Transcorp Hotels Plc - FMDQ Group...Transcorp Hotels Plc’s Board of Directors comprises eight...

Transcorp Hotels Plc ₦10 billion 7-Year 16% Fixed Rate Unsecured Bond Due 2022 (Series 1)

₦9.758 billion 5-Year 15.5% Fixed Rate Unsecured Bond Due 2020 (Series 2)

under its ₦30 billion Bond Issuance Programme

2017 Final Bond Rating Review Report

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2017 Corporate Bond Rating Review Report

TRANSCORP HOTELS PLC ₦10 billion 7-Year 16% Fixed Rate Unsecured Bond Due 2022 (Series 1)


Issue Rating

(Series 1&2):

Bbb

Issuer Rating: Bbb

Outlook: Stable

Issue Date: 27 October 2017

Expiry Date: 30 September 2018

The rating is valid throughout the life of

the instrument and will be subject to

annual monitoring and review.

Previous Issue rating: Bbb

Analysts:

Ikechukwu Iheagwam [email protected]

Isaac Babatunde [email protected]

Agusto & Co. Limited

UBA House (5th Floor)

57, Marina

Lagos

Nigeria

www.agusto.com

RATING RATIONALE Agusto & Co. hereby affirms the “Bbb” rating assigned to Transcorp Hotels Plc

(“Transcorp Hotels”, “THP”, “the Issuer”, or “the Company”) and the ₦10 billion 7-

year 16% fixed rate unsecured bond due 2022 (“Series 1”) and ₦9.758 billion 5-

year 15.5% fixed rate unsecured bond due 2020 (“Series 2”) under its ₦30 billion

Medium Term Bond Programme.

The assigned rating reflects the Issuer’s satisfactory financial condition

characterized by low leverage, good cash flows as well as a stable and

experienced management team. However, the rating is constrained by Company’s

overall working capital deficiency and profitability that requires improvement.

In Q4’2015, Transcorp Hotels Plc issued two bonds (Series 1 & 2) totaling ₦19.758

billion, which was 100% subscribed. The net proceeds of the Series 1 & 2 bonds

were earmarked for the upgrade & refurbishment of several parts of the Transcorp

Hilton Abuja (“THA”) as well as the construction of a 5,000 capacity Multipurpose

Banquet Centre within the unutilized portion of land in THA.

The Series 1 & 2 bonds are direct, unconditional, senior, unsecured obligations of

the Issuer and rank pari-passu with all existing and new senior, unsecured

obligations of the Company. Thus, the Issuer is responsible for meeting the

obligations of the Series 1 & 2 bonds from operating cash flow (OCF). In FYE

2016, THP’s OCF stood at ₦4.3 billion, which represented 30% of revenue.

In accordance with the Series 1 & 2 transaction documents (prospectus and trust

deed), the Issuer has continued to meet the bonds’ obligations timely. As at 30

September 2017, three coupon payments and an initial principal repayment

(following the lapse of one-year moratorium), amounting to ₦2.92 billion and

₦3.2 billion had been paid to the Series 1 & 2 bondholders respectively. In

addition, Agusto & Co. notes that THP met most of the financial covenants stated

in the Series 1 & 2 transaction documents as at FYE 2016.

Satisfactory quality debt with moderate credit risk; adequate capacity to pay

returns and principal on local currency debt in a timely manner

2


Transcorp Hotels Plc’s ₦10 billion 7 year (Series 1) & ₦9.75 billion 5 year (Series 2) Fixed Rate Unsecured Bonds

The upgrade and refurbishment of Transcorp Hilton Abuja is ongoing with six out

of the 10 floors completed as at 30 September 2017, while renovation continues

on all outstanding floors and the expected completion date is March 2018.

Although preliminary works have commenced on the 5,000 capacity Multipurpose

Banquet Centre as at 30 September 2017, THP plans to collaborate with a partner

for the construction and operation of the Centre.

Although THP posted a satisfactory operating profit margin of 28% in FYE 2016,

return on assets (ROA) and return on equity (ROE) of 6% and 10% respectively

were below our expectations. In the same review period, Transcorp Hotels

recorded an overall working capital deficiency of ₦4.3 billion.

In the six months ended 30 June 2017 (H1’2017), the Company generated revenue

of ₦5.8 billion, which is 20% lower than comparable period in 2016. Part of the

reasons alluded for the lackluster sales is associated with the closure of the Abuja

airport for repair works as well as the prolonged absence of the President with the

attendant impact on business activities, especially hospitality business in Abuja.

THP plans to close 2017 with a revenue of ₦13 billion, which is 10% lower than

FYE 2016.

Going forward, THP plans to complete the ongoing refurbishment of the rooms

and external works in Q1’2018, with the overriding objective to position THA as

the leading luxury hospitality brand in Nigeria and top business hotel in Africa. In

addition, Transcorp Hotels intends to pursue prudent cost management practices,

notwithstanding the high energy and rising raw material cost, in order to improve

the Company’s overall financial condition in the near term.

Based on the above, we attach a stable outlook to the Series 1 & 2 bonds.

