Hotel business: PAKISTAN SERVICES LIMITED - Analysis of Financial Statements June 2002 - June 2009
Pakistan Services Limited is an international public company, incorporated in 1958 in Karachi under the Companies Act, 1913 now Companies Ordinance, 1984 as a public limited company. It is quoted on Karachi Stock Exchange. The company is principally engaged in hotel business, owns and operates the chain of six Pearl Continental Hotels in Pakistan at Karachi, Lahore, Rawalpindi, Peshawar, Bhurban and Muzaffarabad.
Strategically situated at prime locations, the hotels cater to the business and leisure needs of local and international market. PSL's commitment to excellence, attention to details and personalised services ensures a loyal guest list. PSL has positioned itself at top of the list in serving and leading the hospitality industry in the country. It has successfully promoted its logo "Pearl Continental" locally and in other parts of the world too.
In 1985, the company was acquired by Hashoo Group of Companies, a pre-eminent player in hospitality industry in Pakistan. Since its inception in 1972, it has offered its valued guests warm hospitality, impeccable service and unparalleled facilities promising a memorable experience. The task to manage the hospitality interests of the group led to the formation of two companies: Hashwani Hotels Limited and Pakistan Services Limited.
Following its acquisition with PSL, the portfolio of the five hotels initially operated under the management of Inter Continental Hotels Group, which was later re-branded as Pearl Continental Hotels.
In 2001, PSL acquired the master franchise for destination of the world creating an augmentation to its well-defined position in the tourism and hospitality sectors of Pakistan. The company also floated its rated TFCs in November 2003 and has recently expanded its network in Pakistan and the GCC market. The latest addition has been opening of Pearl Continental Hotel in Muzaffarabad - capital of Azad Kashmir.
In 2006, PSL also made an equity investment in PC Hotels Limited incorporated in Dubai after approval from SBP.
In 2009, PSL acquired 100% stake in M/s Musafa International (Private) Limited; this company is principally engaged in project management business. Currently, it has been awarded a project for construction and development of an underground parking at a highly demanding area in Karachi and is expected to complete in the current financial year. It is noteworthy to mention that the company successfully completed 50 years of its existence this year.
From overall perspective, the financial year 2008-09 will be remembered as one of the worst years of all times. The global recession took its toll on domestic economy which itself was facing internal challenges like inflation, energy crisis, continuing war against terrorism and domestic security issues. The GDP took a downturn and at the same time, stock market crashed significantly. Impact of the unfortunate happening badly affected the performance of the hospitality industry due to the security threats, not only foreign visitors refrained from coming to Pakistan, but also retarded the economic activity and discouraged domestic travelling, which in turn exposed the hotel industry to the prodigious challenge of survival.
To cope with these threats, the management of the PSL took its utmost efforts to restore the confidence of customers. This was done by applying comprehensive and integrated medium-term strategy besides providing security solution to the entire satisfaction of all, which in return will definitely result into comparatively fair business results in the time of cynicism.
Financial performance (June 2009):
Despite the unprecedented challenges and threats, the company successfully managed to avert the competition of business potential. It is evident from this fact that overall business remained behind an ignorable drop of just 4 percent. Total revenue (exclusive of GST) of Rs 4,634 million recorded in the last year dropped to Rs 4,463 million during the year under report. The drop in revenue resulted in dilution of gross profit of the reporting year as against achieved in the financial year 2007-08; the inflationary effects also played an extraneous role in decelerating the gross margin. The gross profit for the reviewing year recorded at 32 percent which in the corresponding year was achieved at 36 percent. From operational point of view, the company's performance for the year under review, remained satisfactory and it registered a profit before tax of Rs 496 million, but due to un-realized loss of Rs 597 million recorded on investments in the shares of listed companies the above stated operational performance gulped down and turned it into "(Loss) before taxation" of Rs 101 million.
Revenue from Rooms Department for the year 2008-09 (inclusive of GST) was recorded at Rs 2,473 million as against Rs 2,782 million of the preceding year and thus registered a drop of 11 percent which in terms of amount comes to Rs 309 million. Average occupancy went down from 55 percent recorded during the year 2007-08 to 49 percent achieved in the year under review - a reduction of 6 percent. Significant business drop witnessed all over the world which also shriveled market potential in Pakistan and created stiff competition; in order to retain our market share to all possible extent, we had to compromise over room rate and resultantly the average daily room rate of Rs 8,439 achieved in the year 2007-08 went down to Rs 8,060 during the reviewing year.
Despite extreme poor business conditions in the country, revenue from food and beverage department not only maintained the numbers achieved in the last year but also surpassed it. During the reporting year, the revenue generated from food and beverage department reached to Rs 2,584 million (inclusive of GST) as against Rs 2,426 million earned in the corresponding period of last year. From these numbers, it is evident that company had managed to earn incremental revenue of Rs 158 million from this segment; thus modest rise in business from this segment resulted into nearly 7 percent growth than that of the comparable period of last year.
