Ahead of Transcorp Hotel IPO

Recently, the Nigerian Stock Exchange (NSE) said it was processing the application for proposed Initial Public Offering (IPO) of Transcorp Hotels plc, a hospitality subsidiary of Transnational Corporation of Nigeria plc (Transcorp).

The company filed an application at the NSE for an IPO of 800 million ordinary shares of 50 kobo each at N10 per share.

This means that when the application finally sails through at the regulatory level, Transcorp Hotels through the IPO will be raising additional equity capital of N8 billion. Transcorp plc holds 88 percent interest in Transcorp Hotels through Capital Leisure and Hospitality Limited. The remaining 12 percent is owned by the Federal Government of Nigeria.

The premier hotel brand continues to outperform in the local and African hotel industry. No doubt, its recent planned expansion in hospitality following the recent management agreement executed in partnership with Hilton Worldwide to open additional hotels in Lagos and Port Harcourt is bound to consolidate the company’s position as the pacesetter in that space.

The parent company – Transnational Corporation of Nigeria plc was incorporated on November 16, 2004, and quoted on the NSE. With a shareholder base of about 300,000 investors, the largest of which is Heirs Holdings Limited, a pan-African proprietary investment company.

Transcorp is a leading diversified conglomerate that focuses on acquiring and managing strategic businesses that create long-term shareholder returns and socio-economic impact. Its business interests are in four strategic sectors: Power, Oil and Gas, Hospitality and Agriculture.

Its business model is built on: equity investments in assets with high recovery margins; quick-term-to-profit horizon limit; significant owner control to permit strategic flexibility; partnerships with globally respected sector operators to manage assets; optimal capital structure to maximise shareholder returns; carefully designed turnaround programmes that enhance the business sustainability of acquired assets, and rigorous analysis of market entry mode with in-depth consideration of the opportunities of acquisitions versus greenfield investments.

This further justifies market’s view of Transcorp being one of the most experienced operating asset buyout by investors in Nigeria, and has built unrivalled in-house expertise in the transformation of these companies.

For a long time, Transcorp was on the low end of the rating scale of investors for a mix of factors, which led to more investors betting against the company’s shares. However, with the acquisition of a majority stake in the company by Tony Elumelu-owned Heirs Holdings, the perception of the company among investors has changed for the better.

The boardroom master’s strategy played up recently when Transnational Corporation of Nigeria plc enticed investors by paying dividend for the first time in its history as indicated in the group’s audited and consolidated financial statements for the year ended December 31, 2013.

The company paid a dividend of N1.93 billion to shareholders on the basis of 5 kobo per share. The Group reported a strong increase in turnover of N18.8 billion, representing a 42 percent rise over the N13.2 billion recorded in the corresponding period in 2012. Profits before tax (PBT) rose by 129 percent from N3.9 billion in 2012, to N9 billion in 2013.

Ahead of the Transcorp Hotels IPO, research analysts at CardinalStone, in their report simply described Transcorp Hotels plc (THP) as “a leading franchise.”

They stated: “Transcorp Hotels plc is a hotel developer, owner and asset manager with a clear roll-out strategy, primarily in the under-supplied Nigerian market. Based on number of rooms, Transcorp Hotels plc is Nigeria’s largest luxury hotel operator with a total of 816 rooms in two hotels, ahead of Capital Hotel plc, owner of Sheraton Hotel Abuja, which has 540 rooms and Ikeja Hotel plc – the owner of Sheraton Hotel Lagos, which has 332 rooms. Transcorp Hotels plc has a strong pipeline, and plans to grow its room stock by 67 percent by 2017. Since its acquisition of the hotels (Calabar Metro and Hilton Abuja), THP has been consistent in maintaining a good balance between offering world-class service to customers and delivering good financial performance to shareholders.”

On the offer price valuation, the analysts said “based on a weighted average of the Enterprise Value (EV) Discounted Cash Flow (DCF) and Peer Multiple (EV/ earnings before interest, taxes, depreciation, and amortisation (EBITDA) and Price Earnings (P/E) valuation methodology, we arrive at a fair value of N10.50.”

“As a developer and owner, THP enjoys a strong relationship with the Hilton International brand which operates under management agreements. The operators (Hilton Worldwide) recognise the potential for branded premium and upscale hotels, but high barriers to entry exist in local markets given the level of investments required and the difficulty in obtaining the requisite permits. The legal structure maintains local ownership requirements, while management’s influence, reputation and contacts enable it to identify opportunities and execute its development plans,” research analysts at CardinalStone further said.

The analysts are of firm belief that Nigeria is an attractive hotel market; with more opportunities coming to the fore following the rebasing of its GDP to become the biggest economy in Africa.

“More importantly following the rebasing, we believe that services which now accounts for about 52 percent of Nigeria’s GDP (previously 29%) has a strong evolving potential. Hence, the hospitality as a significant subset of the services sector is still at a nascent stage, offering significant upside potential for investors, in the medium to long term. Despite the influx of upscale luxury hotels in major cities in recent years, there’s still room for growth given Nigeria’s improving macro-economic fundamentals, the emergence of new sectors such as power, increasing foreign direct investments and the expanding aspirational millennial generation (who increasingly prioritise leisure and tourism). Yet at 9 percent of branded hotel stock (data as at 2013), Nigeria’s premium and mid-scale segment is significantly under-supplied. THP’s pipeline puts it on course for about 25 percent share of Nigeria’s branded mid-scale and premium hotel units,” the analysts noted.

Though not without risk – but surmountable! “As well as operational and development risks, performance could be affected by country risks. Execution of the planned projects could pose some difficulties given it is the first time the company is building a hotel from the ground up. It is also dependent on raising additional equity and N25 billion of new debt.

However, given the company’s strong cash position, zero debt balance, strong management with arrays of successful project team at its disposal, we expect a successful debt raising,” CardinalStone said further.

Iheanyi Nwachukwu