Nigeria’s Largest Hospitality Provider · Nigeria’s Largest Hospitality Provider A leading franchise: Transcorp Hotels Plc (THP) is a hotel developer, owner and asset manager

Page | 1

Equity Research

Initiation of Coverage: Transcorp Hotel Plc

PREMIUM HOSPITALITY LISTING

Nigeria’s Largest Hospitality Provider

A leading franchise: Transcorp Hotels Plc (THP) is a hotel developer, owner and

asset manager with a clear roll-out strategy, primarily in the under-supplied Nigerian

market. Based on number of rooms, THP is Nigeria’s largest luxury hotel operator with a

total of 816 rooms in two hotels, ahead of Capital Hotel Plc (CAPHOTEL), owner of Sheraton

Hotel Abuja which has 540 rooms and Ikeja Hotel Plc (IKEJAHOTEL) – the owner of Sheraton

Hotel Lagos which has 332 rooms. THP has a strong pipeline, and plans to grow its room

stock by 67% by 2017. Since its acquisition of the hotels (Calabar Metro and Hilton Abuja),

THP has been consistent in maintaining a good balance between offering world-class service

to customers and delivering good financial performance to shareholders.

Transparent business model: As a developer and owner, THP enjoys a strong

relationship with the Hilton international brand which operates under management

agreements. The operators (Hilton Worldwide) recognise the potential for branded

premium and upscale hotels, but high barriers to entry exist in local markets given the level

of investments required and the difficulty in obtaining the requisite permits. The legal

structure maintains local ownership requirements, while management’s influence,

reputation and contacts enable it to identify opportunities and execute its development

plans.

Dynamic market positioning: Nigeria is an attractive hotel market; with more

opportunities coming to the fore following the rebasing of its GDP to become the biggest

economy in Africa. More importantly following the rebasing, we believe that services which

now accounts for c.52% of Nigeria’s GDP (previously 29%) has a strong evolving potential.

Hence, the hospitality as a significant subset of the services sector is still at a nascent stage,

offering significant upside potential for investors, in the medium to long term. Despite the

influx of upscale luxury hotels in major cities in recent years, there’s still room for growth

given Nigeria’s improving macro-economic fundamentals, the emergence of new sectors

such as power, increasing foreign direct investments and the expanding aspirational

millennial generation (who increasingly prioritise leisure and tourism). Yet at 9% of branded

hotel stock (data as at 2013), Nigeria’s premium and midscale segment is significantly

under-supplied. THP’s pipeline puts it on course for a c.25% share of Nigeria’s branded

midscale and premium hotel units.

Risks are there but surmountable: As well as operational and development

risks, performance could be affected by country risks. Execution of the planned projects

could pose some difficulties given it is the first time the company is building a hotel from

the ground up. It is also dependent on raising additional equity and N25 billion of new debt.

However, given the company’s strong cash position, zero debt balance, strong management

with arrays of successful project team at its disposal, we expect a successful debt raising.

Valuation: Based on a weighted average of the EV DCF and Peer Multiple (EV/EBITDA

and P/E) valuation methodology, we arrive at a fair value of N10.50 (see details on page 16 – 18).

Analyst Damilola Lawal*

[email protected]

+234 818 398 2518

Team lead

Oluwatosin Ojo, CFA*

[email protected]

+234 818 398 2518

08 Sep. 2014

mailto:[email protected]

mailto:[email protected]

Page | 2

Equity Research



Table of Contents

Summary ....................................................................................................................................................... 1

Investment Rationale .................................................................................................................................... 3

Company Overview ....................................................................................................................................... 7

Financial Performance Review and Outlook ............................................................................................... 12

Valuation Assumptions ............................................................................................................................... 14

Africa’s Hospitality Industry ........................................................................................................................ 17

Nigeria’s Hospitality Industry ...................................................................................................................... 20

Disclosure and Disclaimer ........................................................................................................................... 30

Page | 3

Equity Research



Investment Rationale

Operating model offers the highest earnings and cash generation,

provides long-term control over destiny:

