Pakistan Services Limited

Pakistan Services Limi-ted (PSX: PSEL) was established in 1958 under the Companies Act, 1913 (now, Companies Act, 2017). It owns and runs a hotel chain “Pearl Continental”. It also grants franchise for use of its trademark and name.

Shareholding pattern

As at June 30, 2022, foreign companies hold nearly 55 percent shares in the company. Castle Participations Inc. and Dominion Hospitality Investments Limited are major shareholders within this category. Associated companies own over 32 percent shares, within which Gulf Properties (Private) Limited and Orient Petroleum Inc. are key shareholders. The sponsors, directors, CEO and their children own about 1 percent shares, while the remaining 11 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has largely seen a growing topline over the years, while profit margins in the last six years have declined between FY17 and FY20, before rising again until FY22.

In FY19, revenue contracted by almost 3 percent. The prominent contributor to the total revenue, the rooms division decreased by 13.2 percent. Moreover, the next major contributor to revenue, the food and beverages division registered only a marginal growth. It is pertinent to note that the year began with general elections in the country, and despite the smooth transition of government, uncertainty prevailed. Moreover, there were also tensions on the border with the neighbouring country that impacted the hospitality industry. This reflected in the occupancy ratio that reduced to 57 percent. On the other hand, inflationary pressures caused cost of sales to increase to 60 percent of revenue. Thus, gross margin fell to almost 40 percent. With finance expense continuing to climb due to higher interest rates, the company posted a loss of Rs 863 million for the first time.

The company witnessed the biggest contraction in topline in FY20 by 20 percent with revenue falling to Rs 8 billion, versus over Rs 10 billion for the last two years. While revenue from rooms division fell by 23.3 percent, food and beverages division fell by 19 percent. The outbreak of Covid-19 pandemic was primarily a cause for this as the former led to strict lockdowns, and limited travel. Thus, four of the company’s properties were shut down in the last quarter- PC Bhurban, Muzaffarabad, Peshawar and Rawalpindi. The aviation industry was also adversely impacted. The loss in revenue reflected in the gross margin that was down to 33.4 percent, while net loss further escalated to an all-time high of Rs 1.7 billion.

In FY21, the company saw topline declining for the third consecutive period. In value terms, it was down to Rs 6.9 billion, the lowest seen since FY13. Revenue from the rooms division decreased by 24 percent, while revenue from the food and beverages section fell by 11.7 percent. This was attributed to the outbreak of the Covid-19 pandemic that lingered on for another year, and adversely impacted the hospitality industry. The restrictions on food and beverage outlets, restaurants, banquet activities, etc. continued. While the company did incur a loss of Rs 396 million, it was notably lower year on year. This was due to a number of factors such as a reduction in administrative, finance and other expenses as a share in revenue, coupled with a positive impairment loss figure of Rs 123 million.

In FY22, topline posted an incredible growth of almost 73 percent, with revenue recorded at an all-time high of nearly Rs 12 billion. Revenue from the rooms division registered a growth of 70 percent while the food and beverages section experienced a growth of 83 percent, surpassing the contribution made by rooms division in value terms. This can be attributed to travel largely resuming to its pre-Covid levels, and lifting restrictions from large gatherings. Thus, gross margin improved to over 41 percent. This also trickled to the bottomline that was recorded at Rs 609 million, with a net margin of 5 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY23 was higher by 30 percent year on year. Revenue from the rooms division was up by 37 percent year on year, while the same for food and beverages section was up by over 28 percent. However, the highest costs prevented profit margins to improve year on year. Although, cost of sales was only marginally higher, the escalation in administrative expense has been the major cause of dent in profitability. Coupled with finance expense, the company eventually posted a loss for the period of Rs 152 million, compared to a net profit of Rs 5 million in the same period last year.

While FY22 saw some economic recovery from the impact of Covid-19, it was offset by the Ukraine-Russia war that led to an upward revision of global commodity prices. This in turn led to inflationary pressures. The currency has also been sliding against US dollar. Moreover, the catastrophic floods in the country have also had a severe adverse impact, particularly for the tourism industry since entire roads, villages and infrastructure in general has been swept away in a large part of the country.