Wednesday, October 08, 2014 1.41 AM / Festus Akanbi, Thisday

Q1 Transcorp Plc has started to market its initial public offering (IPO). It is raising N8 billion ($48.8 million). It is offering 800 million ordinary shares to new investors at N10 per share. The sale was scheduled initially for one week and the shares will be listed on the Nigerian Stock Exchange (NSE) on November 5 as shown in the prospectus made available. 

Response: The sale opened on 25th of September, 2014 and closes on the 17th of October, 2014. The initial period of four working days was a compliance issue with the SEC, one that required firms to conduct such an offer not more than 9 months after their particular year-ends and in the case of Transcorp Hotels, their year end was December 2013 (creating a cut-off date of September 30, 2014). However, giving consideration to the entity as a national asset wherein the BPE insisted rightly that the offer be conducted in a transparent way to ensure that all Nigerians were able to participate and benefit therein – it is understood that the company applied for an extension to the SEC wherein they required it to present and publish its half-year returns as a condition for granting the extension now in place. The key point here is the need to ensure that a national asset sold under the terms of engagement must be open and available to a number of Nigerians across all regions and states, hence the extension sought and granted. This is the information available to us and in the absence of any other explanation, it is one we are comfortable with. 

Q2How realistic is the company’s ambition to raise funds at a time like this when investors confidence is just returning to the nation’s capital market? 

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 (I must acknowledge the research work done by Cardinal Stone Research here, from whom I gleaned a lot about the IPO as I did from Sriram’s analysis from India), 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 (CAPHOTEL), owners of Sheraton Hotel Abuja which has 540 rooms and Ikeja Hotel Plc (IKEJAHOTEL) – 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% 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. 

Second, the industry –  and I will rely on the empirical work done by Cardinal Stone Research to demonstrate this. 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. 

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”. 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 N20bn 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 of 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. 

Q3What is the justification for the offer price-N10?

This question if properly contextualized 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 / cashflows of the entity (in this case EV/EBITDA, P/E and DCF valuation). 

Q4What do Nigerian shareholders stand to gain by staking their hard earned money on this offer?

Good question, beyond rhetoric, 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 privatization 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. 

Q5What are the potentials of hotel business in Nigeria?

As stated earlier, the hotel business in Nigeria has an upside that will come into its own and create a vibrant sector to invest in.

Culled from Proshare