PEGASUS HOTELS OF CEYLON PLC
A Carson Cumberbatch Company
Annual Report 2023/24
CONTENT | |
Chairman's Statement | 2 |
Management Discussion & Analysis | 4 |
Directors Profiles | 8 |
Risk Management | 10 |
Annual Report of the Board of Directors on the | |
Affairs of the Company | 14 |
Related Party Transactions Review Committee Report | 34 |
Audit Committee Report | 36 |
Financial Calendar | 39 |
Independent Auditor's Report | 40 |
Statement of Profit or Loss and | |
Other Comprehensive Income | 44 |
Statement of Financial Position | 45 |
Statement of Changes in Equity | 46 |
Statement of Cash Flows | 47 |
Notes to the Financial Statements | 48 |
Five Year Summary | 103 |
Statement of Value Added | 105 |
Information to Shareholders and Investors | 106 |
Notice of Meeting | 108 |
Form of Proxy | 112 |
Corporate Information | IBC |
This report can be accessed online at https://www.carsoncumberbatch.com
CHAIRMAN'S STATEMENT
"Today's consumer is increasingly seeking value for money and a plethora of new experiences."
Dear Shareholders,
As the newly-appointed Chairman of Pegasus Hotels of Ceylon PLC, it is my privilege to welcome you to the 58th Annual General Meeting. I am pleased to present the Annual Report for the financial year ended 31 March 2024.
The year 2023 was a welcome year for global tourism - and Sri Lanka was no exception. Early in the financial year, we saw a notable influx of visitors, particularly along our southern and eastern coasts. As the year unfolded, arrivals remained healthy into the peak winter season, with traditional Western markets picking up pace. This recovery was partly a result of new
visa facilitation measures, improved flight connectivity, and a destination marketing push.
Incremental progress was witnessed in the economy due to a confluence of factors: the intervention of the International Monetary Fund (IMF) and bilateral aid, coupled with government policy initiatives. The rupee stabilised with higher remittances, tourism inflows, and a lower trade deficit. Although inflation receded to single digits, the required tax reforms were observed to impact consumer spending across most sectors, with visible cutbacks in discretionary purchases.
While the ongoing tourism recovery is gratifying, there is an urgent need to upscale the country's tourism proposition to be more competitive. A matter of greater importance is to lay the required groundwork, which implies improving the tourism infrastructure, strengthening tourist safety and security, ensuring digital readiness, and, most importantly, reinforcing the talent pool. The skills crisis remains the biggest hurdle for our industry, the only recourse being on-the-job training for newcomers. Thus, the challenge of a shrinking talent pool calls for an immediate macro-level solution, perhaps through building extensive training initiatives from the granular level.
The financial year 2023/24 commenced with a subdued start for us, primarily attributed to delayed recovery in key source markets, resulting in an annual occupancy rate of 47% for Pegasus Reef Hotel. As the Chinese market continued to underperform, our strategy was to deepen agent relationships with a focus on Europe and other emerging markets. While the MICE sector was the primary revenue source last year, we faced soft demand, especially concerning Weddings, due to factors beyond our control, such as slower domestic spending.
Today's consumer is increasingly seeking value for money and a plethora of new experiences. More than ever, new market entrants are shaping the local hospitality scene.
Clearly, these trends highlight the need for continual business investment for our hotels - which is a daunting task - especially in an environment characterised by unprecedented rises in construction costs. In the last few years, our cash reserves were tapped to offset losses, delaying our essential business development projects. However, as our business recovers, we plan to commit to these projects in a phased approach by reinvesting our cash flows. We also remain steadfast on continuous service improvements, resource building, and optimising value for the entire spectrum of our guests. A key focus is to elevate our beach experience through a comprehensive beach activation plan and soft beach development. Our main restaurant will also undergo a complete revamp in the upcoming months, infusing an extra element of luxury for our guests. Plans are also in the pipeline to introduce broad-based experiences and events that resonate with different audiences.
