PACE Pakistan Limited

PACE Pakistan Limited (PSX: PACE) is a public limited company, set up in 1992. It acquires, develops, sells and manages real estate assets such as condominiums, departmental stores, shopping plazas, super markets, utility stores, housing societies, etc. The business is divided into two segments- real estate and investment properties.

Shareholding pattern

Over 15 percent shares of the company are held under associated companies, undertakings and related parties. Within this, a major shareholder is Sisley Group of Companies Limited. Close to 65 percent shares are held by the local general public while the directors, CEO, their spouses and minor children own less than 1 percent shares. The foreign companies, etc. own over 11 percent shares, followed by 7.6 percent in joint stock companies. The remaining about 1 percent share is with the rest of the shareholder categories.

Historical operational performance

PACE Pakistan has over the years experienced a fluctuating topline. Gross margin, on the other hand, in the last six years has witnessed a slight incline, operating margin declined gradually, and net margin witnessed a sharp decline from FY17 to FY19, before rising again.

In FY18, topline grew by over 50 percent. This was due to an increase in sale of PACE tower. Moreover, the property market generally had been following an upward trend during the period. But this could not be translated into a higher profitability as the cost of sales exceeded the topline. A major component of cost of sales was the value of purchases of inventory.

Thus, the company incurred a gross loss of Rs 8 million compared to a gross profit of Rs 15 million. Profitability was further worsened by a significant decline in other income due to “substantial amounts of settlements executed during the previous year”. Additionally, the company also experienced a notable exchange loss on foreign currency convertible bonds of Rs 278 million that was not seen in the previous year.

Revenue in FY19 fell by nearly 29 percent. In FY18 shops in Gujrat, Model Town Extension and M.M Alam plazas were sold, the revenue of which was absent in FY19. With a more than corresponding decline in costs, the company was able to post a gross margin of 24 percent. But the significant currency devaluation from Rs 121.6 in FY18 to Rs 164 in FY19, led to a hike in exchange loss on foreign currency convertible bonds. This resulted in a net loss of Rs 929 million- the highest seen since FY13.

In FY20, revenue fell notably by nearly 47 percent. This was attributed to “recognition of revenue, on percentage of completion basis, pertaining to sale of floors on Pace Tower in FY19 that raised the revenue then. A corresponding decrease in costs made some room for profitability. But impairment loss on trade and other receivables categorized under administrative expenses increased the operating loss from Rs 65 million in FY19 to Rs 125 million in FY20. However, there was some improvement in the bottom-line as the net loss reduced from Rs 929 million in FY19 to Rs 398 million in FY20. This was due to a major reduction seen in exchange loss on foreign currency convertible bonds from Rs 725 million in the previous year to a mere Rs 65 million in FY20.

Topline in FY21 contracted for the third consecutive period by over 12 percent. Majority of the decline in revenue was associated with development services that nearly disappeared year on year, and rental income from lease of investment property. Cost of sales also reduced due to a reduction in construction cost and operating costs regarding Plazas. Thus, the company was able to post a gross profit of Rs 138 million- the highest seen in the last decade. With administrative expenses reverting to their previous levels, finance cost reducing due to a lower interest rate and an exchange gain earned due to some currency appreciation, the company managed to reduce its net loss to Rs 46 million for the year.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was marginally higher by 5 percent year on year. But the drop in cost of sales due to decrease in construction and operating costs of the Plazas allowed gross profit to improve to Rs 47 million.

Operating profit was also supported by other income that was sourced from gain on settlement of loan. However, the substantial exchange loss of Rs 225 million versus an exchange gain of Rs 36 million in 1QFY21 led the company to incur a loss of Rs 97 million during the period compared to a loss of Rs 8 million in the same period last year.

With the delivery of PACE towers in 2020 and 2021, and having investments in PACE Circle, the company forecasts operating cash flows coming from converting assets into cash flowing operating assets.