PSEL: finance costs bite

Pakistan’s leading hotelier apparently felt the heat in FY18 – a year of immense political instability. But the bottom-line slump at Pakistan Services Limited (PSX: PSEL), for the year ended June 30, 2018, has more to it than just weak top-line growth.

For background, PSEL owns and runs six luxury hotels under the Pearl Continental brand, having a combined capacity of ~1526 rooms. The PC-owner also operates in the budget segment in several cities through the ‘Hotel One’ brand. The group has also franchised the PC brand name (e.g. Zaver PC Hotel in Gwadar).

The unconsolidated PSEL top-line grew just a tad more than the broader economy in FY18. At 7 percent, the top-line growth is lower than the 11 percent average growth seen in the past five years. Two revenue streams – ‘Rooms’ and ‘Food & beverages ‘ – have historically had a dominant share in the company’s gross revenues.

Based on recent directors’ reports, it appears that PSEL top-line growth is being held back mostly by low growth in the ‘food & beverages’ segment (FY17: 47% share in gross revenues). The hotels’ restaurants and banquet halls have been in tough competition with outside restaurants and marriage halls for a while now. The overall top-line growth seemed owed mostly to double-digit growth in the ‘Rooms’ segment (FY17: 48% share in gross revenues) as room occupancy levels continue to go up.

Thanks to controlled core costs, PSEL managed a decent up tick in its gross profits – the FY18 gross margin (46.4%) has been the highest this decade.

But slippages in administrative expenses (by about four percentage points of net sales) led to operating profit coming in lower than in FY17. The real blow to the profitability down the line, however, came from the company’s net finance costs.

Under that head, the company expensed 75 percent higher sum on its finance costs (Rs725 mn), as a result of loans taken out for expansion and up gradation of hotel facilities. The company also booked quarter billion (unrealized) net-loss on re-measurement of investments to fair value. That led to a collapse in net profits and net margin (4.7%) coming in the lowest this decade thus far.

During the year under review, PSEL issued Rs7 billion in Sukuk to fund its expansion and up gradation plans. Anticipating higher demand in the future, the company seems rightly focused on expanding its footprint – two more PC hotels are currently being constructed in Multan and Mirpur. In the meanwhile, the management will do well to keep its admin overheads lean and its financial-investment portfolio smart.