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Meanwhile, Giritale Hotel reflected an occupancy rate of 49% during the year due to the slow recovery of its source markets and subdued domestic travel. However, the hotel is primed for growth with its revamped adventures and experience-driven offerings. We closed the year with a consolidated revenue of Rs. 927 Mn (29% growth) and an EBITDA of Rs. 6 Mn. During the year under review, we faced outsized cost structures, as did the rest of the industry, which negated our gains despite our strong financial discipline. Importantly, we strengthened our financial footing in the same period by paying off Rs. 88 Mn of Equity Hotels Limited's (EHL) debt through rights issue proceeds. A portion of the remaining proceeds will be primarily utilised for the restaurant revamp project.
We enter the next year with a relentless focus on performance. To support the industry's recovery efforts, policymakers may explore areas of underinvestment and strategically allocate resources to strengthen its capabilities. Just as important, policy consistency will hold us in good stead in the future.
In conclusion, I thank all the board committees, business partners, staff, and other stakeholders for their tremendous efforts during the year. I also want to take a moment to acknowledge the incredible guidance of our former Chairman, D.C.R. Gunawardena, who has dedicated years of service and made invaluable contributions to the growth of our organisation. Finally, I would like to thank all the shareholders for their continued support.
(Sgd.)
- Dayananda Chairman
24th June 2024
Annual Report 2023/24 | 3 |
MANAGEMENT DISCUSSION & ANALYSIS
"During the year under review, we managed to deleverage, thereby reducing the impact of interest costs."
GLOBAL CONTEXT
In 2023, global tourism experienced a significant recovery, reaching 88% of pre-pandemic levels, according to the United Nations World Tourism Organization (UNWTO). The Middle East, Europe, and Africa led this resurgence, with Europe achieving an impressive 94% of its pre-pandemic figures, largely driven by intra-regional demand. Conversely, the Asia Pacific markets displayed mixed outcomes, with South Asia rebounding to 87% of pre-pandemic levels, while sub-regions such as North-East Asia only recovered to 55%. This disparity in the rate of global travel recovery was primarily influenced by economic and geopolitical factors, which had varying impacts across different regions.
Looking ahead, there is an anticipated surge in leisure travel worldwide due to pent-up demand, and the return of corporate travel is expected to invigorate the Meetings, Incentives, Conferences, and Exhibitions (MICE) segment. However, ongoing geopolitical tensions and uneven economic recovery across regions may continue to impact traveller confidence. In Asia, consumer interest is projected to stabilise as economic conditions improve and flight capacities and connectivity expand. The current resurgence of domestic travel in China suggests that outbound travel will follow suit, although the timing of this recovery remains uncertain.
In the contemporary era, groundbreaking technologies and captivating travel experiences are rapidly transforming the global travel landscape. The increasing desire for solo travel adventures, the growing interest in quiet luxury travel, and the rise of digital nomad lifestyles have fundamentally reshaped our perception of travel. Furthermore, there is a rising preference for customised tours and a significant emphasis on sustainable travel practices, which are not fleeting trends but integral elements of the industry's future.
LOCAL CONTEXT
Sri Lanka's economic outlook improved in 2023 with the assistance of the International Monetary Fund (IMF) and other credit lines, resulting in a reduced economic contraction rate of 2.3%. The Central Bank's accommodative monetary stance led to a reduction in the Standing Lending Facility Rate (SLFR) and the Standing Deposit Facility Rate (SDFR) to 9.50% and 8.50%, respectively, by the end of the financial year. Inflation was also tamed to lower single-digit levels, while the exchange rate strengthened due to the easing of external sector pressures. However, the increase in the Value-Added Tax and other tax adjustments dampened consumer spending and general business activities. While the current economic trajectory
is promising, it is imperative to implement comprehensive reforms to ensure long-term economic resilience and growth.
Sri Lanka's tourism sector made positive strides in the past financial year as crisis conditions eased. In the first half, daily arrivals averaged 3,700, reaching about 66% of pre-crisis levels, with India and Russia accounting for around 30% of arrivals during this period. Towards the latter part of the year, arrivals stabilised, with daily arrivals averaging to 7,000 in the final quarter. Overall, the recovery rate of arrivals in the financial year 2023/24 was 76% of pre-crisis levels. However, total tourist receipts and per-tourist spending were down by 41% and 22%, respectively, compared to pre-crisis levels.