THP tends to favour the “asset heavy” approach as it generates most of its earnings from

the Transcorp Hilton Abuja which operates under the ownership model. However, the

company’s operating model tends towards the blend of the ownership and franchise model

given that its long term objective is to build capacity in manager model and transform to

owner-manager model. Although the ownership model (also the asset heavy model)

requires a high level of investment and its returns are often lower than those generated by

hotel management or franchise fees, it offers the highest absolute level of earnings, in our

view. It also provides long-term control over the hotel to ensure quality, as well as the

opportunity for capital appreciation. There has been much debate surrounding which model

is the best operating structure for managing a hotel. In the ownership and leasing business

models, the hotel chain bears all daily running costs. In the ownership case, the chain owns

the fixed assets (land, property and equipment etc), while, in the leasing case, the chain

rents the fixed assets. Both approaches are thus very similar and are said to be “asset-

heavy”. The franchise and management business models, being fee-based, are examples of

the “asset-light” approach. Heavy costs are indeed supported by third parties (the hotel

owners) whilst the hotel manager, the lodging company lends its on-the-ground expertise

to an owner, making all the day-to-day decisions on his behalf (the hotel general manager is

usually been appointed by the chain). In return, the property owner pays base fees (3% to

5% of revenues), incentive / outperformance fees (between 10% and 20% of profits, after

owner’s priority) and additional fees for pre-opening support or access to the central

booking and purchasing systems and to the brand marketing campaign. As a franchisor, the

lodging company licenses hotel owners the right to use its brand name. In return, and in

addition to the initial application fee, the franchisee will pay royalties (4-6% of room

revenues and eventually a percentage of the food & beverage revenues) and additional fees

for access to the booking system, marketing, advertising, etc.

Hotel industry back in business – room demand rises sharply

Nigeria continues to experience sustained demand levels against a relatively inadequate

supply of quality hotel rooms. With an improvement in the domestic economy, the hotel

industry is back on track with a sharp increase in room demand as the country elicits more

international attention. Indicators of Nigeria’s emergence as a destination hub include

statistics such as hotel occupancy rates and passenger arrivals at the airports. Occupancy

rates at various destinations have picked up considerably with Lagos and Abuja markets

leading the way. Occupancy rates are even higher for branded hotels. The growth in

demand is driven by an increase in corporate travel budgets leading to higher business

travellers. In addition, there is a growing market for young, wealthy Nigerians, with

exposure to quality hotel offerings overseas, and looking for similar experiences back home.

THP by virtue of its current presence in key strategic markets -Abuja, Calabar, Lagos

(ongoing) and Port Harcourt (proposed) is well placed to tap into the expected boom.

Page | 4

Equity Research



Pipeline ready to roll

THP would be undergoing a major expansion over the next 18 - 24 months to meet growing

business demand as Nigeria’s leading hospitality provider. The company’s expansion

strategy is to develop premium and luxurious hotels leveraging the Hilton brand and design

expertise. We show management’s room roll-out plan in Exhibit 1 below, resulting in 1,366

rooms projected by 2017, a 67% increase on the current 816 rooms. The IPO proceeds,

together with new debt and cash flow, will fund the development of the two new hotel

units in Port-Harcourt and Ikoyi, Lagos with the design finalised and permit obtained.

Already, THP has acquired land for the construction of the Port Harcourt hotel and this

should further boost its inventory above that of its competitors. At completion of these

projects, we expect a strong boost to the company’s revenue.

Table 1: Pipeline

Hotel State Rooms Opening

Transcorp Hilton, Ikoyi Lagos 300 2017

Transcorp Hilton, Port Harcourt Rivers 250 2017

Transcorp Hilton, Ikeja Lagos 200 TBA

Transcorp Hilton, Warri Delta 200 TBA

*TBA – To be announced

Key partner in Hilton Worldwide

It is our view that THP has chosen an excellent partner in Hilton Worldwide, given the

latter’s proven experience as a leading hospitality firm with its operations spread across the

globe. According to consumer surveys, Hilton is the best-known brand name in the hotel

industry. We believe Hilton Worldwide possesses the right technical and development

expertise given its wealth of experience. As of March 2014, Hilton brands encompass 4,112

hotels with over 680,117 rooms in 91 countries. We believe THP’s partnership with Hilton

Worldwide will help attract demand as it will help capture individual travellers by virtue of

the brand name, the operation of loyalty card rewards schemes as well as referrals from

sister hotels elsewhere in the world. Furthermore, the strong association with the Hilton

brand helps THP compete effectively against existing competition. Strong and instant brand

recognition and familiarity can often make the difference in guiding a customer’s choice at

the crucial decision making moment.

