Pakistan Services Limited was incorporated in Karachi on December 6, in 1958, under the Companies Act 1913 (now Companies Ordinance, 1984). The firm primarily operates in the hotel business. It owns and runs the Pearl Continental (PC) Hotels chain in Pakistan, operating in six cities: Karachi, Lahore, Rawalpindi, Bhurban, Peshawar and Muzaffarabad (Azad Jammu & Kashmir). The firm also owns and manages one small, budget hotel in Lahore. It is listed on the Pakistan Stock Exchange under the moniker (PSEL). Its latest available shareholding pattern is provided below.
The latest available corporate information states that PSEL has 1,526 rooms in the 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 and 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.
PSEL has four subsidiaries, having 100 percent stake in each of them. These include Pearl Tours and Travels (Private) Limited, which deals in "rent-a-car, tour packages and travel related work"; City Properties (Private) Limited, which is into real estate development; and Elite Properties (Private) Limited, which is also in the business of real estate development. The fourth subsidiary, Pearl Continental Hotels (Private) Limited was non-operational in FY16.
Presented below is the analysis of PSEL financials (unconsolidated) for the recent years.
Recent financial performance In the decade thus far, PSEL has expanded its top line each year. Average net revenue growth stood at 13 percent per annum between FY12 and FY16. The top line is yet to cross the psychological Rs 10 billion mark; though PSEL came close to it in FY16, scoring Rs 9.15 billion with a yearly growth of 16 percent. Gross revenues however crossed that mark, coming in at Rs 10.78 billion in FY16.
The firm's revenue breakup (gross revenue) shows that two streams remain dominant: rooms, and food & beverages. Gross revenues from room bookings have gradually increased their share in the revenue mix, rising from 41 percent in FY11 to 48 percent in FY16. Food and beverages, which used to command 53 percent of gross revenues in FY11, had their share fall to 47 percent by FY16.
The up tick in room revenues reflects the rising occupancy levels at the hotels, as economy has been picking up in recent years. Growth in room revenues has surpasses other revenue streams in recent years, rising an average of 16 percent p.a. between FY12 and FY16, compared to 10 percent p.a. for food and beverages. The management stated in the latest annual report that average daily rate had increased in the year by 8.4 percent, even as average occupancy had improved by five percentage points to 66 percent in FY16.
But despite those top line gains, PSEL's bottom-line hasn't shown similar gains. For instance, the FY16 net profits were actually lower than what the firm earned in FY11. In the last two fiscals, PSEL has seen high double-digit declines in its net profits. Let's see what has been the cause(s) behind this stagnation.
As far as core costs are concerned, they remained in check. Though the 'cost of sales and services' has grown each year between FY12 and FY16, the increase was less-than-proportionate vis-à-vis the growth in net sales and services. Such cost efficiency is evident in that the firm consumed 52 percent of its net revenues on cost of sales and services in FY16, down from an average of 57 percent seen between FY11 and FY15. Gross margin picked up in FY16 - at 47.9 percent, highest in the last six fiscal years.
One of the culprits behind a depressed profitability has been the rising administrative expenses. These expenses grew at an average of 17 percent p.a. between FY12 and FY16. That is higher compared to the 13 percent average top line growth in this period. As a result, these expenses consumed 28 percent of top line in FY16, up from 23 percent in FY11.
But the main reason behind a lackluster bottom-line was non-operating in nature. If it weren't for a massive bill of 'other operating expenses' worth Rs 798 million in FY16, PSEL would have closed the fiscal with a healthy double-digit growth in net profits. Those expenses hit a high last fiscal because of impairment losses on two of firm's investments in associated companies: Hashoo Group Limited - British Virgin Islands, and PC Hotels Limited - UAE.
Latest financials In the nine months period ended March 31, 2017, PSEL saw its net profits go down by 23 percent, even though its top line had received a fillip of 8 percent year-on-year. Proportionally higher core costs, operating expenditures, and finance costs were responsible behind the drop in net profits. Also contributing to the slump was a visible fall in 'other income' due to lower gains from market securities. However, PSEL will still most likely end up posting year-on-year growth in net profits at the end of FY17, due to a massive impairment loss on firm's overseas investments that were recognized later in FY16. The stock has consistently outperformed the broader index, but one cannot read into it too much due to PSEL's very thin daily trading volumes.
Outlook The horizon looks bright for the hotel giant. Better economic environment and security situation are already reflecting in increased corporate activities and domestic tourism - two variables on which local high-end hotels greatly depend on. In fact, PSEL, like other hotel groups, is on a drive for expansion and modernization of their facilities. If the political stability holds and CPEC-related mood prods enough foreign investors to take another look at Pakistan, hotel chains like PC seem well-placed to cash in on the lodging demand.
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PSEL: Pattern of shareholding (as at June 30, 2016) No. of Shares % of total
shareholders held shares
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Directors, CEO, and their spouse and minor children 9 584,938 1.80%
Associated companies, undertakings and related parties 4 3,225,136 9.92%
CDC-Trustee National Investment (UNIT) 1 1,104,551 3.40%
Trustee National Bank of Pakistan 1 77,708 0.24%
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 11 25,171,143 77.39%
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 S.A. 2,905,000 8.93%
Sharan Associates S.A. 2,760,000 8.49%
Individuals (local) ~ 206,994 0.64%
Others ~ 1,686,338 5.18%
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) FY16 FY15 FY14 FY13 FY12 FY11
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Operating results
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Sales and services-net 9,151 7,922 7,610 6,801 5,761 5,017
Gross profit 4,379 3,633 3,359 2,948 2,468 1,998
Operating profit 1,384 1,660 1,994 1,413 1,341 1,141
Profit after tax 625 1,071 1,390 887 784 669
Earnings per share (Rs) 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 31,647 28,897 24,329 22,987 22,507 21,990
Long-term investments 1,038 905 838 1,368 1,315 1,222
Long-term financing-secured 2,187 685 348 350 583 500
Trade and other payables 1,603 1,633 1,865 1,458 1,305 1,327
Share capital 325 325 325 325 325 325
Surplus on revaluation of PPE 23,780 23,780 19,854 19,989 19,989 20,008
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Financial ratios
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Current ratio 1.24 1.89 1.36 1.23 1.22 0.97
Return on equity 8.0% 14.3% 21.7% 17.3% 18.5% 19.4%
Return on assets 1.7% 3.1% 4.7% 3.2% 2.9% 2.6%
Operating cycle (days) 33 30 14 39 38 16
Gross margin 47.9% 45.9% 44.1% 43.3% 42.8% 39.8%
Operating margin 15.1% 21.0% 26.2% 20.8% 23.3% 22.7%
Net margin 6.8% 13.5% 18.3% 13.0% 13.6% 13.3%
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Source: Company accounts
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LATEST FINANCIALS: PSEL
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(Rs mn) 9MFY17 9MFY16 Chg
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Sales and services-net 7,553 6,981 8%
Cost of sales and services 4,109 3,681 12%
Gross profit 3,444 3,300 4%
Administrative expenses 1,915 1,703 12%
Other income 360 518 -30%
Operating profit 1,889 2,116 -11%
Finance costs 288 112 157%
Profit before taxation 1,600 2,003 -20%
Taxation 427 473 -10%
Profit for the year 1,173 1,530 -23%
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Source: PSX announcement (April 25, 2017)
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