The recent surge in tourism can be attributed to a range of measures implemented by the authorities. Visa-free travel offered to selected nationalities has played a significant role in shaping current travel patterns. The Sri Lanka Tourism Development Authority (SLTDA) launched destination marketing campaigns targeting both traditional and emerging source markets. The endorsement of influential global travel
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figures and increased recognition of Sri Lanka as a top travel destination on the international stage have further fuelled the current sense of optimism.
In this context, there was a discernible increase in SLTDA- registered accommodation in 2023, with a year-on-year increase of 5,109 rooms. The Southern and Western provinces experienced the highest influx of new rooms, leading to heightened competition in these regions. SLTDA also streamlined the registration process for tourist accommodations using technology, which increased the registration of homestays, guest houses, and bungalows. This was a positive step towards regulating the informal sector.
Looking forward, the government has set an ambitious target of attracting 5 million tourists annually, which requires the execution of a robust tourism master plan. The focus is on broadening the tourism potential beyond natural assets by creating distinctive offerings and elevating the overall quality of tourism standards. To succeed, aligning with global trends and providing more authentic and immersive experiences is crucial. Various avenues to consider include eco and wellness tourism, heritage tourism, gastro tourism, and adventure tourism. Curated tours could cater to the increasing numbers of solo travellers and digital nomads worldwide. Additionally, Colombo City could be transformed into a vibrant tourist hotspot with distinctive shopping and entertainment districts, capitalising on the growing demand for regional MICE tourism.
To support these initiatives, developing a strong workforce by upskilling professionals in the hospitality sector is equally important. Additionally, there should be a focus on driving strategic investments to build essential tourism infrastructure and facilities, potentially through public-private partnerships (PPPs). Most importantly, developing a sustainability roadmap for the industry's long-term prosperity is paramount.
OUR OPERATIONAL CONTEXT
Our business landscape improved in the financial year 2023/24 in line with favourable market conditions. The foreign guest mix at Pegasus Reef Hotel (PRH) increased to 59% compared to 24% in the previous year. The main source markets were India, France, Poland, Japan and Australia, while the traditional Western markets recovered only towards the winter season. Unfortunately, the hotel's historically second-largest market, China, did not rise to anticipated levels. Meanwhile, the Online
Travel Agent (OTA) segment played a major role in driving room business. Throughout the year, we placed greater emphasis on expanding our market reach and pursuing future business opportunities by actively participating in international trade fairs and strengthening agent relationships.
On the domestic front, lower disposable incomes impacted our business growth during the year. Nevertheless, we capitalised on the demand arising for city staycations due to the high fuel costs of travelling long distances. Further, we utilised
a combination of traditional and digital media through an omnichannel approach to boost brand awareness and drive sales. Our primary aim was to enhance value propositions by introducing new experiences to cater to a diverse range of guests.
The wedding segment exerted challenges over the past year due to low discretionary spending and intense competition from standalone banquet halls that employed aggressive discounting strategies. In response, we broadened our offerings to include cost-effective menus for price-sensitive guests. In an effort to stand apart, we extended outdoor wedding venues and diversified to cater to multi-ethnic functions. To support this, an exclusive outdoor wedding show was hosted at our hotel premises in collaboration with other industry participants. We aim to sustain these efforts and eventually establish ourselves as a highly sought-after wedding destination within our specific market niches. In the year under review, the domestic MICE segment saw increased business activity, benefiting from increased day outings and other banquet events.
Meanwhile, Giritale Hotel observed a 57% mix of foreign guests this year, with a slower recovery of its primary source markets. Additionally, the hotel's performance was impacted by lacklustre domestic demand, attributed to the high cost of travel. However, we concentrated on improving the hotel's brand awareness and sales through increased promotional efforts. Notably, we strengthened our digital media presence through social media marketing and influencer marketing. We also revamped our adventure offerings and itineraries to enhance our value proposition. Our focus continues to be on expanding our presence in foreign source markets while repositioning the hotel brand as an experience-driven destination.
