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Transcorp’s IPO targets opportunities in Nigeria’s hospitality business

By BusinessNews Staff on October 6, 2014

Amidst the growing interest of international brands in the Nigerian hospitality business, Transcorp Plc’s initial public offering which opened on September 25 promises to give the company an edge in the nation’s hospitality sector, writes Festus Akanbi

The on-going public offer of Transcorp Hotels Plc has been described as an audacious move by a leading operator in the hospitality business which seeks to expand its spread to other key parts of the country.

The company’s initial public offering of 800,000,000 ordinary shares of 50 kobo each at N10 per share, which is to fetch N8 billion, opened on September 25 and it is expected to close on October 17.

Transcorp Hotels Plc is the hospitality subsidiary of Transnational Corporation of Nigeria Plc (Transcorp) and the company has expressed its resolve to focus on Nigerian expansion in the short to the mid-term and thereafter develop a strong African footprint in high population and competitive cities. Over the next five years, the company will take a phased approach in developing high-end hotels and apartments in prime locations, including Ikoyi, Port Harcourt and Abuja.

Growth Strategy
As part of the company’s growth strategy, Transcorp Hotels is raising fresh funds from the capital market to support the development of two hotels in Ikoyi, Lagos and Port Harcourt, Rivers State. The offering will be followed by a listing of the entire shares of the company on the Nigerian Stock Exchange.

Explaining the reason for the public offer, the company’s Managing Director/Chief Executive, Mr. Valentine Ozigbo, said the effort was to support Transcorp’s brand in the face of neck-deep competition brought about by the presence of international brands.
He said: “The Nigerian hospitality industry is fast becoming more competitive with the presence of international brands in recent years. We have a strong brand and success story in Nigeria as well as good long term relationships with established suppliers in Nigeria. These, coupled with our partnership with the Hilton Worldwide for management of our facilities, opens up a large opportunity for our proposed developments in the high density areas of Nigeria to attract a considerable portion of business travel and tourist traffic which should translate to adequate guest patronage.”

Notwithstanding this, the management of the company said the proceeds of the offer will be used to part-finance its expansion projects specifically the construction of two new flagship hotels in Ikoyi, Lagos and Port Harcourt, as part of its broader expansion plans.
Speaking on the reality of the company’s ambition to raise funds at a time when investors’ confidence is just returning to the nation’s capital market, Chief Executive, Proshare Nigeria Limited, (provider of business development services) Mr. Olufemi Awoyemi, said using the standard gauge in investment analysis, it will not be difficult to convince Nigerian shareholders to invest in Transcorp.

He said: “I would attempt to answer this in three parts viz: the company’s pedigree, the industry as a barometer of realism and the issue of investor confidence, apathy and right time to approach the market.

First, from the research information available to us, Transcorp Hotels is represented as “Nigeria’s largest luxury hotel operator with a total of 816 rooms in two hotels (Abuja and Calabar), ahead of Capital Hotel Plc, owners of Sheraton Hotel Abuja which has 540 rooms and Ikeja Hotel Plc – the owners of Sheraton Hotel Lagos which has 332 rooms. Transcorp Hotels indeed has over the years built up a strong pipeline (clientele), and believes it can grow its room stock by 67 per cent by 2017 if it can go outside its business model of managing growth using Internally Generated Funds (IGF). Since its acquisition of the hotels (Calabar Metro and Hilton Abuja), Transcorp Hotels has been consistent in maintaining a good balance between offering world-class service to customers and delivering good financial performance to shareholders.

“Far more important for analysts has been the ability of the Transcorp Hotels to manage receivables arising from its close relationship with government, which experience and history tells us have not been the most timely payers. The evidence presented to us at the various analyst conferences reassures us about its ability to manage the fine-line in the private-public-partnership model deployed here. Lastly, and this is instructive, there are few brands that can deliver bulk room arrangements like Transcorp has been able to do which endears it to the corporate clients such as the Institutes of Bankers, Institute of Chartered Accountants and a host of others who readily use their hotels for events. The recently concluded World Economic Forum (WEF) perhaps best represents the realism of the projections that seek to recreate the same service propositions in the next three key business and commercial hubs in the country – Calabar, Ikoyi and Port-Harcourt.”