Figure 1: Strengths, Weaknesses & Challenges

•Strong brand supported by partnership with Hilton Hotels & Resorts

•Good occupancy rate

•Low leverage

•Good cash flow

•Stable and experienced management team

Strengths

•Profitability requires improvement

•Overall working capital deficiency

Weaknesses

•High cost of doing business especially energy and raw materials cost

•Maintaining high occupancy rates given stiff competition from other hospitality players

Challenges

3



COMPANY PROFILE Transcorp Hotels Plc (THP), one of Nigeria’s leading hospitality providers, currently operates Transcorp Hilton

Abuja (THA) and Transcorp Hotels Calabar. The Company is the hospitality subsidiary of Transnational

Corporation of Nigeria Plc (“Transcorp”), a diversified conglomerate with business interests in the Power,

Agriculture, Hospitality and Oil and Gas sectors.

Figure 2: Evolution of Transcorp Hotels Plc

Source: Transcorp Hotels Plc annual report and management presentation

As at 31 December 2016, only Transnational Corporation of Nigeria Plc (83.5%) and Bureau of Public

Enterprises/Ministry of Finance Incorporated representing Federal Government of Nigeria (11.02%) held more

than 5% of the equity in Transcorp Hotels Plc. Heirs Holdings (Mr. Tony Elumelu is the ultimate beneficiary) is

Transcorp’s major shareholder with 44% equity stake, while other investors (individuals and corporate

organisations) hold the balance of 56% in Transcorp.

As at FYE 2016, Transcorp Hotels Plc’s authorized share capital stood at ₦7.5 billion, of which ₦3.8 billion were

issued and fully paid. As at same date, THP’s shareholders’ fund stood at ₦53.3 billion, while total assets

remained at ₦88.3 billion. In the financial year ended 31 December 2016, the Company generated revenue of

₦14.6 billion and recorded a profit before tax of ₦5.2 billion (2014: ₦5.5 billion). THP had an average of 1,587

persons (2014: 1,623 persons) in its employment in the year under review. The Company’s auditors are

PricewaterhouseCoopers.

Transcorp Hotels Plc has three subsidiaries – Transcorp Hotels Calabar Limited (100%), Transcorp Hotels Port

Harcourt Limited (100%) and Transcorp Hotels Ikoyi Limited (52%). However, Transcorp Hotels Ikoyi Limited and

Transcorp Hotels Port Harcourt Limited are at various stages of development. The Company’s head office is

located at 1 Aguiyi Ironsi Street, Maitama, Abuja.

Transcorp Hilton Abuja is a leading hospitality destination situated in Nigeria’s Federal Capital Territory, Abuja.

THP is adjudged Nigerias’ leading hotel1 with 670 rooms, a 1,200 capacity congress hall, 24 multi-purpose

1 World Travel Awards 2016

1987

•Began operations as NICON Hilton Hotel Abuja

1994

•Acquisition of NICON Hilton Hotel Abuja by NIRMSCO Properties Limited (“NIRMSCO”)

2005

•Transcorp Plcpurchased majority stake in NIRMSCO

2007

•NIRMSCO was renamed Transnational Hotels & Tourism Services Limited (“THTSL”)

2011

•THTSL purchased a majority stake in Metropolitan Hotels & Conferencing Limited, which owned Metropolitan Hotel Calabar

2014

•THTSL was rebranded as Transcorp Hotels Plc and listed its shares on the NSE via an IPO

2015

•Issued maiden ₦19.758 billion bond in two tranches

4



meeting rooms, all sitting on 40% of the Company’s total land area in Abuja. The hotel is currently undergoing a

major renovation across all areas with the intention to stay competitive and remain a prominent destination for

business travelers and tourists in Nigeria. The hotel received numerous awards in FYE 2016, notable of which are

the Africa’s Leading Business Hotel and Nigeria’s Leading Business Hotel by World Travel Awards 2016.

Transcorp Hotels Calabar is a premier destination hotel in Calabar, Cross River State with a 146-room capacity.

The hotel is a leading hospitality outlet providing services to meet the needs of leisure and business guests.

During the financial year ended 31 December 2016, Transcorp Hotels Calabar posted a profit after tax of ₦362

million - first time of recording profit since 2012.

The Company has a ten-year technical and management agreement with Hilton Hotels & Resorts (one of Hilton

Worldwide Holdings leading hospitality brands) which is due to expire in 2018, but subject to renewals for five

years. The partnership helps to strengthen the Transcorp Hilton brand in the international hospitality market and

also provides THP’s customers an opportunity to be part of the Hilton Honours Club in order to access Hilton

Hotels Worldwide at preferential rates.

Transcorp Hotels Plc’s Board of Directors comprises eight non-executives and two executives. Olorogun O’tega

Emerhor, leads the 10-member Board of Directors as the Chairman, while Mr. Valentine Ozigbo is the Managing

Director and Chief Executive Officer. Subsequent to FYE 2016, Dr. Vincent Akpotaire, who was appointed in March

2016, resigned his appointment with the Board as non-executive director, while Mr. Alex Okoh (Director General

of Bureau of Public Enterprises, representing the Federal Government of Nigeria) was appointed to replace him in

April 2017. In line with the 2011 SEC Code of Corporate Governance for Public Companies in Nigeria, THP’s Board

met five times during the 2016 financial year. The Board operates mainly through two board committees, namely

Nomination & Governance Committee (NGC) and Finance & Investment Committee (FIC), and maintains a

Statutory Audit Committee (SAC).

