Pakistan Hotels Developers Limited (PSX: PHDL) was incorporated as a private limited company in Pakistan in 1979 as Taj Mahal Hotels Limited. In 1981, it was transformed into a public limited company. The company’s core business is hospitality, in addition to owning and managing a five-star hotel, the Regent Plaza Hotel and Convention Centre, Karachi.
Model of shareholding
As of June 30, 2022, PHDL has 18 million shares held by 415 shareholders. Directors and their relatives have the largest share of 88.85 percent in the company, and directors have 36.55 percent of shares. The general public accounts for 9.92 percent of PHDL’s shares, while joint stock companies hold a 1.2 percent stake in the company. The remaining shares are held by the units of ICP and Modarba & Mutual Funds.
Performance Trend (2018-22)
Among all the years under review, 2020 and 2021 appear to be in poor health, with PHDL’s top line slipping 32 percent and 24 percent year-on-year, respectively. The reasons are quite obvious, i.e. COVID-19 which brutally hit the hospitality industry due to the great slowdown in the movement of people. In 2020, the company managed to make a net profit worth Rs 0.44 crore, however, in 2021, the bottom line entered the red zone posting a net loss of Rs. 2.62 million. 2018 was another year where PHDL posted a negative result. The company’s margins, which had been on a downward journey since 2019, rebounded in 2022.
In 2018, the hotel was restarted with limited capacity after a 9-month suspension of business activity due to a fire incident in the hotel building in 2017. The company’s turnover grew by 20 percent year-on-year in 2018. PHDL achieved a GP margin of 54 percent in 2018 with 40 percent YoY growth in gross profit to Rs 225.39 million. Operating expenses mainly increased after the compensation of those affected by the fire incident, as well as repair and maintenance costs. As a result, the company made an operating loss worth Rs. 2.21 million in 2018. Finance costs also increased during the year as the company obtained current financing to meet its working capital requirements. In 2018, the company made a loss after tax of Rs. 16.97 million Rs. 10.97 million in 2017. Loss per share also grew from Rs 0.61 in 2017 to Rs 0.94 in 2018.
2019 was a fairly stable year for PHDL as the top line grew 15 percent year-on-year due to increased occupancy as well as food and beverage sales. However, high selling costs on the back of market-based wage increases, along with guest inventories, heat and electricity prices kept GP’s margin in check, which narrowed to 52.5 percent in 2019. Operating expenses, which rose over the past year, also fell by 15 percent year-on-year in 2019. As a result, PHDL was able to post an operating profit of Rs 59.87 million in 2019 with an OP margin of 12.5 percent. Finance costs provided a big boost to the bottom line as they fell 57 percent year-on-year as the company settled its financing received in previous years to overcome a lack of liquidity. During the year, the company received an interest-free loan of Rs. 2.5 million from the director of the company for working capital requirements. The company’s finance costs consist of remaining interest payable on short-term borrowings, as well as interest on lease obligations as it purchased furniture and equipment and a vehicle through leasing during the year. The company posted a profit after tax of Rs 28.01 crore in 2019 with an NP margin of 5.8 percent. During the year, the company made capital investments in fire protection equipment to avoid any accidents in the future. The management further asked the occupants of their shops to vacate the premises for safety and security reasons. This added to operating expenses as rent receivables were written off.
While PHDL was in the process of recovering from the aftershocks of the fire that occurred in December 2016 (FY17), the unpredictable COVID-19 shook its existence. PHDL’s business activity has stalled for more than three months, culminating in a 32 percent year-on-year decline in 2020. GP’s margin fell to 36 percent in 2020. Fortunately, operating expenses gave some breathing space as they fell by 34 percent year-on-year, as there was no compensation for those affected by the fire incident, and no store premium this year. Repair and maintenance costs also decreased during the year. Other income grew significantly as the company divested its assets and made gains on savings accounts, however, in absolute terms, the other income of Rs 1.2 million was not capable enough to provide any support to the bottom line. The company made an operating loss of Rs. 8.7 million in 2020. Finance costs fell 74 percent year-on-year in 2020 as the company fully paid off interest on short-term debt last year. Deferred taxation enabled PHDL to post a positive result of Rs 0.44 lakh crore in 2020 with a NP margin of 0.1 per cent.
The economic headwinds that came with the global pandemic were not over in 2021. PHDL’s occupancy rate, which declined to 14.99 percent in 2020, further declined to 9 percent in 2021. The company nearly halved its workforce from 151 workers in 2020 to 75 workers in 2021. The top line also declined by 24 percent year-on-year, and GP’s margin sank further to 29.9 percent in 2021. Operating expenses also decreased by 5 percent year-on-year due to low guest turnover. The operating loss widened further to Rs 46 million. Finance costs represent interest on leased assets. Net loss for 2021 was Rs 47.17 crore with a loss per share of Rs. 2.62.
PHDL, which first battled the fire incident and then the COVID-19, breathed a sigh of relief in 2022 as its top line grew 86 percent year-on-year. Room occupancy rose to 20 percent as signs of a global pandemic began to fade and the hotel and tourism industry strengthened. Cost of sales also increased due to market-driven wage increases along with high heat, light and electricity costs. GP’s margin grew to 47 percent in 2022. As the company made capital investments in air conditioning, equipment and restaurants to improve its services, related repair and maintenance along with other costs increased operating expenses by 30 percent year-over-year in 2022. However, the company was able to post an operating profit worth Rs. 60.6 million in 2022 with an OP margin of 13 percent. Finance charges continued to come down during the year and PHDL was able to post a net profit of Rs. 47.8 million and EPS of Rs.2.66. This is the highest end as well as operating margin and net margin recorded by the company since 2017.
Recent Performance (1HFY23)
During 1HFY23, PHDL’s topline grew by 28 percent YoY, however high cost of sales on the back of inflationary pressure kept margins under pressure. GP’s margin narrowed to 46 percent in 1HFY23 from 50 percent in the same period last year despite a 19 percent YoY growth in gross profit to Rs 139.8 million. Administrative overhead also increased operating expenses by 57 percent YoY in 1HFY23. This reduced operating profit by 29 percent y-o-y in 1HFY23 to Rs 36.6 million. OP margin stood at 12 percent in 1HFY23 from 22 percent in the same period last year. The company made no finance charges during the year, yet the price declined by 22 percent year-on-year to stand at Rs. 30 million. NP margin eased to 10 percent in 1HFY23 from 16 percent in 1HFY22. EPS for the period came out to be Rs. 1.67 less than Rs. 2.15 during 1HFY22.
The future of Pakistan’s tourism industry is highly dependent on the political and economic stability of the country as well as the law and order situation. Karachi, being the economic center of the country, receives corporate traffic of visitors throughout the year, both from domestic and foreign origin. This can underpin PHDL’s top line. The company also invests rigorously in the infrastructure of its restaurants, rooms and convention halls to attract customers and increase room occupancy. However, high selling and administrative costs will keep margins under pressure.