Page | 1 Equity Research Initiation of Coverage: Transcorp Hotel Plc PREMIUM HOSPITALITY LISTING Nigeria’s Largest Hospitality Provider A leading franchise: Transcorp Hotels Plc (THP) is a hotel developer, owner and asset manager with a clear roll-out strategy, primarily in the under-supplied Nigerian market. Based on number of rooms, THP is Nigeria’s largest luxury hotel operator with a total of 816 rooms in two hotels, ahead of Capital Hotel Plc (CAPHOTEL), owner of Sheraton Hotel Abuja which has 540 rooms and Ikeja Hotel Plc (IKEJAHOTEL) – the owner of Sheraton Hotel Lagos which has 332 rooms. THP has a strong pipeline, and plans to grow its room stock by 67% by 2017. Since its acquisition of the hotels (Calabar Metro and Hilton Abuja), THP has been consistent in maintaining a good balance between offering world-class service to customers and delivering good financial performance to shareholders. Transparent business model: As a developer and owner, THP enjoys a strong relationship with the Hilton international brand which operates under management agreements. The operators (Hilton Worldwide) recognise the potential for branded premium and upscale hotels, but high barriers to entry exist in local markets given the level of investments required and the difficulty in obtaining the requisite permits. The legal structure maintains local ownership requirements, while management’s influence, reputation and contacts enable it to identify opportunities and execute its development plans. Dynamic market positioning: Nigeria is an attractive hotel market; with more opportunities coming to the fore following the rebasing of its GDP to become the biggest economy in Africa. More importantly following the rebasing, we believe that services which now accounts for c.52% of Nigeria’s GDP (previously 29%) has a strong evolving potential. Hence, the hospitality as a significant subset of the services sector is still at a nascent stage, offering significant upside potential for investors, in the medium to long term. Despite the influx of upscale luxury hotels in major cities in recent years, there’s still room for growth given Nigeria’s improving macro-economic fundamentals, the emergence of new sectors such as power, increasing foreign direct investments and the expanding aspirational millennial generation (who increasingly prioritise leisure and tourism). Yet at 9% of branded hotel stock (data as at 2013), Nigeria’s premium and midscale segment is significantly under-supplied. THP’s pipeline puts it on course for a c.25% share of Nigeria’s branded midscale and premium hotel units. Risks are there but surmountable: As well as operational and development risks, performance could be affected by country risks. Execution of the planned projects could pose some difficulties given it is the first time the company is building a hotel from the ground up. It is also dependent on raising additional equity and N 25 billion of new debt. However, given the company’s strong cash position, zero debt balance, strong management with arrays of successful project team at its disposal, we expect a successful debt raising. Valuation: Based on a weighted average of the EV DCF and Peer Multiple (EV/EBITDA and P/E) valuation methodology, we arrive at a fair value of N 10.50 (see details on page 16 – 18). Analyst Damilola Lawal* [email protected]+234 818 398 2518 Team lead Oluwatosin Ojo, CFA* [email protected]+234 818 398 2518 08 Sep. 2014
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Page | 1
Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Nigeria’s Largest Hospitality Provider
A leading franchise: Transcorp Hotels Plc (THP) is a hotel developer, owner and
asset manager with a clear roll-out strategy, primarily in the under-supplied Nigerian
market. Based on number of rooms, THP is Nigeria’s largest luxury hotel operator with a
total of 816 rooms in two hotels, ahead of Capital Hotel Plc (CAPHOTEL), owner of Sheraton
Hotel Abuja which has 540 rooms and Ikeja Hotel Plc (IKEJAHOTEL) – the owner of Sheraton
Hotel Lagos which has 332 rooms. THP has a strong pipeline, and plans to grow its room
stock by 67% by 2017. Since its acquisition of the hotels (Calabar Metro and Hilton Abuja),
THP has been consistent in maintaining a good balance between offering world-class service
to customers and delivering good financial performance to shareholders.
Transparent business model: As a developer and owner, THP enjoys a strong
relationship with the Hilton international brand which operates under management
agreements. The operators (Hilton Worldwide) recognise the potential for branded
premium and upscale hotels, but high barriers to entry exist in local markets given the level
of investments required and the difficulty in obtaining the requisite permits. The legal
structure maintains local ownership requirements, while management’s influence,
reputation and contacts enable it to identify opportunities and execute its development
plans.
Dynamic market positioning: Nigeria is an attractive hotel market; with more
opportunities coming to the fore following the rebasing of its GDP to become the biggest
economy in Africa. More importantly following the rebasing, we believe that services which
now accounts for c.52% of Nigeria’s GDP (previously 29%) has a strong evolving potential.
