Rainbow Tourism Group and African Sun Limited: Hotel groups stomped by Zim economy
THIS is 2016, and the expectation is that analysts would be jostling to give “strong buy” recommendations on tourism, hotel and leisure stocks.
But this is not happening.
Before 2009, the economy was plagued by widespread commodity shortages — the supermarkets were empty, fuel was scarce and there was no cash from banks to facilitate transactions.
Visa International withdrew from the country in 2008 due to a misalignment in the exchange rate caused by hyperinflation in the economy.
Other international cards such as MasterCard, Diners and Maestro had ceased to operate in Zimbabwe much earlier.
American Express had withdrawn its travellers’ cheques and international cards in 2008.
Besides an economic crisis, the country was facing an equally dangerous political catastrophe during the decade to 2008, and visitors into the country had to have real courage, and there were too few that had the guts.
But since 2009, the country’s political environment is less unstable, and the economy, despite being frail, is now stable: international payment franchises are back, and there is hardly a shortage of anything as long as one has the cash.
This, one might argue, should be a boon for our tourism stocks.
But players in the tourism sector are mourning, and the two listed hotel groups are even more afflicted than they were before.
After publishing their financial results for the year to December 31, 2015, African Sun Limited (ASL) and Rainbow Tourism Group (RTG) have faced the grim reality of a recommendation from stock analysts that they would most disdain: Sell!
Essentially, the warning is for long term investors to close out any long positions on the stocks due to a high probability of the risk of a price decline.
It is easy to understand why.
RTG may have expected loyal shareholders to start popping champagne corks after a deal in which the group restructured debts amounting to US$13 640 349 owed to the National Social Security Authority (NSSA); these were moved from the short-term portfolio to long-term.
This huge short term debt had become an albatross around the neck, and so John Chikura, the RTG board chairman, had surely been right to have been “pleased to announce” the restructuring breakthrough.
“The new facility has a seven-year tenure, at an interest rate of six percent per annum,” Chikura said when announcing the restructuring.
Most debts are attracting interest of as much as 20 percent in Zimbabwe.
“The gearing ratio as at December 31, 2015 was 54 percent, with the net debt having reduced by US$3,2 million to end the year at US$19,4 million,” he said.
That depends on the perspective from which Chikaura is looking at his figures. What the debt restructuring with NSSA did was to lessen the costly interest burden.
hat, with due respect to the management and its board, deserves credit.
But a comprehensive assessment of the group’s gearing ratio would put RTG’s net gearing ratio at 110 percent, from 126 percent during the full year to December 31, 2014. That pretty much reflects a great deal of leverage, which makes it discomforting for investors.
The meaning of this, essentially, is that there is a compelling need for a huge cash call to shareholders: RTG requires a huge proportion of equity to cushion the business and give it financial strength.
As it were, the balance sheet remains weak; cash generation is also poor, and the source of cash from the cash flow statement is mainly delayed payments from creditors.
But for the full-year to December 31, 2015, RTG posted an improved operating performance, and that should indeed go to Tendai Madziwanyika, the chief executive officer, and his team.
During the period, RTG’s earnings before interest, taxes, depreciation and amortization soared by nearly 300 percent to US$3,6 million, from US$0,9 million in the prior year.
Occupancies went up by two percentage points during the period to reach 50 percent, from 48 percent during the prior year.
But there was a noticeable decline in revenue per room, as well as group revenue which shed 0,03 percent to US$30,6 million during the year under review.
Foreign revenue went up to US$9,3 million, and management is hoping this will sustain growth in the current year, although sceptics fear a strong United States dollar will undermine foreign traffic into the country.
Chikura reported “a positive swing from the prior year loss of US$800 000” after an operating profit of US$1 million.
The challenge now is to maintain the profit growth momentum.
That certainly would be a herculean task, considering the current state of the economy.
Across town at ASL, a new management regime and board is still trying to clear the decks after the ouster of the Shingi Munyeza-led management and his board last year.