Annual Report 2023/24 | 5 |
MANAGEMENT DISCUSSION & ANALYSIS
During the year under review, our operational priorities encompassed quality enhancements, resource management, and operational efficiency. With this in mind, we executed soft room upgrades to enhance the overall appeal of our properties. Nevertheless, the operational landscape presented challenges as our profit margins suffered from substantial operational leverage, particularly in light of general market- driven escalations in overhead expenses. Another significant challenge was the finance expenses weighing down our bottom line, which we managed to address to a large extent this year through the proceeds of the rights issues.
FINANCIAL PERFORMANCE
Company
Pegasus Reef Hotel (PRH) grew its Revenue by 22% to
Rs. 774.9 Mn during the financial year 2023/24. This growth was driven by increased room revenues, particularly during the year's second half, enhanced business in the MICE segment and other food and beverage revenue. The hotel achieved an occupancy of 47% compared to the previous year's 29%. The improved occupancy in the reviewed year was supported by the upturn in tourism, especially towards the latter part of the financial year, as described earlier in this report.
In the 2023/24 financial year, the Average Room Rate (ARR) was Rs. 12,872, a 1% marginal decrease from the previous year's ARR of Rs. 13,026. This reduction was influenced by various market forces, including the impact of currency movement
on the ARR of foreign business. The Company's direct costs increased by 10%, year-on-year, to reach Rs. 579.3 Mn. This increase was mainly due to a rise of Rs. 39.1 Mn in electricity costs because of tariff escalation. The room and food and beverage costs increased by Rs. 19.3 Mn during the year, reflecting increased business activity. Despite the high-cost environment, the hotel implemented diligent cost management strategies, resulting in an increase in the Gross Profit of
Rs. 90 Mn to reach Rs. 195.7 Mn.
The hotel's total administrative expenses increased by 7% year- over-year to reach Rs. 210.1 Mn due to increased personnel expenses, higher insurance premiums and security costs. In addition, sales and promotional expenses amounted to
Rs. 38.4 Mn, driven by the aforementioned increased marketing efforts. Finance income fell by 35% to Rs. 9.7 Mn due to lower market interest rates, while finance costs increased by 61% due to the expiration of moratoriums and higher market rates
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on loans. Further, a Rs. 4.8 Mn increase in finance costs is attributable to exchange losses. The Company also obtained new borrowings of Rs. 94 Mn primarily for working capital. However, the hotel's net borrowings reduced by 15% year-over- year to reach Rs. 46.5 Mn as of March 31, 2024.
The Company recorded a loss of Rs. 47.8 Mn after tax, a 30% reduction from the previous financial year. More than 70% of this loss stemmed from the first quarter. However, as business conditions improved, the Company experienced stronger results, recording a Total Cash Profit Before Tax (adjusted for depreciation) of Rs. 44 Mn in the year's final four months.
Group
Pegasus Hotels of Ceylon PLC's Consolidated Revenue for the financial year 2023/24 was Rs. 927.4 Mn, a 29% increase over the previous year. Giritale Hotel's revenue for the period was Rs. 152.5 Mn, up 75% year over year, with an occupancy rate of 49%. The consolidated loss before tax for the financial year 2023/24 amounted to Rs. 111.7 Mn, which reduced by 32% over the previous year due to business recovery.
An increase of Rs. 4.9 Mn from exchange losses led to a marginal rise in finance costs. However, during the year under review, we managed to deleverage, thereby reducing the impact of interest costs. As of 31st March 2024, the Group's Net Debt decreased by 57% to Rs. 71.4 Mn due to loan repayments. Over the past year, the Group repaid Rs. 118.8 Mn in existing loans, with Equity Hotels Limited settling Rs. 87.6 Mn of its loans using proceeds from the rights issue. However, the Interest Costs of the Group decreased by only Rs. 0.2 Mn during the year. This was due to the combined effect of EHL's settlement and PRH's increased interest costs, as mentioned earlier.
During the year under review, a deferred tax reversal of
Rs. 12.2 Mn was recognised mainly on account of temporary differences arising from Property, Plant and Equipment and the deferred tax asset identified on the current year's tax losses. Accordingly, for the year ended 31 March 2024, the Group reported a loss after tax of Rs. 99.5 Mn. The cash loss before tax, adjusted for depreciation, was Rs. 31.9 Mn.