Table 1: Board of Directors

Olorogun O’tega Emerhor, OON Chairman

Mr. Valentine Ozigbo Managing Director/CEO

Ms. Okaima Ohizua Executive Director

Mr. Emmanuel Nnorom Non-executive Director

Mr. Peter Elumelu Non-executive Director

Mr. Alex Okoh Non-executive Director

HRH. Baba Mohammed Non-executive Director

Mr. Adim Jibunoh Non-executive Director

Dr. Bakari Wadinga Non-executive Director

Hajia Saratu Umar Non-executive Director

The NGC is chaired by Mr. Emmanuel Nnorom, a non-executive Director, and supported by four other non-

executive directors. Mr. Adim Jibunoh (replaced Mr Emmanuel Nnorom) in June 2017 as the FIC Chairman and is

supported by four members (two non-executive directors, the Managing Director and Executive Director).

Transcorp Hotels Plc’s Statutory Audit Committee is led by Mr. Sanusi Mudasiru (shareholders representative),

and supported by five other members, representing the shareholders and board of directors. In our view, THP

operates in line with the 2011 SEC Code of Corporate Governance for Public Companies.

5



FINANCIAL CONDITION ANALYSTS’ COMMENTS

PROFITABILITY Transcorp Hotels Plc’s main sources of revenue are room rentals, sale of food & beverages, shop rentals and

service charge on retail outlets in the hotel premises. In the financial year ended 31 December 2016 (FYE 2016),

the Company posted a revenue of ₦14.6 billion, which represented a 9% increase from prior year. On account of

the high inflationary environment, which persisted all through 2016, management increased prices across all

services (room rates, circa 25% and food and beverages, circa 12%) and still maintained an average occupancy

rate of 60% in the year under review, despite the weak macroeconomic environment.

In 2016, income from room rentals accounted for 63% of revenue (2015: 65%), while the sale of food &

beverages accounted for 29% in the same year. Income from shop rentals trended south2 in the review period

and accounted for only 2% of revenue,

while service charge and others accounted

for 1% and 5% respectively. THP’s

clientele are mainly business guests linked

to government and private business

concerns and accounts for about 85% of

the Hotel occupancy. This genre of guests’

guarantees some level of stable occupancy

for THP, given that their stay is usually

longer and more frequent owing to

business exigencies, when compared to

leisure guests. Furthermore, Agusto & Co

notes positively that the Company did not

have any customer accounting for more

than 5% of its turnover during the FYE 2016.

In the year under review, the Company was able to moderate cost of sales in line with revenue despite the

inflationary pressures, which lingered in 2016. Thus, THP recorded a gross profit margin of 75% (2015: 77%),

which we consider to be good.

In 2016, THP’s operating expenses mainly comprising management & incentive fees (19%), staff costs (17%),

energy costs (14%) and other administrative expenses (17%), accounted for a high 47% of revenue in 2016 (2015:

41%). Although operating expenses increased by 25% year-on-year, the Company still posted a satisfactory

operating profit margin of 28% in 2016 (2015: 36%).

2 Few tenants that could no longer meet up with rentals exited their shops during the year under review citing low patronage and weak

macroeconomic conditions. As at end of June 2017, all the vacant shops in THP have been leased out

63%65% 64%

29%25%

27%

2%5% 4%

1% 1% 1%5% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

2016 2015 2014

Room rental

Food & Beverages

Shop rental

Service charge

Others

Figure 3: Breakdown of THP's Revenue (2014 - 2016)

6



In 2016, Transcorp Hotels Plc recorded other income of ₦1.1 billion mainly from interest on bank deposits,

interest on intercompany loans and foreign exchange gains. Consequently, THP posted a profit before tax of ₦5.2

billion, which represented 36% of revenue (2015: 41%).

During the year ended 31 December 2016, the Company did not record any interest expense given that the

interest on the Series 1 & 2 bonds are being capitalized in line with IAS 23 Borrowing Cost, until the project is

fully operational. After deduction of company income tax, THP recorded a Profit After Tax margin of 26%, which

is just marginally below prior year of 27%.

In 2016, Transcorp Hotels Plc recorded a low

return on assets (ROA) of 6%, while the return on

equity (ROE) of 10% is lower than the average

yield on 364-day treasury bills of 13.6%3 in the

same year. Similarly, over the last three years

(2014 – 2016), THP’s average ROA and ROE of 6%

and 10% respectively, are below our expectations.

In the six months ended 30 June 2017 (H1’2017),

the Company posted revenue of ₦5.8 billion,

which is 20% lower than comparable period in

2016. This is due to the closure of the Abuja

airport for repair works as well as the prolonged

absence of the President with the attendant

impact on business activities generally in Abuja

and the hospitality business in particular.

THP plans to close the 2017 financial year with a revenue of ₦13 billion, which is 10% lower than prior year.

Based on H1’2017 unaudited accounts, direct and operating costs for full year 2017 (when annualized) are

expected to remain at par with prior year, while other income is expected to improve thus leaving profitability

metrics at par with 2016 level.

In our opinion, THP’s profitability requires improvement.

3 Central Bank of Nigeria average 364-day treasury bills rate in 2016 – 13.6%

2%

6% 6%7%

4%

10% 10%9%

0%

2%

4%

6%

8%

10%

12%

H1'2017 2016 2015 2014

ROA ROE

Figure 4: Return on Asset (ROA) & Return on Equity (ROE)

7



CASH FLOW Transcorp Hotels Plc generates cash from room rentals, sale of food & beverages and shop rentals. THP’s sales

are largely on cash basis, while about 30 days credits are granted to select corporate customers based on internal

credit assessment.