Hence, the hospitality as a significant subset of the services sector is still at a nascent stage,
offering significant upside potential for investors, in the medium to long term. Despite the
influx of upscale luxury hotels in major cities in recent years, there’s still room for growth
given Nigeria’s improving macro-economic fundamentals, the emergence of new sectors
such as power, increasing foreign direct investments and the expanding aspirational
millennial generation (who increasingly prioritise leisure and tourism). Yet at 9% of branded
hotel stock (data as at 2013), Nigeria’s premium and midscale segment is significantly
under-supplied. THP’s pipeline puts it on course for a c.25% share of Nigeria’s branded
midscale and premium hotel units.
Risks are there but surmountable: As well as operational and development
risks, performance could be affected by country risks. Execution of the planned projects
could pose some difficulties given it is the first time the company is building a hotel from
the ground up. It is also dependent on raising additional equity and N25 billion of new debt.
However, given the company’s strong cash position, zero debt balance, strong management
with arrays of successful project team at its disposal, we expect a successful debt raising.
Valuation: Based on a weighted average of the EV DCF and Peer Multiple (EV/EBITDA
and P/E) valuation methodology, we arrive at a fair value of N10.50 (see details on page 16 – 18).
Company Overview ....................................................................................................................................... 7
Financial Performance Review and Outlook ............................................................................................... 12
Africa’s Hospitality Industry ........................................................................................................................ 17
Nigeria’s Hospitality Industry ...................................................................................................................... 20
Disclosure and Disclaimer ........................................................................................................................... 30
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Investment Rationale
Operating model offers the highest earnings and cash generation,
provides long-term control over destiny:
THP tends to favour the “asset heavy” approach as it generates most of its earnings from
the Transcorp Hilton Abuja which operates under the ownership model. However, the
company’s operating model tends towards the blend of the ownership and franchise model
given that its long term objective is to build capacity in manager model and transform to
owner-manager model. Although the ownership model (also the asset heavy model)
requires a high level of investment and its returns are often lower than those generated by
hotel management or franchise fees, it offers the highest absolute level of earnings, in our
view. It also provides long-term control over the hotel to ensure quality, as well as the
opportunity for capital appreciation. There has been much debate surrounding which model
is the best operating structure for managing a hotel. In the ownership and leasing business
models, the hotel chain bears all daily running costs. In the ownership case, the chain owns
the fixed assets (land, property and equipment etc), while, in the leasing case, the chain
rents the fixed assets. Both approaches are thus very similar and are said to be “asset-
heavy”. The franchise and management business models, being fee-based, are examples of
the “asset-light” approach. Heavy costs are indeed supported by third parties (the hotel
owners) whilst the hotel manager, the lodging company lends its on-the-ground expertise
to an owner, making all the day-to-day decisions on his behalf (the hotel general manager is
usually been appointed by the chain). In return, the property owner pays base fees (3% to
5% of revenues), incentive / outperformance fees (between 10% and 20% of profits, after
owner’s priority) and additional fees for pre-opening support or access to the central
booking and purchasing systems and to the brand marketing campaign. As a franchisor, the
lodging company licenses hotel owners the right to use its brand name. In return, and in
addition to the initial application fee, the franchisee will pay royalties (4-6% of room
revenues and eventually a percentage of the food & beverage revenues) and additional fees
for access to the booking system, marketing, advertising, etc.
Hotel industry back in business – room demand rises sharply
Nigeria continues to experience sustained demand levels against a relatively inadequate
supply of quality hotel rooms. With an improvement in the domestic economy, the hotel
industry is back on track with a sharp increase in room demand as the country elicits more
international attention. Indicators of Nigeria’s emergence as a destination hub include
statistics such as hotel occupancy rates and passenger arrivals at the airports. Occupancy
rates at various destinations have picked up considerably with Lagos and Abuja markets
leading the way. Occupancy rates are even higher for branded hotels. The growth in
demand is driven by an increase in corporate travel budgets leading to higher business
travellers. In addition, there is a growing market for young, wealthy Nigerians, with
exposure to quality hotel offerings overseas, and looking for similar experiences back home.
THP by virtue of its current presence in key strategic markets -Abuja, Calabar, Lagos
(ongoing) and Port Harcourt (proposed) is well placed to tap into the expected boom.
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Pipeline ready to roll
THP would be undergoing a major expansion over the next 18 - 24 months to meet growing
business demand as Nigeria’s leading hospitality provider. The company’s expansion
strategy is to develop premium and luxurious hotels leveraging the Hilton brand and design
expertise. We show management’s room roll-out plan in Exhibit 1 below, resulting in 1,366
rooms projected by 2017, a 67% increase on the current 816 rooms. The IPO proceeds,
together with new debt and cash flow, will fund the development of the two new hotel
units in Port-Harcourt and Ikoyi, Lagos with the design finalised and permit obtained.