Page | 5

Equity Research



Geographically diversified portfolio, mitigating risk:

A key part of THP’s strategy is to de-risk its business model from cyclicality of its main Abuja

operations by increasing share of revenue from other key markets – Calabar, Lagos and Port

Harcourt. Whilst the flagship hotel (Transcorp Hilton Abuja) accounts for a significant share

of revenue as of FY’13, we consider the other hotel units (given their faster rate of growth –

11% on average vs. 9% growth in the flagship hotel), as the potential growth spot for the

company.

The Lagos market has significant growth potentials, especially across West Africa, given the

anticipated development of the Dakar-Lagos Highway, which at completion would promote

intra-regional trade. Also, with the evolution of new businesses in Lagos State, given its

teeming population in excess of 15 million people, and the proposed development of a new

megacity like the Eko Atlantic City, the potential for hotel demand in that market is

enormous.

Calabar has carved a niche as the cultural and tourism capital of Nigeria as a result of its

significant investment in tourism assets, which are complemented by its magnificent

landscape and tropical climate. Such efforts have led to significant investments in

infrastructure and tourist attractions such as the Obudu Ranch Resort, Tinapa Business

Resort, Marina Resort, etc. These investments have led to increased employments, foreign

direct investments and internally generated revenue. Through careful planning, Calabar

has the potential to further develop its image as a key tourism hub in West Africa.

Port Harcourt (the location of a potential hotel) boasts of a teeming population of about 6

million with a higher income per capita, strong middle class, presence of expatriates and a

more buoyant economy relative to Calabar. Expected demand should come from local state

residents (local business community, expatriates and other leisure seekers), out-of-state

travellers (business and leisure travellers) and international tourists.

Higher proportion of food & beverage and rental income also de-risks

the business to some extent

The proportion of food & beverage income to total revenue is quite high as the restaurants

get a lot of day visitors. The two hotels have a combined total of nine restaurants and bars

offering an assortment of international cuisines (both continental and Nigerian) and

targeted at different classes of guests. For meetings and conferences, the hotels boast of

several business executive conference rooms for small meetings, set in various

configurations to accommodate 10 to 300 people in addition to a multi-purpose Congress

Hall with a capacity for 1,200 persons. Food and beverage income from the nine outlets, in

addition to rental income from the convention and meeting facilities, means THP can

maximize its hotel occupancy and customer volumes during off-peak times such as midweek

or during traditionally slower leisure travel periods or even a downturn in the industry.

Page | 6

Equity Research



Low seasonal risk given lower dependency on tourists

Seasonality is known as one of the most typical features of the tourism industry (including

hotels) with both positive and negative impact. Seasonality demands have been a major

problem for the hotel industry and have had a negative impact, such as: difficulties in

gaining access to capital, low returns on investment and the inefficient use of resources;

thus imposing greater risks for tourism. Transcorp Hilton Abuja and the soon to be

completed Transcorp Hilton Ikoyi are located near business destinations primarily targeting

domestic and international business travellers. This reduces the seasonal risk attached to

dependence on foreign leisure tourists.

Hidden value in assets

Transcorp Hotels Plc has N47.57 billion (US$297 million) of Property Plant & Equipment (as

of end-2013), based on historical cost less depreciation. Given the asset price appreciation

in urban centres in Nigeria over the last ten years, we assume that the value of THP’s hotel

properties has also increased significantly. Furthermore, the company holds extensive land

acreage in choice locations in the Federal Capital Territory. Tight supply of land in that area

has been a major factor underpinning the buoyant property market and the surge in land

prices in recent years. We believe value could be extracted through asset sales, although

the company has no track record of selling assets and has not announced any intention to

do so.

Hotel in the heart of Abuja provides a steady stream of cash flows

THP’s flagship property, Transcorp Hilton Abuja is located in highbrow Maitama, in the

heart of the Federal Capital Territory, in close proximity to the airport, several important

government parastatals (offices of the Nigerian National Petroleum Corporation and the

Central Bank of Nigeria) and several embassies. It is the most luxurious hotel in Abuja (even

in Nigeria), miles above its nearest competition and this to an extent makes it the first

choice for discerning locals and international visitors. With the aim of attracting this

particular kind of clientele, it offers all modern amenities such as conference room, board

room, banquet hall and Wi-Fi connectivity. The hotel has had a good influx of business

travellers over a period of four decades as reflected by its occupancy rates (OR) and average

room revenue (ARR) resulting in steady stream of cash flows. Although the ORs were low in

FY12 (56%) due to incessant security issues in and around Abuja, the economic revival has

pushed it back to higher levels (62.5%).

