Transcorp Hotels: Profit slows down on loss of margin

Transcorp Hotels recorded a slowdown in profit growth in the third quarter and the full year profit outlook for the company has moderated. The company is however maintaining the improved growth momentum it has gained on the side of revenue. A new peak in turnover can therefore be expected from Transcorp Hotel at the end of 2016.

The company however failed to defend the profit margin it recorded in the second quarter and a decline from the second quarter level caused a slowdown in profit growth in the third quarter. With that, the company has lost the strength and the hope for achieving an accelerated growth in profit this year.

The hospitality company however looks promising to push turnover back to the five-year peak it registered in 2013. It closed third quarter operations with a turnover of N11.47 billion, an increase of 9.6% year-on-year. The full year outlook is unchanged at a projected turnover of N15.8 billion for Transcorp in 2016. That will be a new peak in the company’s revenue performance and a growth of 13% compared to a decline of 7.4% in 2015. This will be one of the strongest growths in revenue for the company since 2011.

The company closed last year’s operations with turnover down to the region it was five years ago in 2011. Getting revenue to break out from the up and down swings seen in the past five years is the task on the hands of Mr. Valentine Ozigbo, managing director/CEO of Transcorp Hotels. With a good chance for an accelerated growth in turnover in the final quarter, the full year revenue projection may be exceeded.

Transcorp Hotel generates its revenue mainly from hotel accommodation, sales of food and beverages, entertainment and restaurant incomes, other related service fees and rental income. It also earns significant finance income from cash balances.

Profit performance has followed even a wider swing than revenue and the company is getting nowhere close to the peak profit figure it posted in 2011. It closed third quarter trading with an after tax profit of N2.67 billion, an improvement of close to 14% year-on-year and well ahead of the 9.6% growth in turnover. That level of growth isn’t expected to be maintained to full year.

Based on the third quarter growth rate, after tax profit projection is revised down from N4.2 billion to N3.8 billion for Transcorp Hotels in 2016. That will be an improvement of 8.6% over the preceding year’s figure – the same margin of increase last year. Over the past five years, the company’s profit has fallen two times and risen two times in a rise and fall pattern. The drops are heavier than the rises, leaving profit at one-half of the 2011 high at the end of 2015. Ending the high earnings volatility and beginning a new regime of stable growth should reduce the risk level of the company’s traded stock.

Net profit margin went down from 24.8% in the second quarter to 23.3% at the end of the third quarter. On year-on-year basis, it was however an improvement from 22.4% in the same period last year.

The company’s income statement showed no interest expenses at the end of the third quarter while it earned an interest income of N467 million from bank deposits. That appears to suggest that no interest accrued from nearly N20 billion debts in the company’s balance sheet. Long-term borrowings of N16.31 billion and short-term debts of N3.24 billion as at the end of September neither increased nor declined from last year’s closing figures.

A sharp drop of nearly 50% in net cash generated from operating activities and a high growth in net cash used in investing activities induced pressure on the company’s cash flow. A net cash decrease of over N10 billion was recorded at the end of the third quarter.

The company earned 55 kobo per share at the end of the third quarter with a full year outlook of 50 kobo. It earned 46 kobo in 2015 and paid a cash dividend of 40.85 kobo per share.