins.