Services: PAKISTAN SERVICES LIMITED - Analysis of Financial Statements June 2002 - 2001 Q 2010

Thursday, 07 January 2010 12:16

Highlights - Corporate News

OVERVIEW  : Pakistan Services Limited, is an international public company, incorporated in 1958 in Karachi under the Companies Act, 1913 now Companies Ordinance, 1984 as a public limited company. It is quoted on the Karachi Stock Exchange. The company is principally engaged in hotel business and owns and operates the chain of six Pearl Continental Hotels in Pakistan at Karachi, Lahore, Rawalpindi, Peshawar, Bhurban and Muzaffarabad.

Strategically situated at prime locations, the hotels cater to the business and leisure needs of local and international market. PSL s commitment to excellence, attention to details and personalized services ensures a loyal guest list. PSL has positioned itself at the top of list in serving and leading the hospitality industry in the country. It has successfully promoted its logo Pearl Continental locally and in other parts of the world too.

In 1985, the company was acquired by Hashoo Group of Companies, a preeminent player in hospitality industry in Pakistan. Since its inception in 1972, it has offered its guests warm hospitality, impeccable service and unparalleled facilities promising a memorable experience. The task to manage the hospitality interests of the group led to the formation of two companies: Hashwanai Hotels Limited and Pakistan Services Limited. Following its acquisition by the PSL, the portfolio of the five hotels initially operated under the management of Inter-Continental Hotels Group, which was later re-branded as Pearl Continental Hotels.

In 2001, PSL acquired the master franchise for Destination of the World creating an augmentation to its well-defined position in the tourism and hospitality sectors of Pakistan. The company also floated its rated TFCs in November 2003 and has recently expanded its network in Pakistan and the GCC market. The latest addition has been opening of Pearl Continental Hotel in Muzaffarabad (capital of Azad Kashmir). In 2006, PSL also made an equity investment in PC Hotels Limited incorporated in Dubai after approval from SBP.

In 2009, PSL acquired 100% stake in M/s Musafa International (Private) Limited; this company is principally engaged in project management business. Currently it has been awarded with a project for construction and development of an underground parking in the highly demanding area in Karachi and is expected to complete in the current financial year. It is noteworthy to mention that the company successfully completed 50 years of existence this year.

From overall perspective, the financial year 2008-09 will be remembered as one of the worst years of all times. The global recession took its toll on domestic economy which itself was facing internal challenges like inflation, energy crisis, continuing war against terrorism and domestic security issues. GDP took a downturn and at the same time stock market crashed significantly. The impact of unfortunate happening badly affected the performance of the hospitality industry. Due to the security threats, not only the foreign visitors refrained from coming to Pakistan, but also the retarded economic activity and discouraged domestic travelling which in turn exposed the hotel industry to the prodigious challenge of survival.

To cope with these threats, the management of the PSL took utmost efforts to restore the confidence of its customers. This was done by applying the comprehensive and integrated medium-term strategy besides providing the security solution to the entire satisfaction of all its customers, which in return will definitely result into comparatively fair business results in the time of cynicism.

RECENT RESULTS 1Q10 

Sales and services revenue has declined by 23.9% to Rs 945 million. Gross profit has also declined by 35.1% to Rs 257 million. PAT has moved from being in the red to Rs 51 million in 1Q10, registering an EPS of Rs 1.60 against a loss of Rs 6.06. The hospitality business has been badly affected because of the economic recession both globally and domestically. Room revenue has dropped drastically to Rs 388 million from Rs 607 million in the quarter 2008 due to drop in occupancy rates from 52% to 43%. Also the average rate per day has declined. Revenue from food and beverage department was not affected as much nd showed a decline of 51 million to Rs 517 million.

Business from the other segments also showed a decline due to the reasons mentioned above. Despite the decline in revenues, PSL was able to record profit due to unrealized gain of Rs 27 million on securities that they are holding as compared to a unrealized loss of Rs 197 million in the same quarter 2008. The future still looks bleak for the hospitality sector. With the local economy threatened by spiraling utility prices and terrorist attacks, the future performance needs to be kept in place by cutting costs and increasing efficiency. PSL has been affected by these attacks as the Peshawar PC was attacked.

FINANCIAL PERFORMANCE (JUNE 2009) 

Despite the unprecedented challenges and threats we successfully managed to avert the competition of business potential. It is evident from this fact that our overall business remained behind an ignorable drop of just 4 percent. Total revenue (exclusive of GST) of Rs 4,634 million recorded in the last year dropped to Rs 4,463 million during the year under report. The drop in revenue resulted in dilution of gross profit of the reporting year as against achieved in the financial year 2007-08; the inflationary effects also played an extraneous role in decelerating the gross margin.

The gross profit for the reviewing year recorded at 32 percent which in the corresponding year was achieved at 36 percent. From the operational point of view company s performance for the year under review remained satisfactory and it registered a profit before tax of Rs 496 million, but due to un-realized loss of Rs 597 million recorded on investments in the shares of listed companies the above stated operational performance gulped down and turned into (loss) before taxation of Rs 101 million.

Revenue from rooms department for the year 2008-09 (inclusive of GST) was recorded at Rs 2,473 million as against Rs 2,782 million of the preceding year and thus registered a drop of 11 percent which in terms of amount comes to Rs 309 million. Average occupancy went down from 55 percent recorded during the year 2007-08 to 49 percent achieved in the year under review - a reduction of 6 percent. Significant drop in the business witnessed across the world, which also shriveled market potential in Pakistan and created stiff competition.

In order to retain the market share to the all possible extent, the company had to compromise over room rate and resultantly the average daily room rate of Rs 8,439 achieved in the year 2007-08 went down to Rs 8,060 during the year under review. Despite the extreme poor business conditions in the country, revenue from food and beverages department not only maintained the numbers achieved in the last year but also surpassed it.

During the reporting year the revenue generated from food and beverages department reached to the tune of Rs 2,584 million (inclusive of GST) as against Rs 2,426 million earned in the corresponding period of last year. From these numbers, it is evident that the company had managed to earn incremental revenue of Rs 158 million from this segment; thus modest rise in business from this segment resulted into nearly 7 percent growth compared to the period of last year.

The revenue (inclusive of GST) for performance of other related services/licence fee/travel and tour division, during the year under review was Rs 201 million as compared to Rs 184 million in the last year. It is evident from the above numbers that in spite of facing the economic imbalances; revenue for the year under review from this segment surpassed that of the last year by Rs 17 million which shows nearly 9% growth.

PROFITABILITY 

The gross profit margin has declined on a YoY basis in FY09. The revenue declined only marginally by 3.69%, operating expenses increased drastically by 955%, which brought the profitability down. These operating expenses were mainly on the back of impairment cost prudently applied by the company. Simultaneously the company investments resulted in 162% increase in returns earned from that source. Liabilities worth Rs 196 million were written back.

This along with the return from the investment resulted in 376% increase in other operating income. All in all, the company registered a loss of Rs 101 million. The rest of the profitability ratios illustrate a similar downward trend. Total Assets and Equity registered a slight decline over FY09 mainly at the back of diminution of investments and negative return for the year.

LIQUIDITY 

All the liquidity ratios of PSL show a decline after 2004 indicating expansion. This decline in both CR and QR can be attributed to the increase in current liabilities mainly due to trade payables, accrued and other liabilities. In FY08 the current liabilities showed a heavy rise of 41.6%, mainly due to the rise in running finance under mark-up arrangements. Current assets also registered a growth of 35%, mainly due to the rise of short-term investments. FY09 figures depict a similar trend, mainly at the back of increased current liabilities as the company s short-term borrowings and trade payables registered an increase of 53% and 24% respectively.

ASSET MANAGEMENT 

Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. The trend line indicates a declining ITO over the period FY02 to FY07 from 16 to 6 days. This showed that PSL is able to efficiently turn its inventory (room equipment and food and beverages) into sales and services. In FY08, ITO again rose to 8.7 days, mainly due to the rise in stock of food and beverages, which could not be avoided as it served the purpose of growing revenue in that sector of sales. In FY09, the ITO ratio increased to 10 days mainly at the back of reduced demand of hotel services, resulting in an increase in average number of days that the company held its stocks.

Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. DSO for PSL has declined from 20 to 17 days in 2005. However, it increased to 24.7 days in 2008, due to a high proportionate increase in trade debts (18%) coupled with the reduction in net sales (5.09%) indicating that perhaps the company faced some difficulties in extracting money from some of its clients due to the high inflation rates. In FY09, it has reduced to 18 days, owing to 28% decline in trade debts.

The operating cycle of PSL hence followed the same trend as that of ITO in the respective declining till 2005 but rising slightly since and in 2008 showing a high rise particularly due to higher DSO. In FY09, it reduced to 29 days attributable to the reduced DSO. Both Total Assets Turnover and Sales/Equity show decline in FY08 due to the effect of growing asset and equity base coupled with reducing sales. In FY09 both these ratios remained declined insignificantly due the small fall in sales and services, corresponding to slight decreases in total equity and total assets.

DEBT MANAGEMENT 

As far as the debt management is concerned, both debt to asset and debt to equity ratios showed its reduced reliance on debt financing rather than equity financing. The trend lines in particular show that both these ratios have increased slightly owing to increase in running finance and trade payables in the current debts. These short-term liabilities caused the total current liabilities to increasing progressively on a YoY basis. Long-term debts (mainly in the long-term finances, TFCs and deferred liabilities) have continued being reduced.

This is further evident by the long-term debt to equity ratio, which decreased to 0.05 in FY09 from 0.06 in FY08. All these ratios of PSL are reflecting trend towards lower leveraging. The TIE ratio for PSL which has shown a rising trend over the FY02-FY08 owing to comparatively lower finance and a higher increase in EBIT (due to high operating and gross profits) reduced in FY08 from 6.29 to 5.06. Though interest income for the year reduced from Rs 188 million to Rs 132 million, yet the decrease in EBIT was much more than the decrease in finance costs. In FY09, the TIE registered a further decline to 0.51.

