A few months ago, this publication did a story on Pakistan Hotel Developers Limited (PHDL) and how its share price had seen a meteoric rise. The crux of the previous story revolved around the fact that the share price of the company went from Rs 83 as on 6th September to Rs 177 by the 20th of September. Seeing the unexplainable rise, the stock exchange inquired if the company had any material information that had not been made public. The company said that it was not aware of any such information. This was disclosed to the exchange on the 22nd of September.
The share kept increasing in price as the company disclosed that there were parties which were interested in buying its hotel, Regent Plaza, but no firm offer had been received. Then, on 25th of September, the company announced that Sindh Institute of Urology and Transplantation (SIUT) was looking to buy the hotel and were carrying out the necessary due diligence. After the announcement was made public, the share price kept increasing and settled at around Rs 523. The story concluded by saying that someone had prior knowledge of the talks going on between the company and SIUT and based on this, the shares were being accumulated before this information was made public. A case was made for the regulators to step in and investigate what had happened.
The recent development in this saga has been that the deal has finally gone through and the company has announced a dividend of Rs 725 per share. This is the biggest interim dividend announced by any company in the exchange if not the biggest entitlement ever announced. How has the company been able to give out such a huge dividend, why this has been done and who are the winners and losers of the dividend being given out. Profit tries to pick the bones out of the announcement being made.
Pakistan Hotel Developers Limited
PHDL is a company which is listed on the stock exchange and owns the Regent Plaza Hotel located on Shahrah-e-Faisal, Karachi. It might seem a little bit surprising that a hotel company is listed on the stock exchange. Even the company that owns Pearl Continental and Marriott chain of hotels is listed on the stock exchange under the ticker name Pakistan Services Limited (PSEL). The difference between PSEL and PHDL is that the latter only has one hotel property that it owns and operates.
The recent performance of Regent Plaza has been dismal. From being impacted by the pandemic to a fire that broke out on the premises, the profitability of the company has been severely impacted. The company has only one major asset on its books which accounted for 98.9% of its total assets at June end 2023. The hotel was valued at Rs 10 billion and was the sole asset of any note for the company.
The company had been evaluating the value of the property at regular intervals and an asset which had a value of Rs 2.4 billion in 2010 was worth 4 times that at the end of 2023. Based on accounting standards, companies are allowed to revalue their assets at regular intervals and any gain seen in its value of assets reflects on the health of the company. With an asset worth Rs 10 billion, the company showed a book value of Rs 542 in 2023 which was Rs 125 in 2010.
Even though the value of the asset was rising, the company was still seeing losses in its income statement which was due to the after effects of the pandemic and internal issues at the company itself. Due to the lackluster performance of the company and a lack of motivation to sell the business, the share price of the company was hovering between Rs 20 and Rs 160 till August of 2023.
The deal being announced
In September 2023, it was announced that the company was interested in selling its only property and it had been approached by SIUT. Even before the announcement was made, the share price of the company started to increase. Once SUIT announced its interest in buying the hotel, the board of directors of PHDL met and decided to share the relevant documentation with SIUT to help in its valuation of the company. On 11th October, it was announced that a bid was received to buy the hotel for Rs 14.5 billion. A hotel which had been valued at Rs 10 billion was being sold for a premium of 45%. Why would that be?
SIUT explained that they were interested in buying the hotel as it had the infrastructure in place that would help them design a hospital around it. The non-profit organization was saying that they saw value in the building that already stood in its place and were willing to pay a higher price for the property. At that time, this was the highest value real estate transaction that was carried out in rupee terms and was going to be executed in due time.
The impact of this sale was going to be massive for PHDL. Based on the recent accounts, the company valued the property at Rs 542 in terms of its book value. Book value is what is left once the assets are used to pay off the liabilities. The book value is the amount the shareholders can expect to get after all the liabilities have been paid off. The deal stipulated that PHDL would end up getting Rs 14.5 billion for the hotel which would bring the book value per share to around Rs 786. There would be an instant increase in book value of 45%.
