Pakistan Services Limited primarily operates in the hotel business. The company owns and runs the Pearl Continental (PC) Hotels chain in Pakistan. The PC hotel chain is currently operating in six cities: Karachi, Lahore, Rawalpindi, Bhurban, Peshawar and Muzaffarabad (Azad Jammu & Kashmir). It also owns and manages one small, budget hotel in Lahore. The firm was incorporated in Karachi on December 6, in 1958, under the Companies Act 1913 (now Companies Ordinance, 1984). It is listed on the Pakistan Stock Exchange under the moniker (PSEL). Its latest available shareholding pattern is provided below.
As per latest company information, PSEL hotels have 1,526 rooms in six luxury hotels, besides 32 rooms in the small hotel in Lahore. The firm is currently also constructing new hotels in Multan and Mirpur (Azad Jammu and Kashmir). PSEL allows other hotel companies to use its trademark PC brand and logo. Under this franchise model, the firm currently has "Zaver Pearl Continental Hotel" in Gwadar. It has another hotel coming up in Faisalabad under the PC brand. PSEL's sister concern, Hotel One (Private) Limited also uses the firm's name and logo to offer its hotel services in Islamabad, Multan, Faisalabad, Sialkot, Bahawalpur and Lahore.
Latest company information shows that PSEL has four subsidiaries, with 100 percent stake in each of them. The only operational subsidiary, Pearl Tours and Travels (Private) Limited, deals in "rent-a-car, tour packages and travel related work" - in FY17, it earned revenues of Rs 200 million but made a loss-after-tax of Rs 24 million. City Properties (Private) Limited, and Elite Properties (Private) Limited, both of which are in the business of real estate development, have yet to start their commercial operations. The fourth subsidiary, Pearl Continental Hotels (Private) Limited remained non-operational in FY17.
Let's now turn towards the financial analysis of PSEL (unconsolidated) performance in recent years.
Recent financial performance PSEL has seen a good run in the ongoing decade thus far. The firm's top-line has almost doubled between FY11 and FY17. The firm scored net revenues just shy of Rs 10 billion in FY17; showing a growth of 7.22 percent year-on-year, lower than 15.5 percent growth seen in FY16.
PSEL has four major revenue streams. For FY17, 48 percent of the gross revenues were provided by 'Rooms', 47 percent by 'Food & beverages', 4.6 percent by 'Other related services' (which include revenues from telephone, laundry, discount cards and other ancillary services) and 0.4 percent by 'Shop license fees'. PC Lahore and PC Karachi provide the bulk of firm's revenues for the two dominant segments. PC Lahore provided 44 percent of room revenues and 47 percent of food & beverages revenues in FY17, whereas PC Karachi had a 20 percent share in PSEL room revenues and another 20 percent share in the company's food & beverage revenues.
Growing faster in recent years, the room revenues overtook food & beverages revenues in FY16. The recent up tick in room revenues indicates growing occupancy levels at the hotels. That in turn is perhaps explained by economic expansion, led by domestic demand as well as government spending on infrastructure projects. The management has stated in the latest annual report that average daily rate had increased by 13.8 percent year-on-year in FY17 to reach Rs 13505.
There was double-digit average growth in all four revenue segments between FY12 and FY16: 16 percent for rooms, 10 percent for food & beverages, 13 percent for other related services, and 40 percent for shop license fees. However, the gross revenue growth has slowed down in FY17. Room revenues grew by 8 percent year-on-year, food & beverages 6 percent, other related services also 6 percent, and shop license fees 30 percent.
Meanwhile, the cost of sales has remained steady in the decade thus far, hovering around 55 percent of net sales. This has ensured production of gross margin consistently above 40 percent in recent years. Administrative expenses have also remained below the mark of 30 percent of net sales, exhausting 27 percent of net sales in FY17.
Yet, before FY17, the top-line gains and managed operational expenditures weren't regularly resulting in healthy bottom-line gains. For instance, in FY16, the main reason behind a lackluster bottom-line was an impairment loss, a non-operating event, worth Rs 798 million, which came about because of impairment losses on two of the firm's investments in associated companies: Hashoo Group Limited - British Virgin Islands, and PC Hotels Limited - UAE.