Already, THP has acquired land for the construction of the Port Harcourt hotel and this
should further boost its inventory above that of its competitors. At completion of these
projects, we expect a strong boost to the company’s revenue.
Table 1: Pipeline
Hotel State Rooms Opening
Transcorp Hilton, Ikoyi Lagos 300 2017
Transcorp Hilton, Port Harcourt Rivers 250 2017
Transcorp Hilton, Ikeja Lagos 200 TBA
Transcorp Hilton, Warri Delta 200 TBA
*TBA – To be announced
Key partner in Hilton Worldwide
It is our view that THP has chosen an excellent partner in Hilton Worldwide, given the
latter’s proven experience as a leading hospitality firm with its operations spread across the
globe. According to consumer surveys, Hilton is the best-known brand name in the hotel
industry. We believe Hilton Worldwide possesses the right technical and development
expertise given its wealth of experience. As of March 2014, Hilton brands encompass 4,112
hotels with over 680,117 rooms in 91 countries. We believe THP’s partnership with Hilton
Worldwide will help attract demand as it will help capture individual travellers by virtue of
the brand name, the operation of loyalty card rewards schemes as well as referrals from
sister hotels elsewhere in the world. Furthermore, the strong association with the Hilton
brand helps THP compete effectively against existing competition. Strong and instant brand
recognition and familiarity can often make the difference in guiding a customer’s choice at
A key part of THP’s strategy is to de-risk its business model from cyclicality of its main Abuja
operations by increasing share of revenue from other key markets – Calabar, Lagos and Port
Harcourt. Whilst the flagship hotel (Transcorp Hilton Abuja) accounts for a significant share
of revenue as of FY’13, we consider the other hotel units (given their faster rate of growth –
11% on average vs. 9% growth in the flagship hotel), as the potential growth spot for the
company.
The Lagos market has significant growth potentials, especially across West Africa, given the
anticipated development of the Dakar-Lagos Highway, which at completion would promote
intra-regional trade. Also, with the evolution of new businesses in Lagos State, given its
teeming population in excess of 15 million people, and the proposed development of a new
megacity like the Eko Atlantic City, the potential for hotel demand in that market is
enormous.
Calabar has carved a niche as the cultural and tourism capital of Nigeria as a result of its
significant investment in tourism assets, which are complemented by its magnificent
landscape and tropical climate. Such efforts have led to significant investments in
infrastructure and tourist attractions such as the Obudu Ranch Resort, Tinapa Business
Resort, Marina Resort, etc. These investments have led to increased employments, foreign
direct investments and internally generated revenue. Through careful planning, Calabar
has the potential to further develop its image as a key tourism hub in West Africa.
Port Harcourt (the location of a potential hotel) boasts of a teeming population of about 6
million with a higher income per capita, strong middle class, presence of expatriates and a
more buoyant economy relative to Calabar. Expected demand should come from local state
residents (local business community, expatriates and other leisure seekers), out-of-state
travellers (business and leisure travellers) and international tourists.
Higher proportion of food & beverage and rental income also de-risks
the business to some extent
The proportion of food & beverage income to total revenue is quite high as the restaurants
get a lot of day visitors. The two hotels have a combined total of nine restaurants and bars
offering an assortment of international cuisines (both continental and Nigerian) and
targeted at different classes of guests. For meetings and conferences, the hotels boast of
several business executive conference rooms for small meetings, set in various
configurations to accommodate 10 to 300 people in addition to a multi-purpose Congress
Hall with a capacity for 1,200 persons. Food and beverage income from the nine outlets, in
addition to rental income from the convention and meeting facilities, means THP can
maximize its hotel occupancy and customer volumes during off-peak times such as midweek
or during traditionally slower leisure travel periods or even a downturn in the industry.
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Low seasonal risk given lower dependency on tourists
Seasonality is known as one of the most typical features of the tourism industry (including
hotels) with both positive and negative impact. Seasonality demands have been a major
problem for the hotel industry and have had a negative impact, such as: difficulties in
gaining access to capital, low returns on investment and the inefficient use of resources;
thus imposing greater risks for tourism. Transcorp Hilton Abuja and the soon to be
completed Transcorp Hilton Ikoyi are located near business destinations primarily targeting
domestic and international business travellers. This reduces the seasonal risk attached to
dependence on foreign leisure tourists.
