Sluggish but positive recovery for African Sun

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Most investors have lost faith in both listed and unlisted company operations. Companies have been facing a lot of challenges and as a result have been struggling to survive. Also compounding the situation is mismanagement and little accountability on the part of management. Communication to stakeholders, particularly shareholders, has been lacking. Since dollarisation most listed companies have raised funds through rights issues so as to re-tool their operations. While this was a step in the right direction, most of them failed to turn the corner despite raising capital. Some are even on the brink of collapse. Names that quickly come to mind include African Sun Limited, Star Africa Corporation and PG. The trio has been making losses even after raising funds between 2009 and 2011. It therefore becomes difficult to gain investor’s trust following such events.

Victor Makanda

However, African Sun management, even though the company failed to turn around immediately after the US$25 million capital injection, appears to be taking significant measures to return the company to profitability. In its full year financial results to September 30, 2013, African Sun’s performance was fair with marginal revenue growth of 3,4% to US$56,26 million. A loss for the year of US$6,58 million was recorded owing to a US$7,63 million impairment arising from the disposal of its investment in Dawn Properties. However, excluding this exceptional item, African Sun would have made a profit before tax of US$1,93 million, which was a 15% growth from last years’ US$1,68 million.

Key in the recovery of African Sun has been the realisation by management that they needed to go back to basics. Soon after dollarisation, the group had various ambitious plans lined up. Chief among them was the target to become a US$1 billion-dollar company by 2012. They sought to achieve this through an aggressive regional expansion mainly anchored by the 2010 World Cup which was hosted in South Africa. The company was also pursuing a pan African dream through aggressively expanding its footprint in West Africa. After the dream failed to materialise, management went back to the drawing board and came up with sensible resolutions. The first one was that of aggressively managing costs to improve margins. This seems to have paid off as reflected by a 3,5% improvement in cost of sales to US$15,30 million through centralising procurement of raw materials.

Furthermore, the company shifted towards a leaner staff structure by retrenching, which cost the company approximately US$3,28 million. Consequently EBITDA margins are slowly improving. In the financial year to September they improved by 0,85% to 12,4%.

African Sun management also made the bold decision to offload the loss making units. The Grace Hotel and the Lakes Hotel in South Africa were disposed of and also Hotelserve. Management also terminated contracts in Nigeria. All this saw the company removing the leakages they had been facing in the early years of dollarisation. This decision appears to be paying dividends and management recently highlighted that they seek to rationalise other operations that are no longer adding value. Beitbridge Express, Troutbeck Resort and Carribea Bay Resorts are some of the operations. In a US dollar environment, this appears sensible as holding on to bleeding investments only worsens the situation.

The focus of growing revenue mainly from the local hotel portfolio has also been a game changer for African Sun. Such a move would have greatly benefitted the company had it been aggressively pursued from the time the economy adopted the multi-currency system. In the financial year to September 2013, the local hotel portfolio contributed 99% to total revenue while the balance came from regional operations.

Foreign arrivals especially in the review period lifted turnover as room nights rose by 8% while average daily rates rose by 7% to US$100. Interestingly, the sales mix of the group shifted in favour of foreign arrivals from 35% to 39%. Currently, African Sun is focusing on West Africa as evidenced by the opening of a new hotel in Ghana at the beginning of December.

However, management may need to carefully scrutinise the regional ventures they take up as the contributions coming from these operations are not meaningful both from a revenue and profit perspective. This remains a key area which African Sun management need to consider as the returns on such investments may be low or negative.

One key sticking point on African Sun’s operations relates to debt reduction. The company has a total debt of US$22,32 million against equity of US$16,08 million translating to a gearing ratio of 139%.

The debt issue has been more problematic in the sense that 54% of this is short-term expensive debt and this has continuously eaten into profitability. Worth noting nonetheless is that a US$4,14 million settlement was effected from the proceeds of the 12% shareholding in Dawn. Management intends to further reduce the debt through disposal of the remaining 16,54% shareholding in Dawn and a capital call.

The disposal of the remaining investment is definitely a feasible exercise but the capital call exercise may be a difficult undertaking considering the liquidity in the economy.

Overall, despite the company’s executives fighting hard to return to profitability, regaining trust among investors may be an uphill task. Management need to consider growing their revenues locally through the on-going refurbishments as it will enable them to charge higher rates and also improve marketing initiatives. The various initiatives such as growing their lease commitments and widening revenues through casinos and sport betting may be too ambitious.

This is because casino returns at Ebitda level have been declining while sport betting may not generate the level of activity that will lift revenues by a significant portion especially when domestic demand is shrinking.

Again it is too early to tell how the new majority shareholder Lengrah Investments will impact on the business.

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