Page | 7

Equity Research



Company Overview

Corporate Profile

Transcorp Hotels Plc (formerly Transnational Hotels and Tourism Services Limited) is the

hospitality subsidiary of Transnational Corporation of Nigeria Plc (“Transcorp”). Transcorp

holds a majority stake in the company through a wholly owned entity named Capital Leisure

and Hospitality Limited, whilst the Federal Government of Nigeria holds the balance. The

company currently owns two hotels - Transcorp Hilton Abuja and Transcorp Hotels Calabar,

though plans are afoot to expand the portfolio to four. THP boasts of a prime portfolio of

hotels - its revenue from rental income and hotel operations so far has surpassed that of

other major hospitality providers such as Ikeja Hotel Plc, Capital Hotel Plc and Tourist

Company of Nigeria Plc.

THP’s growth trajectory has been assisted by two main factors. The first is the quality and

pedigree of its partnership with Hilton Worldwide, one of the most recognizable brands in

the world. This partnership with Hilton Worldwide in the EMEA region brings valuable

distribution, operational and cross-selling benefits. The second stems from THP’s acquisition

growth strategy which commenced with the acquisition of a 100% stake in Hilton Hotel,

Abuja in 2005 followed by the purchase of Metropolitan Hotel, Calabar in 2010. By investing

in these two assets, THP has positioned itself to tap into a trend that will run for several

years as both Nigerian and foreign visitors eagerly explore local tourist delights, while

mixing business with pleasure. THP is entering a new frontier in its business model that will

see the company expand its presence in Nigeria and thereafter develop strong African

footprints in high population and competitive cities. Positioning the business to realize

management’s aspirations of high returns to stakeholders has necessitated further infusion

of equity capital. Thus, THP is targeting a public offering of its shares on the Nigerian Stock

Exchange; a process that should see the company raise N8 billion (US$50 million). The

primary purpose of the Offer is to enable THP fund the development of the two (2) new

hotels (“the Projects”) at prime locations within Nigeria. The Hotels include Transcorp

Hotels Ikoyi and Transcorp Hotels Port Harcourt.

Table 2: Evolution of Transcorp Hotels Plc

Year Events and Milestones

1994 NIRMSCO is incorporated to hold 100% interest in Hilton Hotel Abuja.

2005 Transcorp Plc (via capital leisure) acquires 51% stake in NIRMSCO and remains the latter THTSL.

2012 THTSL acquires a 100% stake in Metropolitan Hotel, Calabar.

2014 Pursuant to its Initial Public Offer, THTSL changes its name to THP.

Page | 8

Equity Research



Management and Board Structure

The Board of Directors and Management show an appropriate mix of local identity and

international professionalism. THP's board comprises nine directors out of which seven

(including the chairman) are non-executive directors. The directors are from diverse

backgrounds and have significant experience in accountancy, banking, insurance, law

amongst others. The non-executive chairman, Olorogun O’tega Emerhor, OON is the Vice

Chairman/Group CEO of Standard Alliance Insurance Plc and the Chairman of Synetics

Technologies Limited and Heroes Group. The Managing Director – Mr Valentine Ozigbo –

possesses a wealth of experience spanning commercial, retail, investment and international

banking. Prior to joining THP, Mr. Ozigbo was the General Manager and Divisional Head in

charge of Global Transaction Banking at Keystone Bank Limited, successor to Bank PHB. His

remit covered product development, international business, global trade and eBusiness.

Before then, he was the Divisional Head of International Banking and Head of Global

Strategic Alliances at United Bank for Africa Plc. Valentine has also worked with FSB

International Bank Plc (now Fidelity Bank Plc), Continental Trust Bank Ltd (now part of UBA)

and Diamond Bank Plc. . Mr Ozigbo as the CEO of THP over the last 4 years has overseen the

re-emergence of Hilton Abuja as the leading hotel brand in Abuja and also the turnaround

and modernisation of Transcorp Hotel Calabar. The board is responsible for, and has the

authority to determine, all matters relating to the strategic direction, policies and practices

of the Company and to establish the goals for the Senior Management team and the

operation of the Company.

Awards and Recognition

Transcorp Hotels Plc has received numerous honours in recent years for being an

outstanding company that prides itself on employee satisfaction and its ongoing

commitment to excellence. The company received the following list of awards over the last

five years

At the recently concluded Hilton Worldwide EMEA Sales Conference 2014 which

was held in UAE, employees of THP emerged as winners of Hotel Sales Deal of the

Year 2013 and Hotel Sales Person of the Year 2013 for Middle East, Africa, Russia

and CIS countries.