Hidden value in assets
Transcorp Hotels Plc has N47.57 billion (US$297 million) of Property Plant & Equipment (as
of end-2013), based on historical cost less depreciation. Given the asset price appreciation
in urban centres in Nigeria over the last ten years, we assume that the value of THP’s hotel
properties has also increased significantly. Furthermore, the company holds extensive land
acreage in choice locations in the Federal Capital Territory. Tight supply of land in that area
has been a major factor underpinning the buoyant property market and the surge in land
prices in recent years. We believe value could be extracted through asset sales, although
the company has no track record of selling assets and has not announced any intention to
do so.
Hotel in the heart of Abuja provides a steady stream of cash flows
THP’s flagship property, Transcorp Hilton Abuja is located in highbrow Maitama, in the
heart of the Federal Capital Territory, in close proximity to the airport, several important
government parastatals (offices of the Nigerian National Petroleum Corporation and the
Central Bank of Nigeria) and several embassies. It is the most luxurious hotel in Abuja (even
in Nigeria), miles above its nearest competition and this to an extent makes it the first
choice for discerning locals and international visitors. With the aim of attracting this
particular kind of clientele, it offers all modern amenities such as conference room, board
room, banquet hall and Wi-Fi connectivity. The hotel has had a good influx of business
travellers over a period of four decades as reflected by its occupancy rates (OR) and average
room revenue (ARR) resulting in steady stream of cash flows. Although the ORs were low in
FY12 (56%) due to incessant security issues in and around Abuja, the economic revival has
pushed it back to higher levels (62.5%).
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Company Overview
Corporate Profile
Transcorp Hotels Plc (formerly Transnational Hotels and Tourism Services Limited) is the
hospitality subsidiary of Transnational Corporation of Nigeria Plc (“Transcorp”). Transcorp
holds a majority stake in the company through a wholly owned entity named Capital Leisure
and Hospitality Limited, whilst the Federal Government of Nigeria holds the balance. The
company currently owns two hotels - Transcorp Hilton Abuja and Transcorp Hotels Calabar,
though plans are afoot to expand the portfolio to four. THP boasts of a prime portfolio of
hotels - its revenue from rental income and hotel operations so far has surpassed that of
other major hospitality providers such as Ikeja Hotel Plc, Capital Hotel Plc and Tourist
Company of Nigeria Plc.
THP’s growth trajectory has been assisted by two main factors. The first is the quality and
pedigree of its partnership with Hilton Worldwide, one of the most recognizable brands in
the world. This partnership with Hilton Worldwide in the EMEA region brings valuable
distribution, operational and cross-selling benefits. The second stems from THP’s acquisition
growth strategy which commenced with the acquisition of a 100% stake in Hilton Hotel,
Abuja in 2005 followed by the purchase of Metropolitan Hotel, Calabar in 2010. By investing
in these two assets, THP has positioned itself to tap into a trend that will run for several
years as both Nigerian and foreign visitors eagerly explore local tourist delights, while
mixing business with pleasure. THP is entering a new frontier in its business model that will
see the company expand its presence in Nigeria and thereafter develop strong African
footprints in high population and competitive cities. Positioning the business to realize
management’s aspirations of high returns to stakeholders has necessitated further infusion
of equity capital. Thus, THP is targeting a public offering of its shares on the Nigerian Stock
Exchange; a process that should see the company raise N8 billion (US$50 million). The
primary purpose of the Offer is to enable THP fund the development of the two (2) new
hotels (“the Projects”) at prime locations within Nigeria. The Hotels include Transcorp
Hotels Ikoyi and Transcorp Hotels Port Harcourt.
Table 2: Evolution of Transcorp Hotels Plc
Year Events and Milestones
1994 NIRMSCO is incorporated to hold 100% interest in Hilton Hotel Abuja.
2005 Transcorp Plc (via capital leisure) acquires 51% stake in NIRMSCO and remains the latter THTSL.
2012 THTSL acquires a 100% stake in Metropolitan Hotel, Calabar.
2014 Pursuant to its Initial Public Offer, THTSL changes its name to THP.
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Management and Board Structure
The Board of Directors and Management show an appropriate mix of local identity and
international professionalism. THP's board comprises nine directors out of which seven
(including the chairman) are non-executive directors. The directors are from diverse
backgrounds and have significant experience in accountancy, banking, insurance, law
amongst others. The non-executive chairman, Olorogun O’tega Emerhor, OON is the Vice
Chairman/Group CEO of Standard Alliance Insurance Plc and the Chairman of Synetics
Technologies Limited and Heroes Group. The Managing Director – Mr Valentine Ozigbo –
possesses a wealth of experience spanning commercial, retail, investment and international
banking. Prior to joining THP, Mr. Ozigbo was the General Manager and Divisional Head in
charge of Global Transaction Banking at Keystone Bank Limited, successor to Bank PHB. His
remit covered product development, international business, global trade and eBusiness.