Looking at this, we can that infer that PSL s interest covering ability was greatly impaired due to the 84% drop in earnings before interest and taxation compounded by 56% rise in finance cost. While the other debt management ratios may indicate a positive leverage position of PSL, the reduced TIE may cause a strain on company due to declining earnings.

MARKET VALUE 

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company s price per share and its the earnings per share (EPS). The EPS of PSL have been increasing over the 5-year period from FY02 till FY06, but has gone downward since. The earnings per share for FY09 is Rs (7.07) as compared to Rs 9.34 in FY08. The P/E ratio also followed a declining trend driven by the combined effect of decreasing market price of shares (FY09: Rs 113.5, FY08: Rs 540) and its EPS, mainly at the back of loss earned in the current year as well as the low investors interest in the year under review.

PSL s book value per share shows a positive trend on the account of expanding equity base (due to increase mainly in accumulated profits and surplus on revaluation of fixed assets) compared to very slight/no change in the number of shares. Even though FY09 didn t bode well for the company, the book value per share reduced only marginally to Rs 327 in FY09 from Rs 342 in FY08, mainly due to the fall in total equity, which in turn in attributable to the loss incurred. In view of financial results of the company, ongoing expansions and projects of the company, dividends for the year haven t been recommended.

FUTURE OUTLOOK 

Revival of the economy and resumption of traditional business opportunities that used to exist in the country is not really expected in the coming years. The depression engulfing the nation following the deteriorating law and order situation along with spiraling inflation is unlikely to boost the feel good factor that drives this business. Unless, the government takes the positive steps, the upturn is not likely to take place.

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FINANCIAL HIGHLIGHTS

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2008-09  2007-08  2006-07  2005-06  2004-05  2003-04

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(Rupees in Millions)

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Performance

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Sales and Services-net              4,463   4,634   4,883   4,173   3,225   2,563

Gross Profit                   1,421   1,662   1,874   1,529   1,102    851

Operation Profit                  105    669   1,181   1,008    630    430

(Loss)/Profit before Taxation           (101)   536    993    805    457    235

Taxation                      128    233    352    51    200    79

(loss)/Profit for the year             (230)   304    641    753    257    156

Dividend Paid Including Bonus Shares         49    33    81    81    81    30

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Financial Position

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Issued, subscribed and paid of share Capital    325    325    325    325    325    325

Share Capital and Reserves            2,356   2,635   2,364   1,804   1,132    956

Shareholders Equity *              10,981  11,260  10,988  10,429   9,756   4,023

Long Term Financing                 108    180    412    744   1,047    968

Non Current Liabilities               590    661    838   1,104   1,413   1,319

Current Liabilities                2,416   2,186   1,496   1,130    913    595

Property Plant and Equipment * (Cost)      13,299  13,231  12,742  12,201  12,136   6,531

Property Plant and Equipment * (Carry Value)   10,721  10,759  10,741  10,313  10,313   4,817

Current Assets                  1,463   2,309   1,687   1,455   1,450   1,094

Net Current Assets/liabilities           (953)   123    191    325    452    499

Long Term Debt: Shareholders Equity * Ratio    0.01   0.02   0.04   0.07   0.11   0.32

Current Ratio                   0.61   1.06   1.13   1.29   1.59   1.84

Debt Coverage Ratio                2.01   2.15   1.83   1.16   0.68   0.58

Interest Cover Ratio                0.51   5.06   6.29   4.97   3.65   2.20

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Investor s Information

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Gross Profit Ratio                31.85%  35.38%  38.38%  36.63%  34.16%  33.22%

(Loss)/Earning Per Share **            (7.07)   9.34   19.71   23.16   7.91   4.79

% of (Loss)/Profit After Tax to Sales       (5.15%)  6.56%  13.13%  18.05%   7.98%  6.08%

Return on Capital Employed            (1.99%)  2.55%   5.42%   6.53%   2.30%  2.92%

Debtor Turnover Ratio               68.66   79.38   93.44   83.64   74.33   67.63

Inventory Turnover Ratio             15.57   15.09   19.93   22.18   23.69   21.30

Fixed Assets Turnover Ratio            0.42   0.43   0.45   0.40   0.31   0.53

Breakup Value per share *            337.63  346.20  337.85  320.64  299.98  123.68

Market value at the end of the year **      113.05    540    466  393.55    180    130

Highest Market value during thee year **      530    564    466  393.55  197.55    145

Lowest Market value during thee year **     113.05    412    316  161.50  125.50  109.25

Price Earning Ratio               (16.00)   57.79   23.64   16.99   22.76  27.14

Dividend Per Share - Bonus **             -     -     -     -     -     1

Dividend Per Share - Cash **            1.5     1    2.5    2.5    2.5     -

Dividend Yield Ratio %               1.33%   0.19%   0.54%   0.64%   1.39%  0.77%

Dividend Payout Ratio %               (21%)   11%    13%    11%    32%   21%

Addition to Property, Plant and Equipment *     288    581    549    75   5,612    103

(without Capital Expenditure)

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** Amount in Rupees

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].

Courtesy : Business Recorder