Pakistan Hotels Developers Limited

Pakistan Hotels Developers Limited (PSX: PHDL) was incorporated as a private limited company in Pakistan in 1979 as Taj Mahal Hotels Limited. It was converted into a public limited company in 1981. The principal activity of the company was the hotel business besides owning and operating a five-star hotel, Regent Plaza Hotel and Convention Centre, Karachi. Recently, the company entered into a sale agreement for the transfer of its property to SIUT Trust.

Pattern of Shareholding

As of June 30, 2023, PHDL had a total of 18 million shares outstanding which were held by 507 shareholders. Directors and their relatives have the highest shareholding of 88.62 percent in the company. The general public accounts for 10.98 percent of PHDL’s outstanding. The remaining shares are held by other categories of shareholders.

Performance trend (2018-23)

Except for a year-on-year decline in 2020 and 2021, PHDL’s topline rode an upward trajectory over the period under consideration. During the period, the company posted net losses twice i.e. in 2018 and 2021. In between these years, PHDL’s bottom line strengthened in 2019 followed by a drastic plunge in 2020. In 2022, PHDL posted the highest net profit and EPS which leveled down in the subsequent year. The detailed performance review of the period under consideration is given below.

In 2018, the hotel restarted with limited capacity after a 9-month suspension of business activity due to a fire incident in the hotel building in 2017. The company’s turnover grew by 20 percent year-on-year in 2018. PHDL achieved a GP margin of 54 percent in 2018 with 40 percent year-on-year growth in gross profit to clock in at Rs.225.39 million in 2018. The bliss proved to be short-lived as soaring operating expenses overshadowed the healthy growth in gross profit. Operating expenses are mainly elevated on the heels of compensation to the affectees of fire incidents as well as repair and maintenance expenses. As a result, the company made an operating loss worth Rs. 2.21 million in 2018. Finance costs also magnified during the year as the company obtained a running finance facility to meet its working capital requirements. In 2018, the company posted loss after tax of Rs. Rs.16.97 million up from Rs. 10.97 million in 2017. Loss per share also grew from Rs.0.61 in 2017 to Rs.0.94 in 2018.

2019 was a rather stable year for PHDL as its topline grew by 15.29 percent year-on-year on the back of higher occupancy as well as reasonable food and beverage sales. However, the high cost of sales on the back of market-driven increases in salaries coupled with guest supplies, heat, and power prices kept the GP margin under check which ticked down to 52.5 percent in 2019. Operating expenses which grew during last year also slid by 15.46 percent year-on-year in 2019. As a result, PHDL was able to make an operating profit of Rs.59.869 million in 2019 with OP margin clocking in at 12.46 percent. Finance cost gave major support to the bottom line as it plunged by 56.56 percent year-on-year during the year as the company settled its running finance facility obtained in the previous years to overcome the liquidity shortfall. During the year, the company obtained an interest-free loan of Rs. 2.5 million from the director of the company for working capital requirements. The finance cost of the company comprised of remaining interest payable on short-term borrowing as well as interest on lease liabilities as it purchased furniture and fixtures and a vehicle through leasing during the year. The company posted a profit after tax of Rs.28.01 million in 2019 with an NP margin of 5.83 percent. During the year company also made capital investments in fire safety equipment to avoid any mishap in the future.

Further, the management asked the tenants of their shops to vacate the premises for safety and security reasons. This added to operating expenses as rent receivables were written off.

While the PHDL was in the process of recovering from the shocks of the fire incident that happened in December 2016 (FY17), the unpredictable COVID-19 jolted its subsistence. The business activity of PHDL halted for more than three months which culminated into a topline drop of 32 percent year-on-year in 2020. The cost of sales also plummeted due to low occupancy and food and beverage sales. GP margin nosedived to 36 percent in 2020 with 53.28 percent thinner gross profit. Thankfully, operating expenses gave some breather as they slid by 33.72 percent year-on-year as unlike last year, there was no compensation to the fire incident affectees as well as no shop premium paid in 2021. Repair and maintenance costs also shrank during the year. Other income grew significantly as the company disposed of its assets and earned profit on saving accounts, however, in absolute terms, other income of Rs.1.186 million wasn’t capable enough of providing any support to the bottom line. The company made an operating loss of Rs. 8.711 million in 2020. Finance costs dropped by 74.45 percent year-on-year in 2020 as the company fully paid the interest charges on its short-term borrowings last year. PHDL posted a loss before tax worth Rs.9.793 million in 2020, however, deferred taxation allowed PHDL to post a positive bottom line of Rs0.442 million in 2020 with an NP margin of 0.14 percent.