Before then, he was the Divisional Head of International Banking and Head of Global
Strategic Alliances at United Bank for Africa Plc. Valentine has also worked with FSB
International Bank Plc (now Fidelity Bank Plc), Continental Trust Bank Ltd (now part of UBA)
and Diamond Bank Plc. . Mr Ozigbo as the CEO of THP over the last 4 years has overseen the
re-emergence of Hilton Abuja as the leading hotel brand in Abuja and also the turnaround
and modernisation of Transcorp Hotel Calabar. The board is responsible for, and has the
authority to determine, all matters relating to the strategic direction, policies and practices
of the Company and to establish the goals for the Senior Management team and the
operation of the Company.
Awards and Recognition
Transcorp Hotels Plc has received numerous honours in recent years for being an
outstanding company that prides itself on employee satisfaction and its ongoing
commitment to excellence. The company received the following list of awards over the last
five years
At the recently concluded Hilton Worldwide EMEA Sales Conference 2014 which
was held in UAE, employees of THP emerged as winners of Hotel Sales Deal of the
Year 2013 and Hotel Sales Person of the Year 2013 for Middle East, Africa, Russia
and CIS countries.
Transcorp Hilton Abuja has been selected and voted as the Best Hotel in Nigeria for
the year 2013/2014 at the 12th edition of World Travellers Awards in Abuja.
Transcorp Hilton Abuja has been selected and voted as the Best Hotel in Nigeria for
the year 2012/2013 at the 11th edition of World Travellers Awards in Abuja.
Transcorp Hilton Abuja won the award for Group Conference & Events Sales Team
of the Year 2012 for Middle East & Africa at the Hilton Worldwide EMEA Sales
Conference 2013.
Transcorp Hilton Abuja was the winner of the award for Hotel of the Year 2010 for
Middle East & Africa at the Hilton Worldwide EMEA Sales Conference 2011.
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Ownership structure
THP is the hospitality subsidiary of Transnational Corporation of Nigeria Plc (“Transcorp
Plc”), which holds an 88% ownership interest in the Company through a wholly owned
entity named Capital Leisure and Hospitality Limited. The remaining 12% is owned by the
Federal Government of Nigeria.
SWOT Analysis
Strengths Weaknesses
Strong market presence, positioning and accumulated brand loyalty since 2005.
Through its convention and meeting facilities, THP can maximize its hotel occupancy and customer volumes during off-peak periods.
Strong brand name and partnership
Ability to raise significant debt due to existing zero exposure
Significant real estate available for expansion
Lack of low cost hotels
Opportunities Threats
Continued increase in international and domestic passenger traffic at the airport, generating demand for hotel accommodation.
Growing market of young, affluent Nigerians, with exposure to the premium hotel offerings overseas, looking for quality products at home.
Increase in demand resulting from economic growth in Nigeria, fuelled in large part by the oil and gas industry, demand from emerging new sectors e.g. power and the diversification of the economy, especially in the service sector.
Nigeria is currently experiencing security challenges posed by terrorist groups such as Boko Haram.
Potential increases in competitive supply.
The hotel market is highly dependent on government activity and political stability.
Nigeria is currently experiencing an Ebola outbreak which is affecting occupancy rates. Failure to control the outbreak will have worsening consequences for the industry.
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Asset Overview
Transcorp Hilton Hotel, Abuja
The Transcorp Hilton Hotel began operations on April 14, 1987 as NICON Hilton Hotel out of
the determination by NICON Insurance Corporation to aid the development of the
hospitality industry in the Federal Capital Territory (FCT). In 2005, the Federal Government
of Nigeria sold a 51% stake in the hotel to Capital Consortium/Transnational Corporation Plc
which led to a name-change to Transcorp Hilton from Nicon Noga Hilton Hotel. The Hotel is
situated in the heart of Abuja, 40-minutes drive from the Nnamdi Azikiwe International
Airport, Abuja. It is a 670-room, 5-star hotel that provides luxury accommodation, exotic
cuisine, fully equipped meeting rooms and leisure facilities to business travellers and
tourists from all over the world. Following the acquisition, the Transcorp group has invested
heavily in refurbishing and renovating the hotel, in a bid to retain its leadership position as
the hotel of choice.
Expanding to the south – Transcorp Hotels, Calabar
Transcorp expanded its hotel coverage area in 201, with the acquisition of the Metropolitan
Hotel in Calabar, Cross River State. The 146 room hotel is situated in the heart of Calabar,
and is a major destination for both local and international visitors to the city. After the
acquisition, Transcorp changed the name of the hotel to reflect the change in ownership.