Transcorp Hilton Abuja has been selected and voted as the Best Hotel in Nigeria for

the year 2013/2014 at the 12th edition of World Travellers Awards in Abuja.

Transcorp Hilton Abuja has been selected and voted as the Best Hotel in Nigeria for

the year 2012/2013 at the 11th edition of World Travellers Awards in Abuja.

Transcorp Hilton Abuja won the award for Group Conference & Events Sales Team

of the Year 2012 for Middle East & Africa at the Hilton Worldwide EMEA Sales

Conference 2013.

Transcorp Hilton Abuja was the winner of the award for Hotel of the Year 2010 for

Middle East & Africa at the Hilton Worldwide EMEA Sales Conference 2011.

Page | 9

Equity Research



Ownership structure

THP is the hospitality subsidiary of Transnational Corporation of Nigeria Plc (“Transcorp

Plc”), which holds an 88% ownership interest in the Company through a wholly owned

entity named Capital Leisure and Hospitality Limited. The remaining 12% is owned by the

Federal Government of Nigeria.

SWOT Analysis

Strengths Weaknesses

Strong market presence, positioning and accumulated brand loyalty since 2005.

Through its convention and meeting facilities, THP can maximize its hotel occupancy and customer volumes during off-peak periods.

Strong brand name and partnership

Ability to raise significant debt due to existing zero exposure

Significant real estate available for expansion

Lack of low cost hotels

Opportunities Threats

Continued increase in international and domestic passenger traffic at the airport, generating demand for hotel accommodation.

Growing market of young, affluent Nigerians, with exposure to the premium hotel offerings overseas, looking for quality products at home.

Increase in demand resulting from economic growth in Nigeria, fuelled in large part by the oil and gas industry, demand from emerging new sectors e.g. power and the diversification of the economy, especially in the service sector.

Nigeria is currently experiencing security challenges posed by terrorist groups such as Boko Haram.

Potential increases in competitive supply.

The hotel market is highly dependent on government activity and political stability.

Nigeria is currently experiencing an Ebola outbreak which is affecting occupancy rates. Failure to control the outbreak will have worsening consequences for the industry.

Page | 10

Equity Research



Asset Overview

Transcorp Hilton Hotel, Abuja

The Transcorp Hilton Hotel began operations on April 14, 1987 as NICON Hilton Hotel out of

the determination by NICON Insurance Corporation to aid the development of the

hospitality industry in the Federal Capital Territory (FCT). In 2005, the Federal Government

of Nigeria sold a 51% stake in the hotel to Capital Consortium/Transnational Corporation Plc

which led to a name-change to Transcorp Hilton from Nicon Noga Hilton Hotel. The Hotel is

situated in the heart of Abuja, 40-minutes drive from the Nnamdi Azikiwe International

Airport, Abuja. It is a 670-room, 5-star hotel that provides luxury accommodation, exotic

cuisine, fully equipped meeting rooms and leisure facilities to business travellers and

tourists from all over the world. Following the acquisition, the Transcorp group has invested

heavily in refurbishing and renovating the hotel, in a bid to retain its leadership position as

the hotel of choice.

Expanding to the south – Transcorp Hotels, Calabar

Transcorp expanded its hotel coverage area in 201, with the acquisition of the Metropolitan

Hotel in Calabar, Cross River State. The 146 room hotel is situated in the heart of Calabar,

and is a major destination for both local and international visitors to the city. After the

acquisition, Transcorp changed the name of the hotel to reflect the change in ownership.

The hotel is a major destination for business conferences, retreats and meetings and it is

conveniently located along the Murtala Mohammed Highway, a route for the annual

Christmas festival carnival procession held in Calabar.

Table 3: Hotel Performance, June 2014 YTD

Hotel Rooms Occupancy

Transcorp Hilton, Abuja 670 65%

Transcorp Hotels, Calabar 146 54%

Future plans and projections – Transcorp Hilton, Ikoyi

In furtherance of its expansion plans, Transcorp executed a management agreement with

Hilton Worldwide to develop a 300 room five star hotel in upscale Ikoyi, Lagos. The hotel

will be jointly owned by THP and Heirs Holdings, the Pan African Investment Company.

Furthermore, THP has also disclosed plans to upgrade the hotel in Abuja and develop three

other Hilton branded hotels, namely;

A 250 room hotel in Port-Harcourt – land already acquired;

A 200 room hotel in Ikeja; and

A 200 room hotel in Warri.