During the year ended 31 December 2016, the Company recorded an operating cash flow (OCF) of ₦4.3 billion,

which was supported by an improved profit after tax as well as increase in cash receipt from trade receivables

and amounts due from related parties. Thus, OCF was sufficient to cover returns to providers of finance, wholly

comprising dividend of ₦3.1 billion as well as mandatory capital expenditure of ₦1.2 billion. In our opinion,

THP’s OCF is satisfactory. In 2016, Transcorp Hotels plc paid a total coupon amounting ₦3.1 billion to the Series

1 & 2 bondholders.

In 2016, THP posted an OCF to sales ratio of 30%

(2015: 35%), which is in line with our expectation.

The unaudited accounts for the six months ended 30

June 2017 (H1’2017) for Transcorp Hotels Plc shows a

positive OCF of ₦4.8 billion and an improved OCF to

sales ratio of 83%. This improvement is mainly on

account of increase in cash receipts from trade

receivables as well as amounts due from related

parties.

In our opinion, Transcorp Hotels Plc’s overall cash

flow position is good.

83%

30%35%

-52%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

H1'2017 2016 2015 2014

Figure 5: OCF to Sales

8



FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL

As at 31 December 2016, Transcorp Hotels Plc’s working assets stood at ₦9.6 billion, representing an 18%

decrease from prior year. We note positively that the reduction in working assets is mainly due to circa 24%

decline in amounts due from related parties in the year under review. Nonetheless, intercompany receivables still

accounts for the largest portion of working assets at 76%, while other debtors & prepayment and trade

receivables represented 13% and 8% respectively. As at FYE 2016, the Company’s spontaneous financing of

₦14.3 billion largely comprising deferred taxation (50%), dividend payable (21%) and other creditors and accruals

(17%), was adequate to fund the working assets, leaving a short term financing surplus of ₦4.7 billion. Over the

last three years, THP has consistently recorded short term financing surpluses, which we consider to be good.

As at FYE 2016, Transcorp Hotels Plc’s long term funds, comprising equity (79%) and the balance of Series 1 & 2

bonds (21%) amounted to ₦67.8 billion. As at the same date, THP’s long term assets mainly comprising property,

plant and equipment (86%) and long term receivables4 (7%) stood at ₦76.9 billion. THP’s long term funds were

insufficient to cover the long term assets, resulting in a long term financing need of ₦9.1 billion. Overall, THP’s

short term financing surplus was inadequate to cover the long-term financing need, thus resulting in an overall

working capital deficiency of ₦4.3 billion.

In a bid to address the overall working capital

deficiency, the Company bolstered its long term

financing structure by way of securing a ₦5

billion six-year term loan from a commercial bank

in H1’2017 to fund the ongoing upgrade of THA.

In addition, the management of Transcorp Hotels

Plc plans to collaborate with potential partners

for the construction and operation of the 5,000

Multipurpose Banquet Centre in order to minimize

future funding requirements.

The unaudited accounts as at the six months

ended 30 June 2017 (H1’2017) shows that the

Company’s spontaneous financing of ₦12.3 billion

was sufficient to cover working assets of ₦7

billion, leaving a short term financing surplus of ₦5.3 billion. As at the same date, THP’s long term funds was still

insufficient to cover the rising long term assets, leaving a long term financing need of ₦8.8 billion. Thus,

Transcorp Hotels Plc recorded an overall working capital deficiency of ₦3.5 billion as at end of H1’2017. In our

view, THP requires additional long term funds in the form of equity or long tenured debt instruments to cover the

working capital deficiency.

In our opinion, the Company’s overall working capital is inadequate.

4 THP’s long term receivables relates to total amount incurred on ongoing projects at Transcorp Hotels Port Harcourt and Transcorp Hotels

Ikoyi

-3.5 -4.3

10.7

2.6

-6

-4

-2

0

2

4

6

8

10

12

H1'2017 2016 2015 2014

Figure 6: Working Capital Surplus/(Deficiency) N'Billions

9



LEVERAGE

As at 31 December 2016, Transcorp Hotels Plc’s total liabilities stood at ₦35 billion (2015: ₦36.3 billion),

comprising interest bearing liabilities (59%) and non-interest bearing liabilities (41%). THP’s interest bearing

liabilities as at FYE 2016 consisted wholly of the outstanding balances on the Series 1 & 2 bonds in issue,

whereas the non-interest bearing liabilities consisted largely of deferred taxation (50%), dividend payable (21%)

and other creditors and accruals (17%).

Similar to the prior year, the Company did not record any interest expense, as the first two semi-annual coupon

payments on the Series 1 & 2 bonds of ₦3.1 billion in the year under review are being capitalized in line with

IAS 23 Borrowing Cost. Subsequent to FYE 2016, the third coupon payment and first principal repayment

(following expiration of one-year moratorium) have been paid to the Series 1 & 2 bondholders.

As at 31 December 2016, the Company’s total

assets, which was funded by shareholders’ equity

(60%) and total liabilities (40%), depicts a

satisfactory equity cushion. As at the same date,

Transcorp Hotels Plc’s total liabilities to equity

ratio of 66%, interest bearing liabilities to equity

ratio of 39% and net debt to total assets of 38%,

were in line with our expectations.