The hotel is a major destination for business conferences, retreats and meetings and it is
conveniently located along the Murtala Mohammed Highway, a route for the annual
Christmas festival carnival procession held in Calabar.
Table 3: Hotel Performance, June 2014 YTD
Hotel Rooms Occupancy
Transcorp Hilton, Abuja 670 65%
Transcorp Hotels, Calabar 146 54%
Future plans and projections – Transcorp Hilton, Ikoyi
In furtherance of its expansion plans, Transcorp executed a management agreement with
Hilton Worldwide to develop a 300 room five star hotel in upscale Ikoyi, Lagos. The hotel
will be jointly owned by THP and Heirs Holdings, the Pan African Investment Company.
Furthermore, THP has also disclosed plans to upgrade the hotel in Abuja and develop three
other Hilton branded hotels, namely;
A 250 room hotel in Port-Harcourt – land already acquired;
A 200 room hotel in Ikeja; and
A 200 room hotel in Warri.
The company plans to complete the development of these properties by the end of 2017.
Once all the rooms are completed, Transcorp would have a total of 1,816 available rooms in
Nigeria. We expect the expansion of the hotel portfolio to positively impact revenue growth
for the company in the near term, as the domestic hospitality sector continues to boom.
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Catalysts
We consider share price catalysts to be:
Further potential supply in Lagos and Southern market - Further potential new hotels to be
completed in Ikeja, Ikoyi, Port Harcourt and Warri would increase the number of rooms
available for letting. While meaningful new supply in these areas is likely from 2017-18, we
expect the boost to supply will support sales strongly in medium to long-term.
Continuing growth in average room rates - Riding the hikes in average room rates for
premium locations such as Abuja and Lagos; hotels operating in these locations have
recorded double-digit growth in their rates over the last decade and boast of one of the
highest rates in Africa. Whilst rates will come under pressure as supply increases, we expect
hotel rates in Nigeria’s major cities to still stay relatively firm and above peer economies in
the next few years, which will continue to boost the market value of THP’s hotel portfolio.
Investment risks
Slowdown in economy - The hotel business is highly dependent on the overall economic
scenario. Any slowdown in economic activity will affect the business adversely.
Weak business or consumer confidence – Given travel is typically a discretionary spending
decision, THP’s hotel business is materially affected by business and consumer confidence,
which will influence the spending decisions of individuals and businesses. Weak business
confidence may cause companies to tighten their budgets and reduce spending in
discretionary areas. Likewise, consumer confidence levels will play into future spending
decisions. Weaker business and consumer confidence may be caused by higher
unemployment and slower than expected GDP growth, amongst other economic factors.
Stiff Competition - While there are benefits associated with economic recovery and a
strong brand in Hilton Worldwide, it must be noted that THP is not the only established
player in the market. InterContinental Hotels, Four Points by Sheraton, Carlson Rezidor, Sun
International and others have been able to establish their own brand values and command
certain market share in the industry. For third-party property owners, there is a bouquet of
options to choose from. This translates into competitive pricing for room rates and it might
be difficult for THP to raise room rates and prices given the stiff competition in the market.
Threat of terrorist attack or international health epidemic – Both terrorist attacks and
major epidemics (e.g. SARS, Swine Flu and Ebola) have the effect of decreasing international
travel. Such an event would likely see a reduction in arrivals into Nigeria for a short period,
which in turn will affect the demand for hotel rooms.
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Financial Analysis and Valuation
Solid Financial Fundamentals
Good track in revenue and earnings growth: THP’s general performance has been positive
over the last five years, though the company witnessed slight contractions in revenue in
2012 (-3.4%) due to the insecurity and bomb threats in Abuja which affected the hotel
occupancy rates. However, the company has improved its performance post 2012
evidenced by the strong growth in turnover in 2013 (+15.8%) and is on course to do even
better in 2014 judging by the half year results for 2014. THP’s revenues and earnings are
derived primarily from hotel operations. The company has recorded a good number of
business travellers and tourists to its hotels as reflected by the contribution of the hotel
division to overall turnover. Over the last four years, income from letting out its rooms has
contributed on average 65% to total revenue. The proportion of Food & Beverage (F&B)
income to total revenue is also high as its restaurants get a lot of day visitors. The company
has nine F&B outlets offering different cuisines and are targeted at different classes of
customers. F&B income from these outlets make up a substantial 28% of the company’s top
line.
Over the last four years, the company’s gross margin has been above 65.0%; it was as high
as 78.4% in 2013. The lowest gross margin recorded over the period was 67.1% in 2010.
Gross profit margin has been on a steady increase because of management focus on
efficiency by reducing cost of sales as a percentage of sales from 32.9% in 2010 to 21.6% in
2013.
