Company Analysis

Transcorp Hotels off recovery track

Transcorp Hotels is off the earnings recovery track in the current year after two years of progress in rebuilding profit. The company’s earnings records follow a pattern of up and down swings and a downturn seems set to follow the elevated performance in 2016.
The hospitality company closed half year operations at the end of June with a drop of 60 per cent in profit and about 19 per cent fall in turnover. Full year outlook indicates that revenue is headed back to the level attained as far back as 2012 and profit may close lower than any time since then.
Turnover amounted to N6.20 billion for Transcorp Hotels at the end of June, a drop of 18.5 per cent year-on-year. The revenue drop was largely accounted for by income from hotel accommodation, which went down by close to 23 per cent during the period. Income from hotel accommodation accounts for over 61 per cent of the company’s revenue.
Based on the half year performance, turnover is projected to be in the region of N13 billion at the end of 2017. That will be a drop of 15 per cent from the revenue figure of N15.31 billion the company reported at the end of 2016. It will also take revenue back to the level the company recorded as far back as 2012.
The company had improved revenue by 9.5 per cent last year, attaining the highest revenue record in three years. That followed a decline of 7.4 per cent in 2015 and the rise and fall pattern of the company’s earnings performance is continuing in the current year.
Transcorp Hotels reported an after tax profit of N757.6 million at the end of the second quarter trading in June. This is a drop of 60 per cent from the profit figure of N1.89 billion it posted in the same period last year. The drop in revenue against increasing operating cost accounted for the drop in profit.
The dismal profit picture looks likely to follow the company to full year. After tax profit is expected to come to N1.8 billion at the end of the year. This will be a drop of 56 per cent from the after tax profit figure of over N4 million in 2016 and the lowest profit figure in many years.
The company sustained profit recovery for the second year last year after losing 27 per cent of the preceding year’s profit in 2014. Profit performance has followed even a wider swing than revenue and the figures all the way have remained well below the 2011 high of N6.96 billion.
Cost of sales went down at a slower pace of 7.3 per cent than the 18.5 per cent drop in turnover at the end of June.  That resulted in a drop of 22 per cent in gross profit, which came to N4.50 billion. Further constraints came from inability to curb administrative expenses as well as a drop of 58 per cent in other operating income during the period. The developments caused a fall of close to 61 per cent in operating profit, which amounted to N948 million at half year.
There was still a further weakness on the income statement from a drop of 55 per cent in finance income. Pre-tax profit dropped by 60 per cent to about N1.1 billion at the end of the second quarter. Net profit margin dropped from 24.8 per cent in the same period last year to 12.2 per cent at the end of June 2017, the lowest profit margin in many years.
Finance cost of over N2 billion on the company’s N24 billion short- and long-term debts on the balance sheet is not expensed. It was capitalised further to the N4.08 billion capitalised at the end of 2016 and about N600 million capitalised in 2015.
The cash flow pressure the company faced last year has moderated significantly following a moderate improvement in net cash generated from operating activities and a sharp drop in net cash used in investing activities. This resulted in a major cut down in net cash decrease from N6.4 in the same period last year to N606 million at the end of June in 2017.
The company earned 10 kobo per share at the end of half year, down from 27 kobo in the same period last year. It is expected to earn 24 kobo per share at full year. The company earned 54 kobo per share in 2016 and paid out a cash dividend of 40 kobo per share.

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