Pakistan Services Limited (PSX: PSEL) was established in 1958 as a public limited company. It operates in the hospitality industry with a chain of hotels by the name of Pearl Continental Hotels located in the major cities of Pakistan.
Shareholding pattern
The company is largely held by the foreign companies; nearly 55 percent shares are held under this category. Major shareholders within this category include Castle Participations Inc. and Dominion Hospitality Investments Limited. Some 32 percent shares are with the associated companies that majorly includes Guld Properties (Private) Limited and Orient Petroleum INC. the sponsors, directors, CEO and children hold about 2 percent shares while the remaining about 11 percent is with the rest of shareholder categories.
Historical operational performance
The company has seen consistent growth in its topline throughout the decade, but the momentum was broken in FY19 and more so in FY20 when its revenue fell sharply by more than 20 percent. Despite growing topline, profitability could not be sustained as profit margins have declined intermittently, with a gradual decline after FY18.
During FY16, sales revenue grew by 15 percent. A major part of the revenue is earned from renting out rooms. During FY16, the hotel’s occupancy rate increased year on year in all of the cities the hotel has its presence. Cost of sales remained nearly flat which kept gross margins also stable. However, operating margin was notably affected due to impairment loss on investment in associated undertaking and jointly controlled entity. This operating margin reduced to 15 percent, down from 21 percent in FY15. This decrease was also reflected in the net margin that fell close to 7 percent due to higher finance and tax expense.
Topline growth was relatively lower at a single digit 7.2 percent in FY17. The average daily rate (ADR) increased by nearly 14 percent. PC-Lahore has been the largest contributor in both the major revenue generating categories of rooms and food and beverages. Moreover, contrary to previous year the occupancy rate reduced for all the cities except Peshawar. Thus, increase in revenue was mostly as a result of a higher ADR rather than volumes. Cost of sales increased marginally to 55 percent that kept gross margins hovering around 45 percent. However, a year-on-year improvement in operating margin was due to the unusual impairment loss expense seen last year that had abnormally reduced operating margin. Thus, the company recorded an improved net margin of 11.7 percent.
Topline growth was stable at 7 percent in FY18. Both rooms and food and beverages divisions registered a 9.8 percent and 5.6 percent increase in revenue, respectively. Unlike last year, occupancy rate for all the cities improved except for Hotel One the Mall, Lahore; the latter is a budget hotel owned by the company and operated by Hotel One (Private) Limited. The company managed to reduce its cost of sales marginally by 54 percent that improved gross margins slightly to 46 percent. However, administrative expense squeezed operating margins, down to 16.8 percent. Most of the increase in administrative expense was associated with travelling and conveyance and legal and professional charges. In addition, finance expense jumped to make up more than 8 percent of the revenue that brought down net margin to its lowest, thus far, of 4.7 percent.
After eight consecutive years of rising topline, the company saw an almost 3 percent decline in its revenue in FY19. The largest contributing division of Rooms registered a 13.2 percent decline in its contribution, whereas the food and beverage division that also contributes a significant portion towards the total revenue only saw a marginal growth in its revenue. Although other services also saw a rise in in revenue, however, it did not make a large share in the total pie. Business environment in FY19 was considerably impacted due to the general elections as well as instability on the borders with the neighboring country. This is also reflected in the occupancy rate that declined for all the cities except Karachi; the latter boasts of the highest occupancy among all the cities. Owing to the general inflation in the economy, cost of sales went up to 60 percent of the revenue, severely affecting profitability whereas the high finance expense led the company to eventually post a net loss of Rs 86 million- first time since FY09.
In the first half of FY20, the company exhibited decent performance, however, with the onset of Covid-19, the hospitality industry along with aviation was adversely impacted. During the last quarter, four of its properties were completely closed down; PC Bhurban, Muzaffarabad, Peshawar and Rawalpindi. This had a huge impact on its revenue as seen in the topline that contracted by 20.4 percent. Cost of sales also increased to its highest of nearly 67 percent of revenue- a level last seen in FY09, whereas finance expense and impairment loss further squeezed margins and worsened losses to Rs 1.7 billion for the year.
Quarterly results and future outlook
Revenues from both the two major departments less than halved during the first quarter of FY21. The total revenue declined significantly year on year in the aftermath of Covid-19. While the pandemic is still ongoing, a strict lockdown is not in place that has allowed for some business activities. Despite the lowering of interest rates by the government in an attempt to provide relief to businesses, the company still saw a rise in year-on-year finance expense for the quarter indicating a high gearing.
While the world is not entirely free from the pandemic, the Pakistani government has not placed strict lock downs. As a result, the company has been able to keep all of its hotels open and operating and hoping that increased economic activity would create positive impact for the business.
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