Figure 1: Income Split (%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010A 2011A 2012A 2013A
Rooms Food and Beverage Shop Rental Service Charge Other Op. Rev.
Source: Company Financials
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Between 2011 and 2013, EBITDA grew at a CAGR of 4% whilst operating profit has grown at
a faster rate (CAGR of 5%) from N5.2 billion to N5.7 billion over the same period. Over the
same period EBITDA and operating profit margins have been comfortably maintained above
35% and 25% respectively. The strong margins have filtered downwards as the company’s
underlying net margin between 2009 and 2013 is approximately 40.0%. It was as high as
50.7% in 2011 supported by a tax credit which was booked for that year.
Strong balance sheet – low financial gearing: THP has zero gearing ratio, almost unheard of
in the industry, despite the huge acquisition and renovation costs incurred by the company
over the years. At the end of FY13, the net debt-equity ratio of the company was 0.0x,
which is lower than the average debt-equity of c.1.5-2.0x in the industry. This provides
comfort and leads to low financial risks especially in an industry that has high operating
leverage and susceptible to cyclical risks. A low gearing provides the cushion and support
for any future plans and ability to take on debt if needed. Cash flow has been sufficient to
fund hotel investment (including projects now under construction). For example, even after
it acquired the Transcorp Hotels Calabar in 2012, its free cash flow for that period was an
outflow of N5.12 billion. We expect the planned doubling of the room stock in the next
three years to generate a steep change in earnings and profits. We believe the company
possesses the structure, management skills and relationships to turn this into reality. Cash
balance has been healthy for the last three years and investment income derived from
utilising the cash balance has supported earnings.
Figure 2: Margins Trend
67.1%
77.9% 74.1%
78.4%
44.0% 39.5%
30.5%
39.9%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
2010A 2011A 2012A 2013A
Gross Margins PBT Margins
Source: Company Financials
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Financial Outlook
Revenue Projections
In forecasting revenue growth for THP, we have incorporated additional revenue from two
forms: room rate increases and more occupants. Room rate increases in times of lower
demand are likely to hurt occupancy rates. However, due to the expected undersupply of
hotel rooms in THP’s key market - the Abuja market - in the next few years, we believe THP
will have the leeway to raise room rates of the Transcorp Hilton Hotel Abuja without a
decline in occupancy. This, in addition to the expected increase to the number of rooms
available for let, at the completion of the Ikoyi and Port/Harcourt hotels in 2017, should
lead to significant growth in turnover. We expect revenue to grow at a CAGR of 14% over
the next seven years, underpinned by an increase in rooms available for let from 816 to
1,366 by 2020 and 5% CAGR rise in revenue per room (RevPAR). Management has also
disclosed plans to build hotels in Ikeja and Warri but both are excluded from our projections
since the full details on the projects are not yet available.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2014E 2015E 2016E 2017E 2018E 2019E 2020E
Sales Gross Profit EBITDA
Figure 3: Revenue, Gross Profit and EBITDA Projections (N’Mn)
Source: Company Financials
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Profitability Projections
We broke down THP’s cost of sales into four components – room maintenance, staff costs,
food & beverage expenses and other operating expenses. These costs are variable in nature
and are dependent on the total rooms available for let. Holding the view that management
will continue to hold a tight rein on costs, we have projected room maintenance, staff costs,
food & beverage costs and other operating expenses at 19.6%, 34.4%, 45.9% and 0.2% of
total costs over the forecast period in line with historical trend for the last three years. As
such, we project cost of sales (as a percentage of sales) at an average of 21.9% over the
forecast period. Our projection for average gross profit margin over the forecast period is
78.1%, slightly above the four-year historical average of 74.4%. We expect THP’s after tax
profit to grow to N11.78 billion (US$73.63 billion) in FY’20E from N5.6 billion (US$35 billion)
in FY14E driven by strong revenue growth as well as expansion in margins. Thus, we project
a CAGR of c.14% in EPS growth to N1.48 by FY’20. We envisage that ROAA will increase to
8.6% in FY’20 from 6.7% in FY14, while RoAE is expected to move up to 12.9% in FY’20 from
10.9% in FY14. This improvement is on account of increase in margins as well as asset
turnover driven by higher occupancy levels.
79.7% 79.1% 78.6% 79.0% 75.6% 77.0% 78.1%
47.7% 51.6% 53.7%
46.5%
38.1% 41.8%
45.4%
34.3% 37.2% 38.7%
33.5% 27.5%
30.1% 32.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
2014E 2015E 2016E 2017E 2018E 2019E 2020E
Gross Margins PBT Margins PAT Margins
Figure 4: Gross Profit, PBT and PAT Margin Projections
Source: Company Financials
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Valuation We have valued THP using a composite of Peer Multiple approach (in this case EV/EBITDA
and P/E) and DCF valuation, attributing a slightly heavier weighting to the peer multiple
approach (assumptions explained below).