In the half year ended 30 June 2017 (H1’2017),

Transcorp Hotels Plc secured a ₦5 billion six-year

term loan from a commercial bank to finance the

completion of the ongoing upgrade of THA. Given

that the loan is being used to finance a capital

project, the annual interest element will be

capitalized until the project is completed in

accordance with relevant accounting standards.

As at end of June 2017, THP’s equity cushion, liabilities to equity ratio and net debt to total assets were all in line

with our expectations.

In our opinion, Transcorp Hotels Plc’s leverage is low.

40% 38%

30%

22%

68% 66%69%

33%

0%

10%

20%

30%

40%

50%

60%

70%

80%

H1'2017 2016 2015 2014

Net Debt to Total Assets Total Liabilities to Equity

The Series 1 & 2 bonds are direct, unconditional, senior, unsecured obligations of the Issuer and rank pari passu without any

preference among themselves with all other existing senior, unsecured obligations of the Issuer from time to time outstanding except

for obligations mandatorily preferred by law applying to companies generally as provided for in the Series 1 & 2 Trust Deed. In

accordance with Series 1 & 2 executed transaction documents (Prospectus & Trust Deeds), the bond obligations shall be met from the

Company’s operating cash flow. In addition, the sole trustees (United Capital Trustees Limited) have been charged with the

responsibility for ensuring that the financial covenants detailed in the transaction documents are strictly adhered to by the Issuer.

Figure 7: Net Debt to Total Assets & Total Liabilities to Equity

10



UPDATE ON BOND REPAYMENT AND UTILIZATION OF PROCEEDS

In Q4’2015, Transcorp Hotels Plc issued two bonds (Series 1 & 2) totaling ₦19.758 billion under its ₦30 billion

Medium Term Bond Programme, which was 100% subscribed. The net proceeds of the Series 1 & 2 bonds are

earmarked for upgrade & refurbishment of several parts of the Transcorp Hilton Abuja (“THA”) as well as to

construct a 5,000 capacity Multipurpose Banquet Centre within the unutilized portion of land in THA.

As at 30 September 2017, the upgrade and refurbishment of Transcorp Hilton Abuja are still ongoing and the

expected target date for completion is now March 2018 (earlier date was December 2017). As at the same date,

up to 6 floors (out of the 10 floors), all the elevators and the second gate have been completed, while renovation

works continue on all outstanding floors. Although preliminary works have commenced on the 5,000 capacity

Multipurpose Banquet Centre, the management of THP is keen on securing a partner for the construction and

operation of the Centre, hence discussions are ongoing towards selecting a preferred partner before the end of

2017.

₦10 billion 7-Year 16% Fixed Rate Unsecured Bond Due 2022 (Series 1)

The ₦10 billion seven-year 16% fixed rate unsecured bond due 2022 (Series 1) was issued in October 2015 under

the ₦30 billion Medium Term Bond Issuance Programme. The Series 1 bond principal has a moratorium of 12

months from the date of issuance, after which it will be amortized semi-annually over the remaining six years.

The fixed rate coupon of 16% will be paid semi-annually over the life of the Bond. The Series 1 bond was fully

underwritten on a firm basis equally by United Capital Plc and FSDH Merchant Bank Limited. As at 30 September

2017, three coupon payments and an initial principal repayment, all amounting to ₦2.92 billion had been paid to

the Series 1 Bondholders.


In December 2015, Transcorp Hotels Plc issued a ₦9.758 billion five-year 15.5% fixed rate unsecured bond due

2020 (Series 2) under the ₦30 billion Medium Term Bond Issuance Programme. The Series 2 bond principal also

enjoys a moratorium of 1 year from the date of issuance, after which it will be amortized semi-annually until the

maturity of the bond in 2020. The 15.5% fixed rate coupon will be paid semi-annually over the five years. The

Series 2 bond was issued to the public for subscription through a book building process. As at 30 September

2017, three coupon payments and an initial principal repayment, all amounting to ₦3.2 billion had been paid to

the Series 2 bondholders.

Agusto & Co. has reviewed the financial covenants and summarized the outcome below.

Figure 8: Schedule of Financial Covenants by Transcorp Hotels Plc

S/N Financial Covenants Benchmark FYE 2015 FYE 2016 Status

1 Net Debt to EBITDA Ratio Maximum of 3.0 times 0.87 times 3.12 times Not achieved

2 Historical Debt Service Coverage Ratio Minimum of 1.2 times 7.8 times 1.75 times Achieved

3 Interest Cover Minimum of 2.0 times Interest is capitalised N/A

4 Secured Indebtedness Shall not exceed 50% 36% 39% Achieved

Source: Agusto & Co

In our view, we believe that the Company has sufficient capacity to continue to meet the Series 1 & 2 bonds

obligations in a timely manner, barring any unforeseen contingencies.

11



OWNERSHIP, MANAGEMENT & STAFF

As at 31 December 2016, Transcorp Hotels Plc had 7,600,403,900 ordinary shares issued and fully paid, with

Transnational Corporation of Nigeria Plc (Transcorp) holding the largest portion at 83.5%. The Bureau of Public

Enterprises/Ministry of Finance Incorporated (representing the Federal Government of Nigeria) holds 11.02%

stake, while the balance is held by other individuals & institutions (5.48%). Transcorp Hotels Plc is a subsidiary of

Transnational Corporation of Nigeria, which is in turn controlled by Heirs Holdings (Mr. Tony Elumelu is the

ultimate beneficiary) with 44% equity stake.