The market seemed less than enthused about the deal. From October till June, it seemed that the market was not very excited about the deal going through. This was caused by delays in the transaction being executed. Till June 26th 2024, the highest price recorded for the share was Rs 582 in March. Since then, the share is seeing renewed interest and the price reached Rs 606 on 5th of July.
What was the reason behind this renewed interest? That mystery was solved on the 1st of July when the company announced that all regulatory approvals had been received and that 90% of the sales proceeds had been received by the company with the remaining 10% to be received once the title was transferred to SIUT. Once this announcement was made, the share price increased to Rs 606.
It seemed like the best was yet to come when the company finally announced on 8th of July that it was giving out an interim dividend of Rs 725 per share.
In terms of Pakistan’s stock exchange this is nothing short of a seismic shift. No company in its history has declared such a huge dividend. It does seem apropos for the company that after it made the biggest real estate deal in history it would announce the biggest cash dividend in history as well. To put it in perspective, the biggest dividend the company had given in its history was Rs 5 in 2016. This was 145 times the largest dividend the company had given itself.
So why has the company done this and what does it mean for the company going forward?
The significance of the dividend
In order to understand the significance of this dividend, it would serve to consider the balance sheet of the company. In terms of the assets of the company, the company revalued the hotel that it owned and categorized it as an asset held for sale worth Rs. 14.5 billion in March 2024. Based on the total assets of the company, this made up around 89.36% of the assets. The reason for the fall in percentage of assets was due to the fact that the company received 10% of down payment which it was showing as part of cash received and creating a liability for this that had to be paid back.
As the deal with SIUT had been announced and 10% of the payment had been received, the company gave out four dividend payments from September 2023 to February 2024. The total amount of these dividends came to around Rs 11 per share in totality. With the deal close to completion, the company started to take out much of this investment in the form of dividends to its shareholders. With the addition of the recent announcement, the dividend given out in the last year comes to around Rs 736 per share.
So how will the company look like when so much of the funds within the company are distributed to its shareholders?
Once the payment is received by the company, the fixed assets will be transferred to the bank of the company and the company will have to carve out a dividend reserve from the capital or fair value reserve it had. The fair value reserve would stand at Rs 13.9 billion after the deal goes through. From this, the company will pay out the recent dividend which has been announced which will be valued at Rs 13 billion. Once the dividend is paid, the company will have assets worth Rs 1.6 billion left over. It can then use these funds to pay off any liabilities that it has. Once all the assets and liabilities have been converted into cash, the company will end up with a bank balance of Rs 1.2 billion. On the equity side, the company will have a reserves of Rs 0.9 billion, unappropriated profits of 0.2 billion and equity of 0.1 billion.
When the dividend is paid out, the company will become a shell of its former self. With no assets and liabilities to talk about, the major part of the company will have funds in the bank against the investment made by the owners and the reserves it would still have left standing.
What can be next for the company? At this juncture, the next step can either be to buy new assets with the funds left in the company and start afresh. There would be no sense in the owners injecting new funds into the company when they are taking out dividends. When the dividends are announced, the shareholders lose out as tax is deducted from these dividends. If the company had any other investment opportunities in sight, it would have invested these funds rather than give them out.
Outside investors will have little interest in the company as the company would have no operations or sources of revenues and the most they can expect is interest income from the funds the company has left which will generate almost no revenue for the company. The best course of action would be to slowly keep taking these funds out over time in the form of dividends as the company still has the capacity to pay out dividends of Rs 55 going forward.
Another option could be that the company keeps these funds invested in a bank and earn interest on these funds. At the end of 2023, the company made a profit of Rs 44 million on assets worth around Rs 10 billion. If the company keeps the remaining balance of Rs 1.2 billion in an account, they can end up earning Rs 240 million and then distribute this to its investors who have bought the shares. It would be ironic that the company would increase its profits by 6 times after closing its core operations and business.
The future listing of the company will come into jeopardy and a voluntary buyback or delisting would seem likely in order to take the company off the stock exchange. With 88.63% of the company already in the hands of the directors and their relatives, the company can also look to pass the 90% threshold it requires to carry out a successful buyback and delisting of the company from the exchange. The situation will become clearer once the fresh shareholding is released at the end of June 2024. With shares trading in the market since June, it can be assumed that the company has gotten closer to the magic number of 90% since last year.
