Pakistan Services Limited

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

Shareholding pattern

As at June 30, 2021, nearly 55 percent shares of the company are owned by foreign companies. Within this category, majority shares are owned by Castle Participations Inc. and Dominion Hospitality Investments Ltd. Over 32 percent shares are held in associated companies, within which majority shares are owned by Gulf Properties (Private) Limited and Orient Petroleum INC. Sponsors, directors, CEO and their children own close to 2 percent shares while the remaining about 11 percent shares are owned by the rest of the shareholder categories.

Historical operational performance

The company has previously 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 a revenue growth of 7.3 percent, crossing Rs 10 billion. Of this, Rs 6 billion were brought in through the rooms division which registered a growth of 8.8 percent. Moreover, 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 cost of sales, gross margin improved to over 46 percent. But the escalation in administrative expenses kept operating margin from increasing. Most of this increase was due to travelling and conveyance and legal and professional charges. This was further aggravated by the finance expense that made up over 8 percent of revenue, reducing 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 by nearly 3 percent. The rooms division that contributes the biggest chunk to the overall revenue, saw a decline of 13.2 percent. In addition, food and beverages division that 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 that 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 that fell to over 57 percent. Cost of sales rose to over 60 percent of revenue due to the inflationary pressure. This reduced gross margin to 39.7 percent, whereas finance expense continued to consume a larger share in revenue due to rising interest rates. As a result, the company incurred a loss for the first time since FY09, of Rs 863 million.

In FY20, the company saw the biggest contraction in revenue at 20 percent, with topline falling to a little over Rs 8 billion. Revenue from the Rooms division fell by 23.3 percent, followed by food and beverages division posting a decrease by 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, 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 food and beverages division also saw a fall, by 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. Occupancy ratio improved only slightly to 48 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.

Quarterly results and future outlook

The first quarter of FY22 saw revenue nearly doubled year on year as there was some resumption of activities nearly two years after the first incidence of the Covid-19 pandemic. The first quarter of FY21 had seen restrictions gradually easing within the economy while borders across the world continued to remain closed for some countries. The marked improvement in revenue positively impacted profitability as the company posted a net margin of less than 1 percent compared to the net loss of Rs 457 million in the same period last year.

With the onset of new variants of Covid-19 along with mass immunization programs, there is expectation that business activities will return to pre-Covid-19 level. The government is also keen on promoting tourism, while the company itself has also prepared to begin operations at its new resort built near the Attabad Lake.