The story for FY17 was rather better. PSEL has significantly expanded its bottom-line over the previous year. Though the net profits were still below the level seen in FY14, the expansion in net margin, which recorded 12 percent in FY17, is a welcome sign for the firm. Thanks to a significantly lower impairment loss in FY17 (Rs 41mn), the firm was able to show year-on-year amelioration in its gross, operating and net margins, despite a lackluster top-line growth, disproportionate growth in cost of sales & services, administrative expenses, and a spike in finance cost.
Stock performance For the year ended June 30, 2017, PSEL announced Rs 5/share cash dividend after the FY17 results' announcement, in addition to the already-paid Rs 15/share interim cash dividend. Over at the bourse, standing at Rs 970 a piece, the PSEL scrip has been up almost 13 percent in the year-to-date period. The stock has, however, mostly underperformed the broader index in the year-to-date period. Since its trading volumes are too thin (averaging just over 50 shares per day); one cannot possibly read too much into the PSEL performance on the stock market.
Outlook PSEL has benefitted from a better economic environment and security situation in the recent past, as corporate activities and domestic tourism - two of the factors that major impact the business of high-end hotels - picked up in recent years. Going forward, the completion of the first wave of CPEC projects will provide added confidence to business tourists. Additionally, the recent arrival of international athletes to participate in various sports fixtures in Pakistan is also a good omen for the leisure traveler.
However, the rising political instability at home, initial signs of an a macroeconomic crisis in the making, and potential increase in hostility with the US and Nato countries vis-à-vis the war in Afghanistan may stop the hotel industry's recovery in its tracks.
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PSEL: Pattern of shareholding No of Shares held % of total
(as at June 30, 2017) shareholders shares
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Directors, CEO, and their spouse and minor children 8 585,438 1.80%
Associated companies, undertakings and related parties 5 7,255,136 22.31%
CDC - Trustee National Investment (UNIT) 1 1,104,551 3.40%
Trustee National Bank of Pakistan 1 75,074 0.23%
Banks, DFIs, and NBFIs 2 418,947 1.29%
Modarabas and mutual funds 2 19,600 0.06%
Insurance companies 1 28,815 0.09%
Foreign investors 10 21,141,143 65.00%
Of which: Castle Participations INC. 3,170,000 9.75%
Ocean Pakistan Limited 3,170,000 9.75%
Dominion Hospitality Investments Limited 3,150,000 9.69%
Brickwood Investment Holdings SA 2,905,000 8.93%
Sharan Associates S.A 2,760,000 8.49%
Individuals (local) 201,339 0.62%
Others 1,694,127 5.21%
Total 32,524,170 100%
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Source: Company accounts
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PSEL: Financial snapshot
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Rs (mn) FY17 FY16 FY15 FY14 FY13 FY12 FY11
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Operating results
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Sales and services - net 9,812 9,151 7,922 7,610 6,801 5,761 5,017
Gross profit 4,385 4,184 3,633 3,359 2,948 2,468 1,998
Operating profit 2,073 1,384 1,660 1,994 1,413 1,341 1,141
Profit after tax 1,146 625 1,071 1,390 887 784 669
Earnings per share (Rs) 35.23 19.22 32.92 42.74 27.28 24.10 20.55
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Financial position
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Property, plant and equipment 32,899 31,600 28,897 24,329 22,987 22,507 21,990
Long-term investments 1,142 1,038 905 838 1,368 1,315 1,222
Long-term financing - secured 6,817 2,187 685 348 350 583 500
Trade and other payables 1,656 1,603 1,633 1,865 1,458 1,305 1,327
Share capital 325 325 325 325 325 325 325
Surplus on revaluation of PPE 23,780 23,780 23,780 19,854 19,989 19,989 20,008
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Financial ratios
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Current ratio 2.49 1.24 1.89 1.36 1.23 1.22 0.97
Return on equity 13.8% 8.0% 14.3% 21.7% 17.3% 18.5% 19.4%
Return on assets 2.7% 1.7% 3.1% 4.7% 3.2% 2.9% 2.6%
Operating cycle (days) 36 34 30 14 39 38 16
Gross margin 44.7% 45.7% 45.9% 44.1% 43.3% 42.8% 39.8%
Operating margin 21.1% 15.1% 21.0% 26.2% 20.8% 23.3% 22.7%
Net margin 11.7% 6.8% 13.5% 18.3% 13.0% 13.6% 13.3%
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