The Company has a ten-member Board of Directors comprising two executive directors and eight non-executive

directors. Olorogun O’tega Emerhor is the Chairman of the Board, while Mr. Valentine Ozigbo is the Managing

Director and Chief Executive Officer. Subsequent to FYE 2016, Dr. Vincent Akpotaire, who was appointed in March

2016, resigned his appointment with the Board as non-executive director, while Mr. Alex Okoh (Director General

of Bureau of Public Enterprises, representing the Federal Government of Nigeria) was appointed to replace him in

April 2017.

THP’s executive management team comprise six members, each reporting directly to the MD/CEO. Members of

the management team have requisite experience in the management of hospitality business. In addition, THP has

operational and management support of Hilton Worldwide Holdings Inc. In the year under review, there were no

changes to the executive management team. In our opinion, THP’s management team is qualified, stable and

experienced.

Mr. Valentine Ozigbo is the Managing Director / Chief Executive Officer. He holds a B.Sc. in Finance and MBA from

University of Nigeria, Nsukka. Mr. Ozigbo also holds an M.Sc. in Finance (with distinction) from Lancaster

University, UK. Prior to joining the Company in 2012, he was the General Manager and Divisional Head in charge

of Global Transaction Banking at Keystone Bank Plc. He was also Divisional Head of International Banking and

Head Global Strategic Alliances at United Bank for Africa. His banking experience spans over twenty years having

worked with FSB International Bank Plc (now part of Fidelity Bank Plc), Continental Trust Bank Limited (now part

of UBA) and Diamond Bank Plc. Mr. Ozigbo is a fellow of the Institute of Chartered Accountants of Nigeria (ICAN)

and the Chartered Institute of Taxation of Nigeria (CITN).

In the financial year ended 31 December 2016, Transcorp Hotels Plc had an average staff strength of 1,587

persons (2015: 1,623). The Company’s average cost per employee was ₦1.6 million, while the net contribution

per staff stood at ₦3.3 million in the same period. The Company’s net earnings is 2.1 times the staff cost, which

we consider to be satisfactory.

Other members of Transcorp Hotels Plc’s Management Team

Ms. Okaima Ohizua Executive Director

Mr. Adekunle Elumaro Chief Financial Officer

Mrs. Helen Iwuchukwu Company Secretary

Mr. Peter Donnellan Project Director

Mrs. Irene Nwankwo Head of Internal audit

12



OUTLOOK In Q4’2015, Transcorp Hotels Plc issued two bonds (Series 1 & 2) totaling ₦19.758 billion under its ₦30 billion

Medium Term Bond Programme, to upgrade & refurbish THA as well as build a 5,000 capacity Multipurpose

Banquet Centre, as part of its strategic objective of being a leading hotel destination in Nigeria. The Series 1 & 2

bonds principal enjoy 12-month moratoria from date of issuance, after which they will be amortized semi-

annually over the remaining tenor of respective bonds. The fixed coupon rate of 16% (Series 1) and 15.5% (Series

2) are expected to be paid semi-annually over the life of the bonds. As at 30 September 2017, the Company had

paid the sum of ₦2.92 billion and ₦3.2 billion to the Series 1 & 2 Bondholders respectively, representing three

coupon payments and an initial principal repayment. Agusto & Co. notes that THP met most of the financial

covenants enshrined in the Series 1 & 2 transaction documents as at FYE 2016.

In FYE 2016, THP improved in the management of trade receivables and amounts due from related parties; thus

we expect these gains to remain consolidated in the near term. Although the Company’s long term financing

structure requires improvement, we view the ₦5 billion six-year term loan obtained in H1’2017 as positive.

Notwithstanding, the Company’s overall working capital deficiency may persist except there is an injection of

long term funds in the near term. Agusto & Co. expects the Company’s profitability to improve in the near term

on account of efficient operational costs management and resulting increase in patronage following the

completion of the ongoing upgrade in THA. On account of the Issuer’s improved operating cash flow as well as

adherence to most of the financial covenants enshrined in the transaction documents, we believe that THP’s

leverage will remain low in the short term.

In the six months ended 30 June 2017 (unaudited), the Company generated revenue of ₦5.8 billion, which was

20% lower than comparable period in 2016. This was mainly attributed to the closure of the Abuja Airport for

repair works and the prolonged absence of the President with the associated impact on hospitality businesses in

Abuja. Into the future, we expect increase in occupancy levels supported by the fact that more rooms will become

available following the completion of renovation to the Hotel.

As at 30 September 2017, the upgrade and refurbishment of Transcorp Hilton Abuja are ongoing with six out of

the 10 floors completed, while refit continues on all outstanding floors and the expected completion date is

March 2018. Although preliminary works have commenced on the construction of the 5,000 capacity

Multipurpose Banquet Centre, the management of THP is keen on collaborating with potential partners to

minimize funding constraints. Hence, discussions are ongoing towards selecting a preferred partner (before end

of 2017) for the construction and operation of the Centre.