The company plans to complete the development of these properties by the end of 2017.

Once all the rooms are completed, Transcorp would have a total of 1,816 available rooms in

Nigeria. We expect the expansion of the hotel portfolio to positively impact revenue growth

for the company in the near term, as the domestic hospitality sector continues to boom.

Page | 11

Equity Research



Catalysts

We consider share price catalysts to be:

Further potential supply in Lagos and Southern market - Further potential new hotels to be

completed in Ikeja, Ikoyi, Port Harcourt and Warri would increase the number of rooms

available for letting. While meaningful new supply in these areas is likely from 2017-18, we

expect the boost to supply will support sales strongly in medium to long-term.

Continuing growth in average room rates - Riding the hikes in average room rates for

premium locations such as Abuja and Lagos; hotels operating in these locations have

recorded double-digit growth in their rates over the last decade and boast of one of the

highest rates in Africa. Whilst rates will come under pressure as supply increases, we expect

hotel rates in Nigeria’s major cities to still stay relatively firm and above peer economies in

the next few years, which will continue to boost the market value of THP’s hotel portfolio.

Investment risks

Slowdown in economy - The hotel business is highly dependent on the overall economic

scenario. Any slowdown in economic activity will affect the business adversely.

Weak business or consumer confidence – Given travel is typically a discretionary spending

decision, THP’s hotel business is materially affected by business and consumer confidence,

which will influence the spending decisions of individuals and businesses. Weak business

confidence may cause companies to tighten their budgets and reduce spending in

discretionary areas. Likewise, consumer confidence levels will play into future spending

decisions. Weaker business and consumer confidence may be caused by higher

unemployment and slower than expected GDP growth, amongst other economic factors.

Stiff Competition - While there are benefits associated with economic recovery and a

strong brand in Hilton Worldwide, it must be noted that THP is not the only established

player in the market. InterContinental Hotels, Four Points by Sheraton, Carlson Rezidor, Sun

International and others have been able to establish their own brand values and command

certain market share in the industry. For third-party property owners, there is a bouquet of

options to choose from. This translates into competitive pricing for room rates and it might

be difficult for THP to raise room rates and prices given the stiff competition in the market.

Threat of terrorist attack or international health epidemic – Both terrorist attacks and

major epidemics (e.g. SARS, Swine Flu and Ebola) have the effect of decreasing international

travel. Such an event would likely see a reduction in arrivals into Nigeria for a short period,

which in turn will affect the demand for hotel rooms.

Page | 12

Equity Research



Financial Analysis and Valuation

Solid Financial Fundamentals

Good track in revenue and earnings growth: THP’s general performance has been positive

over the last five years, though the company witnessed slight contractions in revenue in

2012 (-3.4%) due to the insecurity and bomb threats in Abuja which affected the hotel

occupancy rates. However, the company has improved its performance post 2012

evidenced by the strong growth in turnover in 2013 (+15.8%) and is on course to do even

better in 2014 judging by the half year results for 2014. THP’s revenues and earnings are

derived primarily from hotel operations. The company has recorded a good number of

business travellers and tourists to its hotels as reflected by the contribution of the hotel

division to overall turnover. Over the last four years, income from letting out its rooms has

contributed on average 65% to total revenue. The proportion of Food & Beverage (F&B)

income to total revenue is also high as its restaurants get a lot of day visitors. The company

has nine F&B outlets offering different cuisines and are targeted at different classes of

customers. F&B income from these outlets make up a substantial 28% of the company’s top

line.

Over the last four years, the company’s gross margin has been above 65.0%; it was as high

as 78.4% in 2013. The lowest gross margin recorded over the period was 67.1% in 2010.

Gross profit margin has been on a steady increase because of management focus on

efficiency by reducing cost of sales as a percentage of sales from 32.9% in 2010 to 21.6% in

2013.

Figure 1: Income Split (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010A 2011A 2012A 2013A

Rooms Food and Beverage Shop Rental Service Charge Other Op. Rev.

Source: Company Financials

Page | 13

Equity Research



Between 2011 and 2013, EBITDA grew at a CAGR of 4% whilst operating profit has grown at

a faster rate (CAGR of 5%) from N5.2 billion to N5.7 billion over the same period. Over the

same period EBITDA and operating profit margins have been comfortably maintained above

35% and 25% respectively. The strong margins have filtered downwards as the company’s

underlying net margin between 2009 and 2013 is approximately 40.0%. It was as high as

50.7% in 2011 supported by a tax credit which was booked for that year.

