Transcorp Hotel hopeful to grow profit despite Q2 drop

Transcorp Hilton Hotel is feeling the pinch of the low scale on which business activity is running this year. It is losing both revenue and profit as per the interim results yet hopeful for a profit rebound at full year. The company looks likely to see a decline in turnover for the second year in 2015 but a gain in profit margin raises hopes for the company to grow profit from a declining revenue.

Valentine Ozigbo, the company’s managing director/chief executive officer, has two key operating advantages working for him. One is that his company’s balance sheet is completely free of interest bearing debts. All costs are therefore largely under his control, giving him some space to maneuver in the effort to defend profit in a tight revenue situation.

The second area of strength is the significantly improved cash flow position of the company, which has enabled management to improve finance income at a time that rising finance costs are eating up revenues of many companies.

The company closed second quarter operations with an after tax profit of N1.76 billion, which is a drop of 16.5% year-on-year. Based on the current growth rate, net profit is projected at N3.8 billion for Transcorp Hotel at full year. This will mean a rebound of 18% after the company’s profit dropped by about 27% to N3.22 billion in 2014.

The drop in profit follows a 10.2% decline in turnover to N7.24 billion year-on-year as well as increasing cost of sales. Full year outlook indicates a turnover in the region of N14.8 billion for Transcorp Hotel in 2015. That would be a decline for the second year from N15.35 billion in 2013 and N15.1 billion in 2014.

Cost of sales failed to decline along with revenue, which caused gross profit to drop slightly ahead of turnover. At N5.6 billion, gross profit went down by 12.9% year-on-year, meaning that cost of sales claimed a slightly increased share of revenue during the review period. Administrative cost was also flat during the period while significant improvements in finance and other operating incomes helped to defend the bottom line.

With costs largely under control, the company was able to improve profit margin at the end of the second quarter. Compared with the closing figure in 2014, net profit margin is up from 21.3% in December to 24.3% at the end of June. Here lies the strength of the company in the current year – the ability to convert an increased proportion of declining revenue into profit.

Earnings per share dropped from 59 kobo to 23 kobo over the review period due to both the drop in profit and increased volume of shares outstanding. The company is expected to earn 50 kobo per share at full year against 59 kobo in 2014. It paid a cash dividend of 37 kobo per share for its 2014 operations.

Its debt free advantage has been further reinforced by a significantly improved cash flow situation this year.  It generated a net cash of N2.84 billion from operating activities at the end of June compared with a net cash utilisation of N10.48 billion in December last year.

Net cash utilisation for investing activities have reduced considerably  and a good part of the cash generated from financing activities last year have improved the company’s liquidity appreciably. A 36% cut down on trade and other receivables has also helped to improve cash and bank balances and consequently the capacity to generate interest income.