The revenue (inclusive of GST) for performance of other related services/license fee/travel and tour division,
during the year under review, was Rs 201 million as compared to Rs 184 million recorded in the last year. It is evident from the above numbers that in spite of facing economic hardships; revenue for the year under review from this segment surpassed that of the last year by Rs 17 million which shows nearly 9% growth.
PROFITABILITY
The gross profit margin has declined on a YoY basis in FY09. Revenue declined only marginally by 3.69%. Operating expenses increased drastically by 955%, which brought the profitability down. These operating expenses were mainly on the back of impairment cost prudently applied by the company. Simultaneously the company investments resulted in 162% increase in returns earned from that source. Liabilities worth Rs 196 million was written back. This along with the return from the invested resulted in 376% increase in other operating income. All in all, the company registered a loss of Rs 101 million. The rest of the profitability rations illustrate a similar downward trend. Total Assets and Equity registered a slight decline over FY09 mainly at the back of diminution of investments and negative return for the year.
LIQUIDITY
All the liquidity ratios of PSL show a decline after 2004 indicating expansion. This decline in both CR and QR can be attributed to the increase in current liabilities mainly due to trade payables, accrued and other liabilities. In FY08 the current liabilities showed a heavy rise of 41.6%, mainly due to the rise in running finance under mark up arrangements. Current assets also registered a growth of 35%, mainly due to the rise of short-term investments. FY09 figures depict a similar trend, mainly at the back of increased current liabilities as the Company's short-term borrowings and trade payable register an increase of 53% and 24% respectively.
ASSET MANAGEMENT RATIO
Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. The trend line indicates a declining ITO over the period FY02 to FY07 from 16 to 6 days. This showed that PSL is able to efficiently turn its inventory (room equipment and food and beverages) into sales and services. In FY08, ITO again rose to 8.7 days, mainly due to the rise in stock of food and beverages, which could not be avoided as it served the purpose of growing revenue in that sector of sales. In FY09, the ITO ratio increased to 10 days mainly at the back of reduced demand of hotel services, resulting in an increase in average number of days that the company held its stocks.
Days sales outstanding (DSO), shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. DSO has declined from 20 to 17 days in 2005. However, it increased to 24.7 days in 2008, due to a high proportionate increase in trade debts (18%) coupled with the reduction in net sales (5.09%) indicating that perhaps the company faced some difficulties in extracting money from some of its clients due to the high inflation rates. In FY09, DSO has reduced to 18 days, owing to 28% decline in trade debts.
The operating cycle of PSL hence followed the same trend as that of ITO in the respective declining till 2005 but rising slightly since and in 2008 showing a high rise particularly due to higher DSO. In FY09, it reduced to 29 days attributable to the reduced DSO.
Both, Total Assets Turnover and Sales/Equity show a decline in FY08 due to the effect of growing asset and equity base coupled with reducing sales. In FY09 both these ratios declined insignificantly due the small fall in sales and services, corresponding to slight decreases in total equity and total assets.
DEBT MANAGEMENT RATIO
As far as debt management is concerned, both debit to asset and debt to equity ratios of PSL show its reduced reliance on debt financing rather than equity financing. The trend lines in particular show that both these ratios have increased slightly owing to increase in running finance and trade payables in the current debts. These short-term liabilities caused the total current liabilities to increasing progressively on a YoY basis. Long-term debts (mainly in the long term finances, TFCs and deferred liabilities) have continued being reduced. This is further evident by the long-term debt to equity ratio, which decreased to 0.05 in FY09 from 0.06 in FY08. All these ratios of PSL are reflecting trend towards lower leveraging.
The TIE ratio for PSL, which has shown a rising trend over the FY02-FY08 owing to comparatively lower finance and a higher increase in EBIT (due to high operating and gross profits) reduced in FY08 from 6.29 to 5.06. Though interest income for the year reduced from Rs 188 million to Rs 132 million, yet the decrease in EBIT was much more than the decrease in finance costs. In FY09, the TIE registered a further decline to 0.51. Looking at this, we can infer that PSL's interest covering ability was greatly impaired due to the 84% drop in earnings before interest and taxation compounded by 56% rise in finance cost. While the other debt management ratios may indicate a positive leverage position of PSL, the reduced TIE may cause a strain on company due to declining earnings.
MARKET VALUE
The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the earnings per share (EPS).
The EPS of PSL have been increasing over the 5-year period from FY02 till FY06, but has gone downward since. The earnings per share for FY09 is Rs (7.07) as compared to Rs 9.34 in FY08. The P/E ratio also followed a declining trend driven by the combined effect of decreasing market price of shares (FY09: Rs 113.5, FY08: Rs 540) and its EPS, mainly at the back of loss earned in the current year as well as the low investors interest in the year under review.
