GCR affirms Transcorp Hotels PLC of Nigeria’s National Scale Rating at A-(NG); Outlook Stable

19 Sep 2017 In Rating Notifications

GCR affirms Transcorp Hotels PLC of Nigeria’s National Scale Rating at A-(NG); Outlook Stable

Lagos, 18 September 2017—Global Credit Ratings has affirmed the long term and short term national scale issuer ratings of A-(NG) and A2(NG) respectively, assigned to Transcorp Hotels PLC with the outlook accorded as Stable. Concurrently, the national scale ratings accorded to the following bond Issuances were also affirmed:

• Series 1 N10bn Fixed Rate Bond -  A-(NG), Stable Outlook
• Series 2 N9.8bn Fixed Rate Bond -  A-(NG), Stable Outlook

The long and short term issuer and bond ratings are valid until August 2018.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Transcorp Hotels PLC (“THP” or “the Company”) based on the following key criteria:

Transcorp Hotels PLC remains one of the most prominent hotel brands in the country, benefitting from strong shareholder support and an operational agreement with Hilton International. Although, earnings derive predominantly from the Abuja hotel, construction of Lagos and Port Harcourt hotels will help to diversify revenue sources over the medium term. In the interim, ongoing refurbishments to the core Abuja hotel should consolidate its leading position in the upper scale market.

The challenging operating environment in 2016 (with the economy in recession), drove a significant decline in tourism and hospitality sector volumes, which severely impacted hotel patronage across the country. Despite this, and given the fact that some floors were shut for renovation (for a number of months), revenue remained resilient, rising by 10% to N15.3bn in FY16. This was largely attributed to the increased business development and marketing activities, which kept occupancy rates at the hotel around 60% (well above the industry average of 35%), and improved inflows from food and beverage. However, as economic activity remained sluggish at the start of 2017, with patronage reduced by the closure of the Abuja airport for six weeks, 1H FY17 revenue of N6.2bn evidenced a 23% year-on-year decline and lagged budget on an annualised basis.

Notwithstanding the top line growth, the impact of inflation, as well as the devaluation in the Naira value, led to an increase in both direct costs and overheads (personnel, energy), partly reversing gains reported from the implementation of cost saving measures in FY15. Operating income fell to N4.1bn (FY15: N4.7bn), translating to a 26.8% margin, the lowest over the last five years. With economic challenges persisting, and a further reduction in operating income to N856m at 1H FY17, it appears unlikely that the full year profitability target will be achieved.

Cost overruns on current capex projects (including refurbishment of the Abuja hotel) necessitated additional loans to meet the shortfall in funding. As such, total debt rose by a net N3.6bn to a high N24.2bn at 1H FY17. Whilst gross gearing remained moderate at 47% at 1H FY17 (FY16: 41%), gross debt to EBITDA rose to 891% (FY16: 408%) and net interest coverage was relatively low at 1.1x in FY16. If persisting, such low debt coverage metrics are not consistent with companies in the ‘A’ band. Despite the economic challenges, THP still reports robust operating cash flows (N1.4bn at FY16 and N2.3bn at 1H FY17), underpinned by a strong cash generation and a favourable working capital position. However, the continued payment of high dividends amidst falling cash flows and high capex, places additional strain on liquidity.

Given that the Bonds are senior unsecured obligations of the Issuer, the Series 1 and Series 2 Bonds bear the same rating as the Issuer. Any change in the rating assigned to the Issuer will directly affect the Bonds ratings.

Positive rating action is only likely once the current capex programme is successfully completed, with minimum unexpected costs incurred, as well as an improvement in the operating environment. This should translate to improved earnings and also enhance profitability over the medium term. Conversely, persistently weak debt service metrics could result in negative ratings actions. This could be driven by continued weakness in operating performance, or delays and cost overruns related to capex.

 

NATIONAL SCALE RATINGS HISTORY

Rating Class Rating Outlook Date
       
Initial rating      
Long term A-(NG) Stable
August 2015
Short term A2(NG)  
Series 1: N10bn Bond A-(NG) Stable
August 2015
Series 2: N9.8bn Bond A-(NG) Stable
August 2015
Last rating      
Long term A-(NG) Stable
August 2016
Short term A2(NG)  
Series 1: N10bn Bond A-(NG) Stable
August 2016
Series 2: N9.8bn Bond A-(NG) Stable
August 2016

 

ANALYTICAL CONTACTS

Primary Analyst
Kunle Ogundijo
Analyst
Lagos
+23 41 462 2545
.(JavaScript must be enabled to view this email address)
Committee Chairperson
Dave King
Chairman
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2017
Transcorp Hotels PLC Report 2015-16
Glossary of Terms/Ratios (February 2017)

 

 

 

 

 

 

RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until August 2018.

Transcorp Hotels Plc. participated in the rating process via face-to-face management meeting, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to THP with no contestation of the ratings.

The information received from Transcorp Hotels Plc and other reliable third parties to accord the credit rating included:
• the 2016 audited annual financial statements (plus four years of comparative numbers),
• revenue budget for 2017,
• unaudited management accounts to June 2017,
• trustees’ report on the bonds as at end of June 2017

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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