Pakistan Services Limited (PSX: PSEL) was set up as a public limited company in 1958 under the Companies Act, of 1913 (now Companies Act, 2017). It owns and manages a chain of hotels under the name “Pearl Continental”, which it also grants franchises to use its trademark and name.

Shareholding pattern

As at June 30, 2022, nearly 55 percent of shares of the company are owned by foreign companies. Within this category, the majority of shares are owned by Castle Participations Inc. and Dominion Hospitality Investments Ltd. Over 32 percent of shares are held in associated companies, within which the majority of shares are owned by Gulf Properties (Private) Limited and Orient Petroleum INC. Sponsors, directors, CEO, and their children own close to 1.5 percent of shares. The breakup of the shareholding is shown in the illustration.

Historical operational performance

The company has mostly seen a growing topline with the exception of the last three years when it has been contracting consecutively. Profit margins, on the other hand, have followed a gradual downward trajectory from FY16 to FY20, before improving a little in FY21.

In FY18, the company witnessed revenue growth of 7.3 percent, crossing Rs 10 billion in value terms. Of this, Rs 6 billion were brought in through the rooms division which registered a growth of 8.8 percent. Moreover, the food and beverages division posted a growth of 5.6 percent. Additionally, the company also saw an overall improvement in occupancy ratio that grew from 61.4 percent in FY17 to 63.9 percent in FY18, as all the cities witnessed an increase in occupancy ratio barring Hotel One The Mall, Lahore which is a budget hotel owned by the company but operated by Hotel One (Private) Limited. With some decrease in the cost of sales, the gross margin improved to over 46 percent. But the escalation in administrative expenses kept the operating margin from increasing. Most of this increase was due to traveling and conveyance and legal and professional charges. This was further aggravated by the finance expense that made up over 8 percent of revenue, reducing the net margin significantly to 4.7 percent for the year, compared to 11.7 percent in FY17.

After growing consecutively for eight years, revenue in FY19 witnessed a contraction of nearly 3 percent. The rooms division which contributes the biggest chunk to the overall revenue saw a decline of 13.2 percent. In addition, the food and beverages division which also makes a sizeable contribution to revenue saw only a marginal growth in revenue. The year was impacted by the general elections held in the country which brought a lot of uncertainty. This was further worsened by the tension on the borders with the neighboring country. This decline was mirrored in the occupancy ratio which fell to over 57 percent. The cost of sales rose to over 60 percent of revenue due to inflationary pressure. This reduced gross margin to 39.7 percent, whereas finance expense continued to consume a larger share of revenue due to rising interest rates. As a result, the company incurred a loss of for the first time since FY09, of Rs 863 million.

In FY20, the company saw the biggest contraction in revenue at 20 percent, with the topline falling to a little over Rs 8 billion. Revenue from the Rooms division fell by 23.3 percent, followed by the food and beverages division posting a decrease of 19 percent. This was attributed to the outbreak of the Covid-19 pandemic that limited travel. This also had a negative impact on the aviation industry. In the last quarter, four properties of the company were shut down- PC Bhurban, Muzaffarabad, Peshawar, and Rawalpindi. Thus, the gross margin further decreased to over 33 percent. With further expenses incurred, the company posted another year of loss, of Rs 1.7 billion.

Revenue continued to fall in FY21, by 15 percent. Revenue from the Rooms division was down to Rs 3 billion, whereas the food and beverages division also saw a fall, of 11.7 percent. This was again due to the continued presence of the Covid-19 pandemic that resulted in intermittent restrictions on food and beverage outlets, restaurants and banquet activities, etc. The occupancy ratio improved only slightly to 48.5 percent, from last year’s 46.6 percent. While the company did incur a loss of Rs 396 million for the period, it was notably lower than that seen in FY20.

PSEL in FY22

In FY22, the company was able to report earnings growth. This came despite the economic headwinds that the economy faced in FY22. Some recovery post-COVID was seen in early FY22, which also helped the company post a whopping increase in its operating profits. Revenues were seen growing by over 70 percent, year-on-year in FY22 while operating profits were up by 286 percent. The rooms department's revenues were signing up, and so was the food and beverages department. The occupancy rate improved from 48.5 percent in FY21 to 63.8 percent in FY22. However, higher finance costs during the year ate away the gains. Despite the higher financing expense, PSEL was able to turn negative earnings in FY21 into positive in FY22.