THP plans to complete the ongoing refurbishment of the rooms and external works in THA in Q1’2018, with the

overriding objective to position THA as the leading luxury hospitality brand in Nigeria and top business hotel in

Africa. To achieve this objective, management plans to maintain an occupancy rate between 60% and 70% in the

short term despite the reduction in room inventory while the upgrade is on. Should all these initiatives be

successful, we expect improvement in the financial condition of the Company in the near term.

Based on the aforementioned, we expect Transcorp Hotels Plc to continue to meet the obligations of the Series 1

& 2 bonds timely. Therefore, we have attached a stable outlook to the Series 1 & 2 bonds.

13



FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION AS AT 30-Jun-17 31-Dec-16 31-Dec-15

₦'000 ₦'000 ₦'000

ASSETS

IDLE CASH 1,127,169 1.2% 1,757,974 2.0% 13,998,377 15.7%

MARKETABLE SECURITIES & TIME DEPOSITS

CASH & EQUIVALENTS 1,127,169 1.2% 1,757,974 2.0% 13,998,377 15.7%

FX PURCHASED FOR IMPORTS

ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS - - -

STOCKS 373,782 0.4% 321,810 0.4% 232,935 0.3%

TRADE DEBTORS 507,877 0.6% 747,934 0.8% 1,093,959 1.2%

DUE FROM RELATED PARTIES 4,131,192 4.6% 7,300,113 8.3% 9,653,654 10.9%

OTHER DEBTORS & PREPAYMENTS 2,009,057 2.2% 1,217,270 1.4% 763,244 0.9%

TOTAL TRADING ASSETS 7,021,908 7.8% 9,587,127 10.9% 11,743,792 13.2%

INVESTMENT PROPERTIES 1,765,126 1.9% 1,751,576 2.0% 1,507,000 1.7%

OTHER NON-CURRENT INVESTMENTS 3,529,781 3.9% 3,529,781 4.0% 3,529,781 4.0%

PROPERTY, PLANT & EQUIPMENT 71,564,209 79.0% 66,143,308 74.9% 54,068,669 60.8%

SPARE PARTS, RETURNABLE CONTAINERS, ETC 352,369 0.4% 361,805 0.4% 425,281 0.5%

GOODWILL, INTANGIBLES & OTHER L T ASSETS 5,226,775 5.8% 5,157,779 5.8% 3,616,541 4.1%

TOTAL LONG TERM ASSETS 82,438,260 91.0% 76,944,249 87.2% 63,147,272 71.0%

TOTAL ASSETS 90,587,337 100.0% 88,289,350 100.0% 88,889,441 100.0%

Growth 2.6% -0.7% 27.9%

LIABILITIES & EQUITY

SHORT TERM BORROWINGS - - -

CURRENT PORTION OF LONG TERM BORROWINGS 4,671,972 5.2% 6,116,876 6.9% 3,238,531 3.6%

LONG-TERM BORROWINGS 19,571,848 21.6% 14,571,848 16.5% 16,313,564 18.4%

TOTAL INTEREST BEARING LIABILITIES (TIBL) 24,243,820 26.8% 20,688,724 23.4% 19,552,095 22.0%

TRADE CREDITORS 122,343 0.1% 199,264 0.2% 283,699 0.3%

DUE TO RELATED PARTIES 21,160 0.0% 21,160 0.0% 84,942 0.1%

ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS 122,698 0.1% 126,573 0.1% 123,244 0.1%

OTHER CREDITORS AND ACCRUALS 3,301,390 3.6% 2,377,768 2.7% 3,046,260 3.4%

TAXATION PAYABLE 1,614,212 1.8% 1,424,231 1.6% 2,912,972 3.3%

DIVIDEND PAYABLE - 3,040,161 3.4% 3,105,101 3.5%

DEFERRED TAXATION 7,158,798 7.9% 7,158,798 8.1% 7,221,889 8.1%

OBLIGATIONS UNDER UNFUNDED PENSION SCHEMES - - -

MINORITY INTEREST - - -

REDEEMABLE PREFERENCE SHARES

TOTAL NON-INTEREST BEARING LIABILITIES 12,340,601 13.6% 14,347,955 16.3% 16,778,107 18.9%

TOTAL LIABILITIES 36,584,421 40.4% 35,036,679 39.7% 36,330,202 40.9%

SHARE CAPITAL 3,800,202 4.2% 3,800,202 4.3% 3,800,202 4.3%

SHARE PREMIUM 4,034,411 4.5% 4,034,411 4.6% 4,034,411 4.5%

IRREDEEMABLE DEBENTURES - - -

REVALUATION SURPLUS

OTHER NON-DISTRIBUTABLE RESERVES - - -

REVENUE RESERVE 46,168,303 51.0% 45,418,058 51.4% 44,724,626 50.3%

SHAREHOLDERS' EQUITY 54,002,916 59.6% 53,252,671 60.3% 52,559,239 59.1%

TOTAL LIABILITIES & EQUITY 90,587,337 100.0% 88,289,350 100.0% 88,889,441 100.0%

14



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 30-Jun-17 31-Dec-16 31-Dec-15

