Pakistan Services Limited (PSX: PSEL) was incorporated in Pakistan as a public limited company in 1958. The company owns and manages the Pearl Continental Hotels chain. The company also earns through granting franchises to use its trademark and name “Pearl Continental”. PSEL also owns a small property in Lahore operating under its concept of a budget hotel.
Pattern of Shareholding
As of June 30, 2024, PSEL has a total of 32.524 million shares outstanding. Foreign companies have the majority stake of 54.9 percent in the company followed by associated companies holding 31.9 percent shares. Modarabas& Mutual funds account for 3.46 percent of shares of PSEL while Sponsors, Directors, and CEO hold 1.57 percent of shares. Around 1.55 percent of the company’s shares are held by Banks, DFIs, and NBFI,s and 0.57 percent by the local general public. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-24)
PSEL’s topline which had been descending until 2021 started rebounding thereafter. The company registered net losses in 2019, 2020, 2021 and 2023. Among the remaining years under consideration where the company posted net profits, 2022 stands out with the highest net profit and the highest year-on-year topline growth. PSEL’s margins drastically fell until 2020. In 2021, the gross margin dipped, however, the operating margin turned from negative to positive. The company’s margins attained their optimum level in 2022 followed by a decline in 2023. In 2024, the margins picked up, however, they couldn’t attain the level last seen in 2022. The detailed performance review of the period under consideration is given below.
In 2019, PSEL’s topline slid by 2.94 percent year-on-year. While revenue from food & beverages, shop license fees, and other related services (telephone, laundry, discount cards, etc) ticked up during the year, the decline in revenue from rooms due to uncertain politico-economic conditions of the country took its toll on the overall topline of PSEL in 2019. Cost of sales & services mounted by 9 percent in 2019 mainly on account of higher salaries & wages paid during the year. This resulted ina 16.79 percent drop in gross profit in 29 with GP margin slipping from 46.35 percent in 2018 to 39.74 percent in 2019. Other income improved by 22 percent in 2019 as the company incurred a lesser loss on the disposal of property, plant & equipment during the year. Administrative expenses ticked down by 2.17 percent in 2019 due to lesser advertising & sales promotion, lower repair & maintenance charges, a decline in legal & professional charges as well as smaller donations extended during the year. PSEL recorded 41.84 percent thinner operating profit in 2019 with OP margin falling down from 16.75 percent in 2018 to 10 percent in 2019. The company made 153 percent higher finance income during the year mainly from term deposit receipts. However, it was offset by a 96.29 percent higher loss recorded on the re-measurement of investments at fair value and a 59.13 percent higher finance cost. Higher finance cost was the result of increased borrowings and monetary tightening. PSEL incurred a net loss of Rs.863.40 million in 2019 as against a net profit of Rs.495.56 million posted in the previous year. Loss per share stood at Rs.26.55 in 2019 versus EPS of Rs.15.24 registered in 2018.
In 2020, PSEL’s topline further eroded by 20 percent. This was the consequence of the outbreak of COVID-19 in the third quarter of FY20 forcing the company to operate with a limited scope. The company closed its four business units in Bhurban, Muzaffarabad, Peshawar, and Rawalpindi. The cost of sales also declined by 11.67 percent in 2020. Gross profit tapered off by 32.78 percent in 2020 with GP margin sliding down to 33.42 percent. Other income strengthened by 64.31 percent in 2020. This was due to an insurance claim as during the year, the under-construction hotel at Mirpur was damaged due to an earthquake. Administrative expenses shrank by 9.26 percent in 2020 due to lesser payroll expenses as the company considerably squeezed its workforce from 3253 employees in 2019 to 2576 employees in 2020. Allowance booked for ECL surged by a whopping 410.52 percent in 2020. The company also incurred other expenses of Rs.300.9 million in 2020 which included loss on disposal of property, plant, and equipment and write-down adjustment of capital work-in-progress due to the earthquake at Mirpur hotel. PSEL incurred an operating loss of Rs. 284.75 million in 2020. Finance income dwindled by 32.65 percent in 2020. The company recorded a gain of Rs.0.67 million on re-measurement of investment at fair value as against a loss of Rs.491.66 million incurred in the previous year. Finance costs grew by 49.73 percent due to increased borrowings and higher discount rates for most part of the year. This resulted in an 11.74 percent higher net finance cost recorded in 2020. The company incurred the highest-ever net loss of Rs.1744.01 million in 2020 with a loss per share of Rs.53.62.
In 2021, PSEL’s topline shed 15 percent. The company continued to operate with a limited scope. Some of its hotels were temporarily closed. The others that were operational had restrictions on food and beverages, restaurants, and banquet activities. The cost of sales and services thinned down by 12.77 percent in 2021. This resulted in a 19.54 percent decline in gross profit in 2021 with GP margin touching its lowest level of 31.64 percent. Other income ticked up by 9 percent in 2021 mainly on account of liabilities written back as well as gain recognized on the disposal of property, plant & equipment, and non-current assets held for sale. The company cut down its administrative expense by 31.48 percent in 2021 mainly by downsizing its workforce from 1620 employees in 2020 to 1491 employees in 2021. This resulted in a massive decline in payroll expenses. The company also booked a reversal of Rs.122.39 million on ECL as against the allowance booked for the past two years. Other expenses also tapered off by 55.34 percent in 2021 due to the high-base effect as it incurred a loss on disposal of its property, plant & equipment in the previous year due to the earthquake. PSEL recorded an operating profit of Rs.528.6 million in 2021 as against the operating loss recorded in the previous year. OP margin was recorded at 7.62 percent in 2021. The decline in finance cost due to monetary easing and higher gain recorded on the re-measurement of investment at fair value resulted in a 29 percent drop in net finance cost in 2021. PSEL recorded a net loss of Rs.395.89 million, down 77.30 percent year-on-year. This translated into a loss per share of Rs.12.17.