The company will slowly wither away as the core of the business is not left standing anymore.
So who are the winners and losers of this transaction?
Winners and losers
The biggest winner from this transaction seems to be the company itself. When SIUT came calling, the company already had an asset it was willing to sell and it was able to sell its core asset for a value that even it did not anticipate. Over time, the hotel had increased in value and even in those circumstances, SIUT placed a price tag much higher than the expectation of the company and its own valuation. The management of the company was able to offload its assets at a handsome profit and with the hospitality business suffering in recent years, this seems like a perfect scenario for the company going forward.
Another winner of this transaction could be SIUT which will be able to buy a hotel and turn it into a hospital. Even though it might seem like they are paying too much, the fact that the hotel infrastructure can be easily turned into a hospital seems to be a win for the non-profit organization. SIUT saw some strategic advantage in buying a pre-build structure which it could utilize rather than building something from scratch which would save time and resources of the company itself. It seems like SIUT also gained from this transaction and deal.
The patients who will benefit from the expansion of SIUT also seem to be the winners as they will get access to a better facility. As SIUT will expand, more and more patients can be treated and the benefit can reach a wider set of patients compared to before. It seems like this is one more party that will be better off after the deal has gone through.
The government will also benefit from the deal. There is a withholding tax of 15% that is placed on dividends. The company has given out a total of Rs 736 per share which can be linked to this deal. When the dividend is paid out, the government will end up earning Rs 110.4 per share. The rate is doubled if the dividend is earned by a non-filer and the withholding tax increases to 30%. Based on the dividends planned to be given out, the government will earn Rs 2 billion from the transaction alone. Meaning a considerable chunk of the Rs 14.5 billion will go into the coffers of the government from the dividend alone. PHDL is mandated to pay Rs 237 million by itself for the sale of assets that is carried out which will also be deposited into the exchequer.
The last beneficiary of this deal will be the shareholders of PHDL. Based on the shareholding of June 2023, 88.63% of the shares of the company were held by its directors or relatives of the directors. These individuals would be the ones who would benefit from the dividend as they will end up making Rs. 11.7 billion amongst themselves from just the dividends that have been announced till now. At the end of June, 10.98% of the shares were held by minority shareholders but based on the volume that has been traded from June 2023 to July of 2024, it can be safely assumed that the directors and their relatives would have increased their shareholding accordingly. Latest shareholding once released for June 2024 will provide better guidance in these regards once the accounts are released.
At this point in time, there can only be one loser in the situation and that would be the fresh investor looking to invest in the company. The announcement of such a large dividend has many people take notice of the company and look to invest in it. With little to no basic understanding of the company and its operations, many investors will look to buy the shares at the time when these shares would cause more harm than good. Once the dividend was announced, the company’s share price shot up from Rs 607 and in two days of trading, it hit a high of Rs 728.
The company was going to be selling its core assets and once the dividend would be paid out, the company would end up nothing more than a shell of its former self. With money being taken out, nothing would remain in the company which can be seen as being investable. Investors would care little about that. With herd mentality and a lack of understanding they would be looking to buy the share. Even for investors who bought the share for Rs 727, the reality is that they paid too much. Let’s say the share price closes at Rs 727 on 15th July. Based on the record of the company, whoever owns the shares on the 15th will get the dividend announced by the company.
Once the dividend is given out, the share price of the company falls in value by the amount equivalent to the dividend. In this case, the share price would go from Rs 727 to Rs 2. The investors would lose out as they bought a share for Rs 727 and got a dividend of only Rs 616 per share as withholding tax is deducted from the dividend. Now they would have Rs 616 in their account in the form of dividend and a share which will start trading at Rs 2 from the next day of trading. The investor actually lost Rs 110 per share of his investment due to the taxation. WIth lack of basic understanding, they would lose out Rs 110 when they bought the shares at a price close to the amount of dividend announced.
In a deal which was seen to be historic as the largest real estate deal, it seems there are mostly winners who would reap the benefits of the transaction taking place, however, the losers would be the investors who always end up holding the short end of the stick in the end.
