9MFY17: a mixed bag for PSEL

Pakistan’s leading hotelier looks set to close another fiscal on a profitable note. Pakistan Services Limited (PSX: PSEL), as per its financial announcement released yesterday, closed the nine-month period ended March 31, 2017 with a respectable growth in top line. However, the firm still underwent a double-digit fall in bottom-line on account of proportionally-higher core costs and operating expenditures year-on-year.

For the uninitiated, PSEL owns and manages six luxury hotels under the Pearl Continental brand. Besides, it also operates in budget segment in six cities, under the ‘Hotel One’ banner. It also franchises its PC brand name. Under the franchise model, PSEL has Zaver PC Hotel in Gwadar. PSEL is in process to construct two PC hotels in Multan and Mirpur. A franchise PC hotel is also coming up in Faisalabad.

Throughout this decade, PSEL’s top line – net sales and services – have consistently grown. Average top line growth between FY12 and FY16 has been 13 percent, based on prior corporate financials.

Breaking down the hotel giant’s gross revenues, it appears that the fastest revenue growth in recent years was the ‘room’ bookings, whose proceeds surged by an average of 16 percent per annum between FY12 and FY16. In the same period, ‘food and beverages’ revenues grew by an average of 10 percent p.a., as hotel restaurants faced competition from a plethora of new high-end and specialty restaurants.

Finally, in FY16, PSEL’s room revenues exceeded its food and beverages revenues, a healthy trend. This happened as average occupancy levels visibly increased in FY16, to 66 percent, company information shows. Now in FY17 as well, it seems that room revenues are growing, albeit at a slower pace than in FY16.

During 9MFY17, the top line gain couldn’t result in better profit margins compared to same period last year. Gross margin went down 170 basis points owing to higher cost of sales and services. Due to a drastic fall in PSEL’s ‘other income’ – mostly on account of lower gains from market securities – and a notable rise in administrative expenses, the operating margin slid 530bps to settle at 25 percent.

Add in the high finance costs – which are the result of higher financing that the firm has taken up in order to expand its operations – and we find that the firm closed this period with a 640bps lower net margin of 15.5 percent.

The hotel chain had closed FY16 with Rs625 million in net profits. So, barring a disaster in the last quarter, PSEL will most likely close FY17 with a massive expansion in bottom-line on a year-on-year basis.

However, the firm will do well to cross the psychological mark of Rs10 billion in net revenues (FY16: Rs9.1 bn). There is every reason it should, given the favourable economic and security environment that seem to be unshackling corporate activities as well as domestic tourism in the country.