GCR Affirms Transcorp Hotels Plc’s national Scale Rating At A-(NG); Outlook Stable

28 Sep 2016 In Rating Notifications

GCR Affirms Transcorp Hotels Plc’s national Scale Rating At A-(NG); Outlook Stable

Lagos, 28 September 2016—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 2017.

RATING RATIONALE

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

Transcorp Hotels Plc is one of the most visible brands in the Nigerian hotel industry, with its experience, operating synergies and partnership with the Hilton Worldwide making it the market leader in the upper scale segment of the industry. THP’s strategic plans to renovate, upgrade and provide new facilities at the Abuja hotel and the construction of the Lagos and Port Harcourt hotels would help improve and diversify the earnings potential of the Company.

Revenue declined for a second year to N14bn in F15 as the generally challenging economy constrained top line growth. Combined with reduced hotel patronage and increased competitive pressure, THP was required to effect a slight reduction in room rates, in order to stimulate volumes. Notwithstanding this, the Company reported an increase in operating profit to N4.7bn (F14: N4.1bn), supported by scale economies, efficient pricing of consumables and its import substitution strategy. This translated to a 33.4% margin. The improved performance was also attributed to the reduction in overheads, as administrative expenses declined by N1.5bn to N5.9bn. In contrast, unaudited management accounts for the six months to June 2016 indicate that revenue grew by an annualised 9% to N7.6bn, as a number of high profile events at the beginning of the year resulted in higher occupancies. Nevertheless, overhead costs were ahead of anticipated levels, as a result of which both the EBITDA and operating margins declined year-on-year, to 35.1% and 28.9% respectively (F15: 40.9%; 33.4%), and were below expectations.

Following the successful issuance of bonds (under a N30bn bond programme) into the capital market in F15, THP reported debt on its books for the first time. Gross debt registered at N19.6bn at FYE15, and was unchanged at 1H F16, given a one year moratorium on principal repayments. Accordingly, gross gearing registered at a relatively low and unchanged 38% at 1H F16 although net gearing rose to 23% at 1H F16 (FYE15: 11%), following the utilisation of cash holdings. In contrast, earning based metrics have been high, with gross and net debt to EBITDA registering at 342% and 94% at FYE15 respectively, before increasing to an annualised 366% and 220% at 1H F16 due to the weaker earnings. Despite the attendant foreign exchange scarcity and the resultant devaluation of the Naira, THP still reports robust operating cash flows (F15: N7.5bn), underpinned by the highly liquid business. The strong liquidity has enabled it to maintain high dividend payments through the review period, with year-end cash balances remaining sizeable.

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, on schedule and with minimum additional costs incurred. This will significantly increase the scale of the group and translate to improved earnings capacity over the medium term. Conversely, the ratings could be constrained in the event of that construction is delayed or the projects budget is materially exceeded. Earnings underperformance from the existing property could also lead to a deterioration in credit protection metrics.

NATIONAL SCALE RATINGS HISTORY

Initial/last rating (August 2015)
Long term rating: A-(NG)
Short term rating: A2(NG)
Series 1: N10bn Fixed Rate Bond: A-(NG)
Series 2: N9.8bn Fixed Rate Bond: A-(NG)
Outlook: Stable

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
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2016
Transcorp Hotels Plc Report 2015
Glossary of Terms/Ratios (February 2016)


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 was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until August 2017.

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 2015 audited annual financial statements (plus four years of comparative numbers),
- revised revenue budget for 2016,
- unaudited management accounts to June 2016,
- a completed rating questionnaire containing information on Transcorp Hotels Plc,
- insurance policy schedule,
- trustees’ report on the Bonds as at end of June 2016
- in respect of the Bond programme: the final pricing supplement for Series 1 and Series 2 bonds were received.

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.

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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