PSEL recorded a staggering topline growth of 72.72 percent in 2022. As the economic and social activities completely resumed post-COVID-19, the company mustered hefty revenue from rooms as well as food & beverages segments. Cost of sales mounted by 48 percent during the year, resulting in 125.94 percent higher gross profit in absolute terms. GP margin attained its highest level of 41.39 percent in 2022. Other income slid by 55.56 percent in 2022 due to the high-base effect as the company disposed of its property, plant, and equipment as well as non-current assets at gain in 2022. Administrative expenses escalated by 45.83 percent in 2022 mainly on account of higher payroll expense as the resumption of customer traffic encouraged the company to expand its workforce to 1627 employees. The company booked an allowance of Rs.166.91 million on ECL in 2022. No other expense was incurred during the year versus other expenses of Rs.134.39 million recorded in the previous year. PSEL recorded an operating profit of Rs.2044.25 million in 2022, up 286.67 percent year-on-year. Net finance cost grew by 28.15 percent in 2022 due to the onset of monetary tightening. The company also incurred a loss on the re-measurement of investment at their fair value in 2022. Net profit clocked in at Rs.609.16 million in 2022 with EPS of Rs.18.73 and NP margin of 5.1 percent.
PSEL’s net sales ticked up by 10.62 percent in 2023 mainly driven by rooms, food & beverages, and other related services. Higher salaries and benefits as well as increased utility charges resulted in a 17.21 percent surge in the cost of sales & services in 2023. Gross profit ticked up by 1.3 percent in 2023, however, GP margin thinned down to 37.9 percent. PSEL recorded a whopping 216.57 percent growth in its other income during the year. The main drivers were gain recorded on the disposal of property, plant & equipment, and non-current assets held for sale. During the year, the company disposed of its Peshawar hotel. Besides, gain on disposal, impact of long-term loan allocation advances, and gain on deferment of accrued markup also drove up other income in 2023. Administrative expense mounted by 32.81 percent in 2023 due to higher payroll expense on account of inflationary pressure and also because of workforce expansion to 1660 employees in 2023. PSEL also recorded a reversal of Rs.136.59 million on ECL in 2023. Operating profit plummeted by 12.81 percent in 2023 with OP margin falling down to 13.43 percent. Net finance cost grew by 20.87 percent in 2023 due to a higher discount rate which drove up both finance income and cost. Loss incurred on re-measurement of investments at fair value slid by 67.18 percent in 2023. Higher net finance costs once again shoved the company into the red zone with a net loss of Rs. 218.28 million. Loss per share stood at Rs.6.71 in 2023.
In 2024, PSEL recorded a 13.44 percent uptick in its net sales. This came on the back of the food & beverages segment followed by rooms. Higher salaries & wages as well as elevated energy tariffs resulted in a 10.76 percent spike in the cost of sales & services in 2024. However, the company’s ability to pass on the impact of cost hikes to its customers resulted in 17.83 percent higher gross profit in absolute terms. GP margin also improved too.39.37 percent in 2024. The company recorded 84.79 percent higher other income in 2024 which was predominantly driven by gain on disposal of non-current assets held for sale. The company used the proceeds of the sale to make its accrued mark-up payments which it deferred last year. Administrative expenses ticked up by 5.98 percent in 2024 mainly due to lesser rent, rates & taxes as well as lesser advertisement expenses incurred during the year. During the year, the company recorded an impairment of investment worth Rs.142 million in its subsidiary, City Properties Private Limited. Allowance for ECL to the tune of Rs. 77.5 million was also booked during the year. Operating profit improved by 39.66 percent in 2024 with OP margin ticking up to 16.53 percent. Monetary tightening continued during 2024 which resulted in an 11.96 percent spike in net finance cost during the year. Both finance income and finance cost grew during the year. The company recorded a massive gain of Rs.274.79 million on the re-measurement of its investment at fair value. PSEL recorded a net profit of Rs.425.46 million in 2024 with EPS of Rs.13.08 and NP margin of 2.83 percent.
Recent Performance [1QFY25]
PSEL recorded a 15.51 percent year-on-year spike in its net revenue in 1QFY25. This was driven by greater revenue proceeds from the food and beverages segment followed by rooms and other services. An increase in prices to pass on the onus of cost hikes to its customers resulted in a 27.18 percent improvement in gross profit in 1QFY25 with GP margin clocking in at 44.15 percent versus GP margin of 40 percent recorded during the same period last year. Other income improved by 17.21 percent in 1QFY25. Inflationary pressure and elevated utility charges drove up administrative expenses by 8.56 percent in 1QFY25. PSEL recorded 58.87 percent higher operating profit during the period with an OP margin of 19.86 percent versus an OP margin of 14.44 percent recorded during the same period last year. Net finance cost mounted by 36.91 percent in 1QFY25 due to higher finance cost and loss incurred on the re-measurement of investment at fair value. This coupled with higher tax expenses resulted in a 34.29 percent decline in net profit which clocked in at Rs.40.38 million in 1QFY25. EPS also ticked down from Rs.1.89 in 1QFY24 to Rs.1.24 in 1QFY25. NP margin clocked in at 0.98 percent in 1QFY25 versus NP margin of 1.73 percent recorded during the same period last year.
Future Outlook
On the positive front, improvement in macroeconomic indicators and a growing middle-class population may buttress the performance of the hospitality industry. However, geopolitical tensions particularly in the Middle East region, and political uncertainty within the home country can take their toll on the tourism sector of Pakistan.