Strong balance sheet – low financial gearing: THP has zero gearing ratio, almost unheard of

in the industry, despite the huge acquisition and renovation costs incurred by the company

over the years. At the end of FY13, the net debt-equity ratio of the company was 0.0x,

which is lower than the average debt-equity of c.1.5-2.0x in the industry. This provides

comfort and leads to low financial risks especially in an industry that has high operating

leverage and susceptible to cyclical risks. A low gearing provides the cushion and support

for any future plans and ability to take on debt if needed. Cash flow has been sufficient to

fund hotel investment (including projects now under construction). For example, even after

it acquired the Transcorp Hotels Calabar in 2012, its free cash flow for that period was an

outflow of N5.12 billion. We expect the planned doubling of the room stock in the next

three years to generate a steep change in earnings and profits. We believe the company

possesses the structure, management skills and relationships to turn this into reality. Cash

balance has been healthy for the last three years and investment income derived from

utilising the cash balance has supported earnings.

Figure 2: Margins Trend

67.1%

77.9% 74.1%

78.4%

44.0% 39.5%

30.5%

39.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2010A 2011A 2012A 2013A

Gross Margins PBT Margins


Page | 14

Equity Research



Financial Outlook

Revenue Projections

In forecasting revenue growth for THP, we have incorporated additional revenue from two

forms: room rate increases and more occupants. Room rate increases in times of lower

demand are likely to hurt occupancy rates. However, due to the expected undersupply of

hotel rooms in THP’s key market - the Abuja market - in the next few years, we believe THP

will have the leeway to raise room rates of the Transcorp Hilton Hotel Abuja without a

decline in occupancy. This, in addition to the expected increase to the number of rooms

available for let, at the completion of the Ikoyi and Port/Harcourt hotels in 2017, should

lead to significant growth in turnover. We expect revenue to grow at a CAGR of 14% over

the next seven years, underpinned by an increase in rooms available for let from 816 to

1,366 by 2020 and 5% CAGR rise in revenue per room (RevPAR). Management has also

disclosed plans to build hotels in Ikeja and Warri but both are excluded from our projections

since the full details on the projects are not yet available.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2014E 2015E 2016E 2017E 2018E 2019E 2020E

Sales Gross Profit EBITDA

Figure 3: Revenue, Gross Profit and EBITDA Projections (N’Mn)


Page | 15

Equity Research



Profitability Projections

We broke down THP’s cost of sales into four components – room maintenance, staff costs,

food & beverage expenses and other operating expenses. These costs are variable in nature

and are dependent on the total rooms available for let. Holding the view that management

will continue to hold a tight rein on costs, we have projected room maintenance, staff costs,

food & beverage costs and other operating expenses at 19.6%, 34.4%, 45.9% and 0.2% of

total costs over the forecast period in line with historical trend for the last three years. As

such, we project cost of sales (as a percentage of sales) at an average of 21.9% over the

forecast period. Our projection for average gross profit margin over the forecast period is

78.1%, slightly above the four-year historical average of 74.4%. We expect THP’s after tax

profit to grow to N11.78 billion (US$73.63 billion) in FY’20E from N5.6 billion (US$35 billion)

in FY14E driven by strong revenue growth as well as expansion in margins. Thus, we project

a CAGR of c.14% in EPS growth to N1.48 by FY’20. We envisage that ROAA will increase to

8.6% in FY’20 from 6.7% in FY14, while RoAE is expected to move up to 12.9% in FY’20 from

10.9% in FY14. This improvement is on account of increase in margins as well as asset

turnover driven by higher occupancy levels.

79.7% 79.1% 78.6% 79.0% 75.6% 77.0% 78.1%

47.7% 51.6% 53.7%

46.5%

38.1% 41.8%

45.4%

34.3% 37.2% 38.7%

33.5% 27.5%

30.1% 32.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2014E 2015E 2016E 2017E 2018E 2019E 2020E

Gross Margins PBT Margins PAT Margins

Figure 4: Gross Profit, PBT and PAT Margin Projections


Page | 16

Equity Research



Valuation We have valued THP using a composite of Peer Multiple approach (in this case EV/EBITDA

and P/E) and DCF valuation, attributing a slightly heavier weighting to the peer multiple

approach (assumptions explained below).