Peer Multiples - EV/EBITDA Multiple
We computed the EV/EBITDA ratio of the appropriate peer set for THP, with the
peers arrived at using a number of criteria. The peer set consists of publicly listed
hospitality providers operating in developing economies. Our estimates are
obtained from bloomberg.
Using this peer set, we arrive at an average EV/EBITDA multiple of 12.27x.
Company Name Country
Market Capitalization
(N’Bn)
Revenues [LTM] (N’Bn)
Total Enterprise
Value [Latest]
(N’Bn) TEV/
EBITDA (x)
Dorsett Hospitality China 69.02 37.55 151.69 10.51
New Mauritius Hotels Mauritius 73.64 41.12 148.33 14.91
Mandarin Oriental Hotel Group China 285.54 110.98 369.04 13.39
City Lodge Hotel South Africa 80.98 16.66 84.76 9.92
Shanghai Jin Jiang China 313.02 247.77 418.13 7.37
Indian Hotels Company India 200.15 109.52 338.20 17.93
Far East consortium China 121.05 85.39 287.43 10.19
TA Enterprise Berhad Malaysia 81.61 44.48 184.62 9.27
EIH Ltd India 161.55 41.54 167.00 16.96
High 313.02 17.93
Low 69.02 7.37
Mean 154.06 12.27
Median 121.05 10.51
Transcorp Hotels Plc
Mean EV/EBITDA Multiple (x) 12.27
Enterprise Value (N’Mn) 92,989.88
Less Net Debt 0
Less Gratuity* 0
Less Minority Interest 0
Equity Value (N’Mn) 92,989.88
Price per share N11.65
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
Peer Multiples - P/E Multiple
We computed the P/E ratio of the appropriate peer set for THP, with the peers
arrived at using a number of criteria. The peer set consists of publicly listed
hospitality providers operating in developing economies, obtained from Bloomberg
Using this peer set, we arrive at an average P/E multiple of 16.86x.
Company Name Country
Market Capitalization
(N’Bn)
Revenues [LTM] (N’Bn)
Total Enterprise
Value [Latest]
(N’Bn)
Price Earnings Ratio (x)
Dorsett Hospitality
69.02 37.55 151.69 12.56
Saudi Hotels & Resorts
182.95 19.60 172.25 27.58
New Mauritius Hotels
73.64 41.12 148.33 20.59
Dan Hotels
99.66 55.18 124.62 16.68
Mandarin Oriental Hotel Group
285.54 110.98 369.04 13.29
Gulf Hotel
62.73 14.48 53.50 10.51
High 285.54 27.58
Low 62.73 10.51
Mean 128.92 16.87
Median 86.65 14.99
Transcorp Hotels Plc
Mean P/E (x) 16.86
Projected 2014E EPS (N) 0.71
Implied Price (N) 12.05
Enterprise Value DCF
The projections in our valuation model (Enterprise Value DCF method) for THP cover a
seven-year period 2014 - 2020. The assumptions driving our cash flow projections over the
forecast horizon are summarised as follows;
A CAGR of 14% over the next seven years (this factors in the expected addition to
the number of rooms available for letting)
Cost of sales as a percentage of sales is projected at 21.9% on average over the
forecast period
Administrative expenses as percentage of sales at an average of 32.3% over the
forecast period
Average EBITDA and EBIT margins of 46.1%% and 37.9% over the seven years
projection respectively
WACC assumptions are as detailed in the table below;
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Equity Research
Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
WACC assumptions
RFR (1year exponential average of 10 year bond) 12.37%
After Tax Cost of Debt (Kd) 5.29%
Cost of Equity (Ke) 17.37%
*Stock Beta 1.00
Debt/Equity (target) 0.35x
LT Growth Rate 3.00%
WACC 13.24% * Market beta of 1.00 as the company is yet to be listed
Net Profit Margin 50.7% 21.9% 28.7% 34.3% 37.2% 38.7%
Valuation Multiples
P/E (x) 0.0 0.0 0.0 14.2 12.3 11.0
P/B (x) 0.0 0.0 0.0 1.3 1.2 1.1
Dividend Yield (%) 0.0% 0.0% 0.0% 1.8% 2.0% 2.7%
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Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
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Page | 35
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Initiation of Coverage: Transcorp Hotel Plc
PREMIUM HOSPITALITY LISTING
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Transnational Hotels Plc
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