Sustaining Demand Levels
Continuing, the analyst said:“In the last decade, the Nigerian hospitality scene – especially the hotels – have experienced a steady and consistent ramping up with new entrants being able to sustain demand levels for quality hotel rooms and service. The Hilton brand is without doubt a plus for the Transcorp Hotels chain in the competitive landscape with Nigeria as a destination hub that continues to throw up impressive statistics for hotel occupancy rates (approx. 70%+) and passenger arrivals at the airports in their preferred locations. This informs discerning minds that the projects under consideration will be able to benefit from an increase in corporate travel budgets leading to higher business travelers. In addition, there is a growing market for young, wealthy Nigerians, with exposure to quality hotel offerings overseas looking for similar experiences back home. Yet again, the hotel business in Nigeria does not carry a high incidence of seasonal risk due to the local market dependency.”

Shareholders’ Confidence
On whether or not the confidence in the market can sustain the offer, the Proshare chief executive said, “For investors, the rebased economic indices should trump the apathy and confidence questions. I am particularly excited and to quote what one investor told me – “You cannot say that because it is raining, you would not go out to work and earn”.

Awoyemi, was however, not unmindful of the pervading security challenge and the impacts on the hospitality business.
“Are there risks involved? Yes of course. Indeed, some are even outside their control such as a heightened security crisis arising from increased terrorism threat and the like(s), as well as a slow-down in the economy. But of course and specifically, the creation of over N20billion new debt should be something the management will have to pay attention to. There are execution risks involved as well, given that they are raising additional capital and new debts as mentioned earlier. Yet, the company’s strong cash position, zero debt balance to date and its effervescent management with a track record of successful completion of previous and scaled projects offers a comfort. More importantly, this is a geographically diversified portfolio that helps to mitigate and averages out risk.”

Pricing
One issue that will interest prospective subscribers to the Transcorp offer is the pricing. When THISDAY asked him to justify the N10 price tag on the offer, Awoyemi said, “This question if properly contextualised should open the eyes of other entities and investors to a more important argument related to how the value of a subsidiary could be higher than that of the holding company. In the case of Transcorp, a company we have covered since inception – it would appear that the management realised that for each segment, there is an inherent intrinsic value that can be harnessed as they have done with the hotel business. I am holding out on pundits to challenge the revenue contribution the Ughelli Energy project will bring into the group at year end to underscore this position. But to your question, we understand that the valuation range was between N8 and N16, and based on an average (expectedly derived from a computational analysis); and a price was arrived at which would have considered the strong financials to date as well as the level and consistency of internally generated funds / cash flows of the entity (in this case EV/EBITDA, P/E and DCF valuation),” he said.

Again, THISDAY raised the question on what prospective investors stand to gain by staking their hard earned money on this.
Awoyemi explained that, an investment in Transcorp Hotels, as in any focused hospitality business in a resurgent sub-saharan economy like Nigeria, will be one that aggregates the benefits of three new hotels as compared to a single Abuja entity.

“For one, investors will be taking advantage of a strong upside from the renewed opportunities in Nigeria’s leisure tourism as evidenced by the influx of more global brands into the Nigerian hotel market, which has created a more competitive environment that can only open up advantages in service quality levels for which a premium brand like HILTON is well positioned to deliver and improve upon.

“Also, they have best practice to rely on. Secondly, this is an untapped market that has up till now, not been fully exploited or integrated as we begin to link the nexus between privatisation of the power sector, private sector participation in the transportation sector through investments in modern rail systems, improved air travel management and airport upgrades; and the growth in our entertainment industry,” he said, adding that the hotel business in Nigeria has an upside that will come into its own and create a vibrant sector to invest in.

[This Day]

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