Pakistan Services Limited

Pakistan Services Limited (PSX: PSEL) was established in 1958 as a public limited company. It fundamentally operates in the hotel industry, operating a chain of 'Pearl Continental Hotels'. Currently, it owns six hotels across the country.

It has a registered trademark 'PC' by which it is known essentially. It has allowed use of its trademark logo to other hotel operating companies such as 'Zaver Pearl Continental Hotel' situated in Gwadar.

Apart from being engaged in the hotel business, it is also dealing in the 'travels and tour related businesses under the name of Destinations of the World (DOTW), licensed under a master franchise agreement signed with DOTW, Dubai (United Arab Emirates).

Shareholding pattern

Foreign companies hold majority of the shares of the company- about 65 percent. Of these the key shareholders are Ocean Pakistan Limited, Dominion Hospitality Investments Limited and Castle Participations Inc. Associated companies hold almost 23 percent shares, of which most are in the ownership of Gulf Properties (Private) Limited and Zaver Petroleum Corporation Limited. Directors, CEO, their spouses and minor children hold a mere 2 percent of the company while the rest are distributed between the remaining categories as shown in the table.

Historical operational performance

Pakistan Services Limited's net revenue has consistently been growing, with the exception of FY19, while the bottom-line has remained positive over the years, again with the exception of FY19 when it recorded a net loss of Rs863 million.

During FY15, the top-line of the company grew by 4 percent year-on-year while cost of sales and administrative expenses together consumed about 83 percent of the revenue, reducing margins considerably as compared to the preceding year. Of the cost of sales, a major expense was seen coming from purchases of food and beverages, salaries and security and protective services.

Another factor contributing to the declining margins was a fall in income generated from other sources, reducing from 9 percent to about 3.5 percent as a percentage of top-line. A major reduction was observed in 'unrealised gain on remeasurement of investments to fair value' from Rs427 million in FY14 to nearly Rs79 million in FY15.

During FY16, PSEL registered a 15 percent year on year growth in top-line, improving from last year's single digit growth. This may have been as a result of an increase of 8.4 percent in the room's Average Daily Rate (ADR). In addition, the average occupancy improved to 66 percent. The cost of sales as a percentage of revenue remained flat on a year on year basis, while administrative costs, although increased in value, it rather declined as a percentage of revenue. A slight incline was seen in finance cost as a result of an increase in mark up on long term financing.

The rate of growth in revenue is lower than last year- at around 7 percent in FY17. However, improvement was seen across the board; performance of rooms department, food and beverage department and other related services/license fee/travel and tour division. With a growth in net revenue, there was a corresponding rise in costs as well, with cost of sales increasing, although marginally, as a percentage of revenue. In this a key contributing factor was again purchases of food and beverages and salaries.In FY16, there was an abnormal expense of impairment loss which was absent in FY17, thus the overall change in margins of FY17 when compared to FY16 is considerable. During FY16, the company recorded a net profit of Rs625 million, while in FY17, the net profit nearly doubled to Rs1149 million with expenses returning to normal.

While PSEL managed its growth momentum in FY18, with the top-line increasing by 7 percent annually, its bottom-line reduced significantly. The cost of sales' share in revenue declined, however administrative cost exhibited a rise. This was owing to a notable increase in traveling and conveyance and legal and professional charges among other factors. Additionally, finance cost increased five times due to increase in interest expense on loans and borrowing and short term borrowing. Thus, net profit saw a decline of 57 percent from Rs1149 million in FY17 to Rs496 million in FY18.

FY19 saw the aftermath of changing policies and reforms, with currency devaluation, monetary tightening and expenditure control.

The rise in inflation contracted the consumer's disposable income, reducing their propensity to spend. This is evident from the contracted state of financials of a lot of companies. PSEL was no exception. With revenue declining by almost 4 percent and expenses rising, gross margin reduced from 46 percent in FY18 to 40 percent in FY19. Finance cost reached an all-time high of Rs1.395 billion, increasing by 59 percent year-on-year, which eventually led the company towards a loss of Rs863 million.

Quarterly results and future outlook

During the period 1QFY20 while the net revenue grew by 3 year-on-year, recording a positive gross profit, the escalation in administrative expenses marred the bottom-line figures for the period. Some relief was brought by income generated from operations with loss reducing for Rs358 million to Rs297 million.

In the past few years, the country has seen some progress in the law and order and security situation thereby restoring confidence of the population. The introduction of international events such as the Pakistan Super League, which brings foreign players into the country, enhancement and development of infrastructure, combined with the country's renewed focus on promotion of tourism, the future of the hospitality industry looks fruitful. With this in view, PSEL began expanding by entering into an agreement to manage a hotel in Malam Jabba while commencing new projects such as PC Multan and PC Mirpur Azad Kashmir.

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PSEL: Pattern of shareholding as at June 30, 2019
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Categories of shareholders                            %
Directors, CEO, their spouses and minor children    1.8
Associated companies                              22.66
Banks, DFIs, and NBFIs                             1.35
Insurance companies                                0.09
Modarabas and mutual funds                         3.45
Foreign companies                                 64.65
General public:
Local                                              0.55
Foreign                                            0.06
Others                                             5.38
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Total                                               100
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Source: Company accounts

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PSEL: Quarterly results
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Rs (mn)                     1QFY20    1QFY19       YoY
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Net revenue-LHS              2,356     2,282     3.24%
Cost of sales              (1,509)   (1,474)     2.37%
Gross profit                   847       808     4.83%
Administrative expenses      (775)     (733)     5.73%
Other operating income          52        34    52.94%
Impairment (loss)/gain         (7)        21  -133.33%
Operating profit               117       109     7.34%
Finance cost                 (334)     (348)    -4.02%
Profit before taxation       (217)     (239)    -9.21%
Taxation                      (80)     (119)   -32.77%
Profit after taxation        (297)     (358)   -17.04%
EPS                         (9.10)   (11.00)
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Source: Company accounts