During the year, the Group recorded revaluation gains on land and buildings worth Rs. 461.1 Mn, recognised under Other Comprehensive Income (OCI). Additionally, a deferred tax of Rs. 135.4 Mn was recognised on revaluation gains and actuarial losses in the OCI.
FUTURE OUTLOOK
As we look ahead to the upcoming year with optimism, we envision a revitalised economic landscape that will effectively mitigate any potential headwinds on the growth of domestic businesses. We also anticipate resilient tourist demand, propelling the industry toward a period of growth. Our unwavering focus will be on strategic investments, including PRH's beach area development and other property and resource enhancements, to drive business growth and maximise shareholder returns. Throughout this process, we will emphatically prioritise financial prudence and efficient operational management.
Carsons Management Services (Private) Limited
24th June 2024
Annual Report 2023/24 | 7 |
DIRECTORS PROFILES
MAHENDRA DAYANANDA (CHAIRMAN)
(Appointed as the Chairman w.e.f 01st January 2024)
Mahendra Dayananda is an Independent, Non-Executive Director of Bukit Darah PLC and Pegasus Hotels of Ceylon PLC and was also an Independent, Non-Executive Director of Nestle Lanka PLC and resigned from the company with effect from 1st February 2024. He was a former Non-Executive Director of Delmege Ltd and Chairman of Lewis Brown & Company Ltd. An expert on the Tea Industry and economic issues, he was until recently the Chairman of the Sri Lanka Business Development Centre and former Chairman of the Colombo Tea Traders Association.
He was until recently the President of the Sri Lanka Japan Business Council, former President of the Sri Lanka Institute of Directors and past Chairman of the Ceylon Chamber of Commerce and also chaired the Monetary Policy Consultative Committee - Central Bank of Sri Lanka for a period of 09 years. He was also the former Chairman of Indo Asia Teas (Private) Limited and continues to chair Total Tea Concepts (Private) Limited.
He was the former Honorary Consul for the Republic of Benin in Sri Lanka until October 2019.
Earlier he was a Founder Managing Director commencing 1st January 1980 and subsequently the Chairman of Tea Tang (Private) Limited
KRISHNA SELVANATHAN
Krishna Selvanathan serves as a Director of Carsons Management Services (Private) Limited and is the CEO of Guardian Fund Management Limited. He also serves as a Director of Lion Brewery (Ceylon) PLC and Pegasus Hotels of Ceylon PLC.
He holds a BA Degree in Accounting & Finance and Business Administration from the University of Kent, U.K.
SUJENDRA MATHER
Sujendra is currently the CEO and Head of Investment Banking at Asia Securities Holdings Pvt. Ltd., a leading Investment firm in Sri Lanka covering Equities, Asset Management and Investment Banking. Prior to this, he was a co-founder and Managing Director of York Street Partners Pvt. Ltd., a leading boutique Investment Banking firm in Sri Lanka. Previously, Sujendra has had over 15 years of international Investment Banking and Corporate Finance experience working with Houlihan Lokey Howard & Zukin, John Keells Holdings PLC and Deloitte & Touche Corporate Finance in the US, Sri Lanka and Singapore respectively.
Sujendra has successfully managed and lead several billion dollars of Mergers & Acquisitions, Fund Raising, Restructuring and Strategic Advisory transactions in the North America and Asia Pacific regions across the Consumer, Retail, Financial Services, Manufacturing, Real Estate, Hospitality, Infrastructure, Technology and Mining sectors. He has acted both as a key strategic advisor to CEO's and entrepreneurs as well as a principal investor throughout his career.
Also, Sujendra is a board member of several publicly listed and private companies in Sri Lanka and overseas.
Sujendra received a B.A. in Economics-Mathematics from Claremont McKenna College in California, USA and recently completed a Wharton Executive Education Program on Economics of Blockchain and Digital Assets.
MICHAEL ELIAS
Michael Elias is an international consultant in Tourism & Hospitality Management with over 40 years of experience in every segment of the Tourism industry.
He was a Vice President of John Keells Holdings PLC and Executive Director/Chief Executive Officer of six Leisure Sector companies of the John Keells Group, including Sri Lanka's only previously CSE listed Destination Management Company, Walkers Tours Ltd. The multi award winning company Nature Odyssey (Pvt) Ltd was conceptualised and created by him.
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