₦'000 ₦'000 ₦'000

TURNOVER 5,784,333 100.0% 14,559,553 100.0% 13,383,004 100.0%

COST OF SALES (1,548,686) -26.8% (3,625,369) -24.9% (3,132,002) -23.4%

GROSS PROFIT 4,235,647 73.2% 10,934,184 75.1% 10,251,002 76.6%

OTHER OPERATING EXPENSES (3,387,348) -58.6% (6,858,464) -47.1% (5,473,493) -40.9%

OPERATING PROFIT 848,299 14.7% 4,075,720 28.0% 4,777,509 35.7%

OTHER INCOME/(EXPENSES) 241,164 4.2% 1,126,067 7.7% 698,643 5.2%

PROFIT BEFORE INTEREST & TAXATION 1,089,463 18.8% 5,201,787 35.7% 5,476,152 40.9%

INTEREST EXPENSE - - -

PROFIT BEFORE TAXATION 1,089,463 18.8% 5,201,787 35.7% 5,476,152 40.9%

TAX (EXPENSE) BENEFIT (339,218) -5.9% (1,468,194) -10.1% (1,901,280) -14.2%

PROFIT AFTER TAXATION 750,245 13.0% 3,733,593 25.6% 3,574,872 26.7%

NON-RECURRING ITEMS (NET OF TAX) - - -

MINORITY INTERESTS IN GROUP PAT - - -

PROFIT AFTER TAX & MINORITY INTERESTS 750,245 13.0% 3,733,593 25.6% 3,574,872 26.7%

DIVIDEND - (3,040,161) -20.9% (3,105,101) -23.2%

PROFIT RETAINED FOR THE YEAR 750,245 13.0% 693,432 4.8% 469,771 3.5%

SCRIP ISSUES

OTHER APPROPRIATIONS/ ADJUSTMENTS - - -

PROFIT RETAINED B/FWD 45,418,058 44,724,626 44,254,855

PROFIT RETAINED C/FWD 46,168,303 45,418,058 44,724,626

ADDITIONAL INFORMATION 30-Jun-17 31-Dec-16 31-Dec-15

Staff costs (₦'000) 1,271,769 2,547,399 2,188,788

Average number of staff 1,183 1,587 1,623

Staff costs per employee (₦'000) 1,075 1,605 1,349

Staff costs/Turnover 22.0% 17.5% 16.4%

Capital expenditure (₦'000) 5,877,234 12,940,722 7,922,075

Depreciation expense - current year (₦'000 456,333 866,083 897,914

(Profit)/Loss on sale of assets (₦'000) - - -

Number of 50 kobo shares in issue at year end ('000) 7,600,404 7,600,404 7,600,404

Market value per share of 50 kobo (year end) 655 498 580

Market capitalisation (₦'000) 49,782,646 37,850,012 44,082,343

Market/Book value multiple 1 1 1

Non-operating assets at balance sheet date (₦'000) 5,294,907 5,281,357 5,036,781

Market value of tradeable assets (₦'000)

Revaluation date - Investment properties

Revaluation date - Other properties

Average age of depreciable assets (years) 7 6 5

Sales at constant prices - base year 1985 (₦'000) 20,799 57,393 62,551

Auditors UNAUDITED PWC PWC

Opinion CLEAN CLEAN

15



CASH FLOW STATEMENT

FOR THE YEAR ENDED Jun-17 Dec-16 Dec-15

₦'000 ₦'000 ₦'000

Operating cash flow (OCF) 4,804,605 4,391,130 4,713,767

Less: Returns to providers of finance (3,040,161) (3,105,101) (2,812,149)

OCF after returns to providers of finance 1,764,444 1,286,029 1,901,618

Non-recurring items - - -

Free cash flow 1,764,444 1,286,029 1,901,618

Investing activities (5,950,344) (14,663,060) (10,080,260)

Financing activities 3,555,096 1,136,629 19,552,095

Change in cash (630,804) (12,240,402) 11,373,453

PROFITABILITY Dec-17 Dec-16 Dec-15

PBT as % of Turnover 19% 36% 41%

Return on equity 2% 10% 10%

Real sales growth -63.8% -8.2% -15.7%

CASH FLOW

Interest cover (times)

Principal payback (years) 45.7 774.6 25.9

WORKING CAPITAL

Working capital need (days) - - -

Working capital deficiency (days) 224 109 -

LEVERAGE

Interest bearing debt to Equity 43% 36% 11%

Total debt to Equity 66% 62% 42%

16



RATING DEFINITIONS

Aaa Highest quality debt issue with minimal credit risk; strongest capacity to pay returns

and principal on local currency debt in a timely manner.

Aa

High quality debt issue with very low credit risk; very strong capacity to pay returns

and principal on local currency debt in a timely manner.

A

Good quality debt issue with low to moderate credit risk; strong capacity to pay

returns and principal on local currency debt in a timely manner.

Bbb

Satisfactory quality with moderate credit risk; adequate capacity to pay returns and

principal on local currency debt in a timely manner.

Bb

Below average quality with moderate to high credit risk; speculative capacity to pay

returns and principal on local currency debt in a timely manner.

B

Weak quality with high credit risk; speculative capacity to pay returns and principal on

local currency debt in a timely manner.

C

Very weak capacity to pay returns and principal. Debt instrument with very high credit

risk.

D In default.

Rating Category Modifiers

A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category.

Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating

with the - (minus) sign.

17



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www.agusto.com

© Agusto&Co.

UBA House (5th Floor)

57 Marina Lagos

Nigeria.

P.O Box 56136 Ikoyi

+234 (1) 2707222-4

+234 (1) 2713808

Fax: 234 (1) 2643576

Email: [email protected]

http://www.agusto.com/

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