PSL's book value per share shows a positive trend on the account of expanding equity base (due to increase mainly in accumulated profits and surplus on revaluation of fixed assets) compared to very slight/no change in the number of shares. Even though, FY09 didn't bode well for the company. The book value per share reduced only marginally to Rs 327 in FY09 from Rs 342 in FY08, mainly due to the fall in total equity, which in turn in attributable to the loss incurred.
FUTURE OUTLOOK
Revival of the economy and resumption of traditional business opportunities that used to exist in the country is expected in the forthcoming years. The improving economic indicators are hopeful signs of economy of Pakistan picking up gradually. Inflation by maintaining downward trend, which started in the end of year 2008, after touching all time high of over 25 percent, has dropped to nearly 11% in August 2009. Overseas remittance has registered a phenomenal growth, which is a positive sign and fall in imports is heading to a contraction in the current account deficit of the country. Other economic indicators also suggest improvement in the national economy. This is worth noting that these healthy trends are surging despite huge challenges faced by the country. The activities of stock exchange market are getting gradual boost. In short it looks that prosperity to the country in general and creation of business opportunities for hospitality industry in particular is about to advent. With the economic turnaround it is expected that business of PSL will prosper.
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FINANCIAL HIGHLIGHTS
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2008-09 2007-08 2006-07 2005-06 2004-05 2003-04
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(Rupee In Millions)
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PERFORMANCE
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Sales and Services-net 4,463 4,634 4,883 4,173 3,225 2,563
Gross Profit 1,421 1,662 1,874 1,529 1,102 851
Operating Profit 105 669 1,181 1,008 630 430
(Loss) / Profit before Taxation (101) 536 993 805 457 235
Taxation 128 233 352 51 200 79
(Loss) / Profit for the year (230) 304 641 753 257 156
Dividend Paid Including Bonus Shares 49 33 81 81 81 30
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FINANCIAL POSITION
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Issued, subscribed and paid of Share Capital 325 325 325 325 325 325
Share Capital and Reserves 2,356 2,635 2,364 1,804 1,132 956
Shareholders Equity* 10,981 11,260 10,988 10,429 9,756 4,023
Long Term Financing 108 180 412 744 1,047 968
Non Current Liabilities 590 661 838 1,104 1,413 1,319
Current Liabilities 2,416 2,186 1,496 1,130 913 595
Property Plant and Equipment * (Cost) 13,299 13,231 12,742 12,201 12,136 6,531
Property Plant and Equipment * (Carrying Value) 10,721 10,759 10,741 10,313 10,315 4,817
Current Assets 1,463 2,309 1,687 1,455 1,450 1,094
Net Current Assets / Liabilities (953) 123 191 325 542 499
Long Term Debt: Shareholders Equity * Ratio 0.01 0.02 0.04 0.07 0.11 0.32
Current Ratio 0.61 1.06 1.13 1.29 1.59 1.84
Debt Coverage Ratio 2.01 2.15 1.83 1.16 0.68 0.58
Interest Cover Ratio 0.51 5.06 6.29 4.97 3.65 2.20
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INVESTOR'S INFORMATION
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Gross Profit Ratio 31.85% 35.86% 38.38% 36.63% 34.16% 33.22%
(Loss) / Earnings Per Share ** (7.07) 9.34 19.71 23.16 7.91 4.79
% of (Loss) / Profit After Tax to Sales (5.15%) 6.56% 13.13% 18.05% 7.98% 6.08%
Return on Capital Employed (1.99%) 2.55% 5.42% 6.53 2.30% 2.92%
Inventory Turnover Ratio 68.66 79.38 93.44 83.64 74.33 67.63
Debtor Turnover Ratio 15.57 15.09 19.93 22.18 23.69 21.30
Fixed Assets Turnover Ratio 0.42 0.43 0.45 0.40 0.31 0.53
Breakup Value Per Share * 337.63 346.20 337.85 320.64 299.98 123.68
Market value at the end of the year ** 113.05 540 466 393.55 180 130
Highest Market value during the year ** 530 546 466 393.55 197.55 145
Lowest Market value during the year ** 113.05 412 316 161.50 125.50 109.25
Price Earning Ratio (16.00) 57.79 23.64 16.99 22.76 27.14
Dividend Per Share - Bonus ** - - - - - 1
Dividend Per Share - Cash ** 1.5 1 2.5 2.5 2.5 -
Dividend Yield Ratio % 1.33% 0.19% 0.54% 0.64% 1.39% 0.77%
Dividend Payout Ratio % (21%) 11% 13% 11% 32% 21%
Addition to Property, Plant and Equipment * 288 581 549 75 5,612 103
(Without Capital Expenditure)
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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