Munyeza’s departure was seen as the sunset of a turbulent era at the hotel and leisure group, but it looks like the new team is still waiting for the sunrise. If it were evening at RTG, it may still be dusk at ASL.
By any measure, the group performed poorly during the 15 months to December 31, 2015, with an attributable loss of US$8,3 million after shifting its year end to December, from September.
This had been exacerbated by non-recurring costs of US$7,51 million, which included impairment on property and equipment, staff redundancies and provision for closure of foreign operations.
As a result of the change in the year-end period, no comparatives are available.
But management indicates that on a like-on-like basis, revenue plunged eight percent largely due to value added tax on foreign visitors introduced by government last year.
The balance sheet remained weak, with the net gearing ratio worsening during the period under review, from 138,4 percent during the year to September 30, 2014 to 189 percent during the 15 months to December 31, 2015.
Total borrowings went down to US$7,7 million during the 15-months under review, from US$17,3 million during the 12 months to September 30, 2014.
This massive decline in borrowings was achieved through debt repayment from cash generated from the sale of the group’s shareholding in property concern, Dawn Properties, which owns the bulk if not all of its current hotels.
But like its peer, RTG, ASL will require significant cash injection from shareholders to extricate itself from its current leverage on the balance sheet.
There are new shareholders at the company, and these have demonstrated a desire to see the group progressing out of its financial quagmire, which, to a very large extent, was created by the previous management.
Last year, ASL announced that it has changed its business model from a hotel management company to a hotel investment company.
“To give effect to this change, a management agreement, which signifies the beginning of a new journey for the company, was signed with the Legacy Hotels Group,” the group announced in October.
The management agreement became effective on October 1, 2015 and affected Elephant Hills Resort and Conference Centre; Hwange Safari Lodge; Monomotapa Hotel; Troutbeck Resort; and The Kingdom at Victoria Falls Resort.
The Intercontinental Hotels Group franchise would be retained for the Holiday Inn Bulawayo and the Holiday Inn Harare, while Amber Mutare Hotel would soon be rebranded back to Holiday Inn.
The Victoria Falls Hotel, which is jointly managed by ASL and Meikles Limited, would remain under the current partnership agreement, while the other Zimbabwean hotels and related units would remain under the management of ASL through the managing director’s office.
Edwin Shangwa replaced Munyeza as the ASL managing director. The hotels and units that will come directly under his management are the Caribbea Bay Resort; the Great Zimbabwe Hotel; Harare Sun and Bulawayo Sun Casinos; and Sun Vacations.
Beitbridge Express Hotel, another unit that was supposed to come directly under his management, was later closed due to poor prospects.
The challenge for RTG and ASL’s hotel operations is that most of their properties still require major sprucing after decades of deterioration due to an economic crisis.
But with the sector still subdued, and debts requiring urgent liquidation to give management space for manoeuvre, deep pocketed shareholders would be needed to bailout the businesses.
RTG has British tycoon, Nicholas van Hoogstraten. The property mogul has the financial wherewithal to bailout the company and turn around its fortunes.
Four years ago, he blocked a planned rights issue to raise US$15 million by RTG, saying he wanted a forensic audit on the company’s debt first.
Most of those that resisted van Hoogstraten from both management and the board have since left, and he seems to have come to an understanding with NSSA on moving the company forward.
ASL’s new shareholder, Lengrah Investments (Pvt) Ltd, a unit of Brainworks Capital, now holds nearly 50 percent of the hotel group.
The company, which has previously announced plans to buy out minorities from ASL, appears to be laden with cash to transform the fortunes of the group.
In a joint statement to shareholders, Shangwa and ASL board chairman, Herbert Nkala, said they had secured a facility to refinance short-term debt to long term debt, something that will ease pressure on working capital.
The new model, they said, would also reduce overheads, relieving pressure on cash flows.
That is certainly reassuring, but not enough for minorities to stop searching the exits.
In this sector, investors have learnt not to count their chickens before they hatch.
Follow us on Twitter @FingazLive and on Facebook – The Financial Gazette