Royal Bank

Remarkable turnaround of fortunes at RTG

Investment highlights Turnover up to $4,2 billion from $900 million from the previous period representing a 364% increase; Headline earnings per share rose to 98 cents from a

loss position of 12 cents in the previous corresponding period; and Increase in attributable profit to $416 million from a loss position of $52 million.


THE results show a remarkable turnaround in the group’s fortunes, particularly as the group made a loss of $52 million during the first six months of last year.


The group for the first six months of this year made an attributable profit of $416 million.


This increase is partly attributed to inflationary pressures in the economy while the remainder of the increase is the result of the introduction of the export exchange rate in March.


A revaluation of the company’s property has also seen an increase in the group’s asset base with the value of property, plant and equipment increasing by 2 018% to $11,185 billion.


Review of operations


Occupancies in all the resort hotels and lodges were lower than anticipated. However, revenue from this occupancy was higher due to the adjustment of the exchange rate in the early part of the year.


City hotels such as the Sheraton Harare Hotel and the Ambassador have been doing extremely well with the main driver being the local market.


While the resorts and lodges continue to suffer due to the continued negative perceptions about the country as a safe tourist destination, management continued on its cost containment push, a key strategy in this hyperinflationary environment.


Operating expenses were 85% of gross profit. While this figure remains high it is a notable improvement on the previous six months in the corresponding period where operating expenses exceeded gross profit by 6%.


This has been done primarily through the control of the payroll, other costs such as food supplies, fuel, guest amenities and maintenance prove difficult to control below the 300% inflation mark.


Outlook


These results firmly put the group back on the road to recovery considering the events of preceding years.


The group generally performs better in the second half of the year and this year should be no different. In fact, management is expecting performance to exceed any of the prior three years.


Not only does management expect continued strong performance from its city hotels, there does seem to be a notable improvement in international arrivals as compared to previous years.


While management always thought any recovery in tourist arrivals would come from non-traditional arrivals, it seems they have been proved wrong with increased arrivals from the United States of America, United Kingdom, and Europe.


The second half always performs better in terms of foreign arrivals as those in the Northern Hemisphere seek to escape winter.


Recommendation and valuation


We believe that at present the stock is fully valued in the short-term suggested by the high rolling PE of 23x.


However, there are indications of a possible strengthening of possible foreign arrivals which should add considerably to the bottom line.


The effect of this should be amplified by a possible official devaluation of the local currency by the government that is now overdue. The city hotels should continue to be the main stay of the group.


In the long-term the group should benefit from the normalisation of the economy and improved perceptions about Zimbabwe.