The economic headwinds that came with the global pandemic were not over in 2021. The room occupancy of PHDL which slid down to 14.99 percent in 2020 further dropped to 9 percent in 2021. The company nearly halved its workforce from 151 workers in 2020 to 75 workers in 2021. The topline also shrank by 23.57 percent year-on-year with GP margin sinking further to 29.94 percent in 2021. Operating expenses also dropped by 5.18 percent year-on-year on account of low guest turnover. Operating loss further magnified to Rs46.357 million in 2021, up 429 percent year-on-year. Finance cost which represented interest on lease assets tapered off by 75.23 percent in 2021. The net loss for 2021 stood at Rs47.165 million with a loss per share of Rs. 2.62.

PHDL, which had been grappling firstly against the fire incident and then against COVID-19 heaved a sigh of relief in 2022 as its topline grew by 86 percent year-on-year. Room occupancy grew to 20 percent as the signs of the global pandemic began to fade and the hotel and tourism industry picked up. The cost of sales also increased due to a market-driven increase in salaries coupled with elevated heat, light, and power charges. The GP margin grew to 47 percent in 2022 with a 192 percent rise in gross profit. As the company made capital investments in air-conditioning, equipment, and restaurants for the improvement of its services, hence, operating expenses mounted by 30.35 percent year-on-year in 2022. The company posted an operating profit worth Rs. 60.624 million in 2022 with an OP margin of 13 percent. Finance costs continued to diminish during the year and PHDL was able to post a net profit of Rs. 47.817 million with EPS of Rs.2.66 and NP margin of 10.29 percent. This was the highest bottom line as well as operating margin and net margin seen by the company since 2017.

In 2023, PHDL’s net sales improved by 20.34 percent year-on-year. Room occupancy slightly fell to 19 percent in 2023, however, room revenue rose owing to price rationalization to make up for high cost. Food & beverages revenue and other services revenue (convention center, health, laundry, telephone, etc) also buttressed topline growth in 2023. Heat, light & power charges continued to be the major component of the cost of sales. In the wake of heightened energy tariffs, the cost of sales mounted by 28.25 percent in 2023. This translated into 11.42 percent growth in gross profit with GP margin falling down to 43.52 percent. Operating expenses surged by 19.32 percent in 2023 due to higher payroll expenses as well as repair & maintenance charges paid during the year. A number of employees which stood intact at 75 for the past two years grew to 105 in 2023. Other income was enhanced by a massive 3529.11 percent in 2023 as the prior year’s liability of WWF worth Rs.4.416 million was written back during the year. Operating profit grew by a paltry 0.01 percent in 2023 to clock in at Rs.60.632 million with OP margin clocking in at 10.85 percent. PHDL didn’t incur any finance costs in 2023. PHDL posted a net profit of Rs.44.129 million in 2023, down 7.71 percent year-on-year. EPS stood at Rs.2.45 and NP margin fell to 7.89 percent.

Recent Performance (9MFY24)

While there was no respite in economic and political instability, PHDL posted a 30.78 percent year-on-year rise in its net revenue. The cost of sales grew by 20.81 percent during the period due to high inflation and heightened energy tariffs. However, the company passed on the impact of cost hikes to its customers which resulted in a 42.6 percent healthier gross profit recorded during 9MFY24 with GP margin rising up from 45.76 percent in 9MFY23 to 49.89 percent in 9MFY24. Operating expenses grew by 3.96 percent in 9MFY24. Other income grew by a massive 6399.49 percent during the period.

The detailed financial statements are not yet available to comment on the reason behind this momentous rise. This could be the result of a revaluation gain or gain on the sale of its fixed assets based on the deal finalized with SIUT. Operating profit grew by 367 percent during 9MFY24 to clock in at Rs.245.689 million with OP margin clocking in at 42 percent from OP margin of 11.78 percent recorded during 9MFY23. No finance cost was incurred during the period. Net profit stood at Rs.172.683 million during 9MFY24, up 279.66 percent. EPS rose from Rs.2.53 in 9MFY23 to Rs.9.59 in 9MFY24. NP margin also climbed up from 10.187 percent in 9MFY23 to 29.57 percent in 9MFY24.

Future Outlook

After entering into a sale agreement with SIUT, PHDL announced a cash dividend of Rs.725 per share. The dividend was paid from the sale proceeds of its property.

This was the highest dividend ever paid in the history of PSX. The next step for the company could be to buy new assets with the remaining funds and take a fresh start or invest the funds and earn interest income. The company can also release the remaining funds by paying off dividends to the existing shareholders.

With over 88 percent of the shares already held by the company’s directors and their relatives, it is easier to attain a 90 percent shareholding threshold and carry out a successful buyback and delisting of the company from the exchange which is the most likely outcome for the company as per industry insiders.