By boldly cutting staff count, closing loss-making businesses and exiting regional operations in the full year to December (FY15), African Sun management could have turned a new leaf and closed a chapter associated with past management and associated failures.
By Chris Muronzi
Through the layoffs, management hopes to save US$2 million annually through this process.
The group, which was spun off from Delta Corporation in 2003 to unlock value, had become a poster-child of black economic empowerment in the country under the stewardship of then CE Shingi Munyeza.
Munyeza had led a consortium of businesspeople and acquired Delta’s priced asset.
At the turn of the century, an economic crisis charecterised by rising inflation and an acute shortage of foreign currency, saw Zimbabwean businesses looking into the region for growth and elusive foreign exchange.
ZimSun, as African Sun was known then, began a drive for hotel management contracts, a decision which saw the group entering various West African markets.
The new Africa focus necessitated a name change to reflect the new focus to position the hotel group as an African hotel group.
ZimSun, it was felt, was inward-looking and confined the company within Zimbabwe’s borders. In no time, African Sun was in West Africa and anywhere the company could get an opportunity.
The group had close to 1 000 rooms in the region and targeted 5 500 in 2012.
That is how big the group had become.
The regional forays quickly became a source of pride for the Munyeza-led management. At a time when companies were ravaged by inflation, the regional forays were lauded as the glue holding the company together as evidenced by the glowing presentations at various analysts briefings back then.
With the adoption of multi-currencies in 2009, the foreign currency the group had been chasing in the region was right in their front yard.
It was time to rethink the business model. Suddenly the need for capital among local businesses arose. And African Sun was not an exception. In order to capitalise the business, Munyeza and company approached various financial institutions. But a key decision was not made on the regional operations.
In retrospect, many feel that management could have acted sooner and could have decisively saved the business from the vagaries of rising debt.
But the appearance of Brainworks a few years ago on the scene as African Sun’s strategic equity partner could have been the antidote the hotel group needed.
Under the new majority shareholder, Brainworks Capital, African Sun has — minus Munyeza — finally decided to concentrate on its Zimbabwe business, a throwback to the 2003 era. Hopefully, a name change will not follow as the company goes full circle.
A look at the financial statement shows that the business had been crying out for bold leadership and direction.
For instance, as at December 31 2015, bank borrowings were US$7,74 million, a 55% reduction from US$17,35 million reported in September 2014. The picture was even scary in FY14 and the year before.
African Sun MD Ed Shangwa says the reduction in debt was made possible through the disposal of the group’s investment in Dawn Properties Ltd,which raised US$5,8 million. The difference of US$3,8 million was financed from the group’s operating cash flows.
“To further reduce its debt, the group will dispose its other investments and apply the proceeds towards its short term obligations,” he said.
Shangwa is optimistic the cost cutting measures implemented in FY15 will result in more cash being available to service the debt as well as finance working capital. The impact of the measures will start reflecting in the FY16 numbers, he said. In the meantime, the group has secured funding to restructure US$5,4 million borrowings from short-term to long-term.
The US$5,4 million debt is current.The group spent US$2,24 million on retrenchments and expects to realise savings of US$1,90 million annually in FY16.
African Sun has a debt-to-equity ratio of 12.5. In simple terms, for every US$12 the company has in debt, it has US$1 in equity.
Its FY14 ratio can yield even scarier results. Its competitor in the hotel industry, RTG, has a debt-to-equity ratio of 1.9, showing a financial gulfbetween the two companies. It seems these worrying investment ratios did little to slow down the 5 500 rooms quest.
African sun has total assets of US$33 million and total liabilities amounting to US$30,9 million. Of the US$30,9 million liabilities, a total US$23 million is current. The balance — US$7 million — is in long-term liabilities.
RTG on the other hand has assets amounting to US$49 million and total liabilities of US$32,6 million. Of the US$32 million liabilities, US$19 million is current. Current borrowings of US$4 million are current.
Shangwa said the board decided to incur significant once-off costs in a bid to clean the balance sheet and optimise the operations. He says these once-off costs and the losses suffered in the past two years have eroded the group’s equity.
He says a combination of an impairment loss on property and equipment of US$2,34 million, change in accounting estimate for service stocks which increased usage for the period by US$1,93 million; staff retrenchments and separation costs of US$2,24 million and closure of loss making hotels. The loss from discontinued operations in respect of Amber Accra Ghana and Beitbridge Express Hotels amounted to US$2,62 million.
“This undoubtedly will distort the debt to equity ratio analysis in the short term,” Shangwa said. “The board decided to move the group forward on a clean balance sheet, self-sustaining business units and optimal staff structure. With the following now in place, the equity position and gearing ratio will self-correct as profitability improves.”
Commenting on the new business model, Shangwa said the group has already started benefitting from Legacy’s robust booking system and economies of scale in international marketing.
With a share price 1,50 US cents and a market capitaisation of US$12,9 million vis-a-vi RTG’s1,20 US cents per share as of Tuesday last week and a market capitalisation of US$22,4 million, it is clear investors value the two counters differently.
“While the board is of the opinion that the group’s share is significantly lower than African Sun’s intrinsic value, concentration will be on delivering strong shareholder returns through embedding of the new business model, reduction of cost of sales and overheads and volume growth drive,” Shangwa said.
Deflationary and liquidity pressures have also resulted in depressed trading volumes and values on the bourse, he added
African Sun hotels include Holiday Inn in Harare and Bulawayo, Elephant Hills (Victoria Falls), Troutbeck Inn (Nyanga), Caribbea Bay (Kariba), Beitbridge Express, Crowne Plaza (Harare), Great Zimbabwe (Masvingo), Victoria Falls Hotel, Kingdom at Victoria Falls, and Hwange Safari Lodge.