Amid the economic downturn, the country’s hospitality industry is also under a cloud. One of Pakistan’s premier hoteliers continues to run a loss, albeit the scale of loss is narrowing. As per (unconsolidated) financial results for six months ended December 31, 2019, Pakistan Services Limited (PSX: PSEL) – which owns and runs the Pearl Continental (PC) hotel chain – is recovering in the ongoing fiscal.
PSEL drives bulk of its business through two major revenue streams – rooms and food & beverages. Between FY11 and FY19, the “rooms” business had an average share of 45 percent in gross sales. Meanwhile, “food and beverages” had a 49 percent share in the topline, on average, in the same period. The remaining 5 percent of the revenues come from ‘other relates services’ and shop license fees.
After performing well through much of the decade, PSEL saw its growth momentum imperiled in FY19. The topline was affected by a downcast business environment that directly hurt revenues at its hotels. In particular, gross revenues from ‘room’ business (which had average growth of 14 percent between FY11 and FY18) declined by 11 percent year-on-year in FY19.
Since three-fourth of room revenues typically come from PCs Lahore, Karachi and Rawalpindi, it is very likely that declining business activities in major cities affected occupancy at these hotels in last fiscal. The food & beverage business, however, returned a gross revenue growth of 5 percent in FY19, albeit the uptick was lower than the average 8 percent growth seen in FY11-FY18. As for spending, rising prices of local utilities as well as PKR-induced spike in value of imported materials raised the operating costs.
However, PSEL seems to be reversing the tide this fiscal. The room business is back to healthy revenue growth, signifying recovery in core business. The company is also doing well to maintain stability in its cost of sales (59% of net revenues) and administrative costs (31% of net revenues). It also helps that finance costs came down to 11 percent of sales, compared to 16 percent in 1HFY19.
PSEL management must feel more relaxed, as 2QFY20 has returned a sizable net profit of Rs206 million. This turnaround is mostly on account of net revenues growth of 8 percent, and decline in finance costs, even as the company started making net gains again on investment re-measurement. If this trend persisted, expect PSEL to clock back to full-year profitability by the time FY20 closes.