Peer Multiples - EV/EBITDA Multiple

We computed the EV/EBITDA ratio of the appropriate peer set for THP, with the

peers arrived at using a number of criteria. The peer set consists of publicly listed

hospitality providers operating in developing economies. Our estimates are

obtained from bloomberg.

Using this peer set, we arrive at an average EV/EBITDA multiple of 12.27x.

Company Name Country

Market Capitalization

(N’Bn)

Revenues [LTM] (N’Bn)

Total Enterprise

Value [Latest]

(N’Bn) TEV/

EBITDA (x)

Dorsett Hospitality China 69.02 37.55 151.69 10.51

New Mauritius Hotels Mauritius 73.64 41.12 148.33 14.91

Mandarin Oriental Hotel Group China 285.54 110.98 369.04 13.39

City Lodge Hotel South Africa 80.98 16.66 84.76 9.92

Shanghai Jin Jiang China 313.02 247.77 418.13 7.37

Indian Hotels Company India 200.15 109.52 338.20 17.93

Far East consortium China 121.05 85.39 287.43 10.19

TA Enterprise Berhad Malaysia 81.61 44.48 184.62 9.27

EIH Ltd India 161.55 41.54 167.00 16.96

High 313.02 17.93

Low 69.02 7.37

Mean 154.06 12.27

Median 121.05 10.51

Transcorp Hotels Plc

Mean EV/EBITDA Multiple (x) 12.27

Enterprise Value (N’Mn) 92,989.88

Less Net Debt 0

Less Gratuity* 0

Less Minority Interest 0

Equity Value (N’Mn) 92,989.88

Price per share N11.65

Page | 17

Equity Research



Peer Multiples - P/E Multiple

We computed the P/E ratio of the appropriate peer set for THP, with the peers

arrived at using a number of criteria. The peer set consists of publicly listed

hospitality providers operating in developing economies, obtained from Bloomberg

Using this peer set, we arrive at an average P/E multiple of 16.86x.

Company Name Country

Market Capitalization

(N’Bn)

Revenues [LTM] (N’Bn)

Total Enterprise

Value [Latest]

(N’Bn)

Price Earnings Ratio (x)

Dorsett Hospitality

69.02 37.55 151.69 12.56

Saudi Hotels & Resorts

182.95 19.60 172.25 27.58

New Mauritius Hotels

73.64 41.12 148.33 20.59

Dan Hotels

99.66 55.18 124.62 16.68

Mandarin Oriental Hotel Group

285.54 110.98 369.04 13.29

Gulf Hotel

62.73 14.48 53.50 10.51

High 285.54 27.58

Low 62.73 10.51

Mean 128.92 16.87

Median 86.65 14.99

Transcorp Hotels Plc

Mean P/E (x) 16.86

Projected 2014E EPS (N) 0.71

Implied Price (N) 12.05

Enterprise Value DCF

The projections in our valuation model (Enterprise Value DCF method) for THP cover a

seven-year period 2014 - 2020. The assumptions driving our cash flow projections over the

forecast horizon are summarised as follows;

A CAGR of 14% over the next seven years (this factors in the expected addition to

the number of rooms available for letting)

Cost of sales as a percentage of sales is projected at 21.9% on average over the

forecast period

Administrative expenses as percentage of sales at an average of 32.3% over the

forecast period

Average EBITDA and EBIT margins of 46.1%% and 37.9% over the seven years

projection respectively

WACC assumptions are as detailed in the table below;

Page | 18

Equity Research



WACC assumptions

RFR (1year exponential average of 10 year bond) 12.37%

After Tax Cost of Debt (Kd) 5.29%

Cost of Equity (Ke) 17.37%

*Stock Beta 1.00

Debt/Equity (target) 0.35x

LT Growth Rate 3.00%

WACC 13.24% * Market beta of 1.00 as the company is yet to be listed

(N’Mn)

2014E 2015F 2016F 2017F 2018F 2018F 2018F

EBIT 6,419 6,821 7,431 8,088 10,444 12,080 13,228

Tax charge (2,179) (2,525) (2,811) (2,604) (3,232) (3,956) (4,588)

NOPAT 4,240 4,297 4,620 5,485 7,212 8,124 8,640

Less: Capex (8,162) (15,894) (15,885) (800) (908) (1,014) (1,083)

Add: Depreciation 1,253 1,285 1,316 1,348 2,791 3,178 3,446 +/- Decrease/Increase in OpWC 668 773 844 413 1,051 973 1,264

Operating FCF (2,000) (9,540) (9,105) 6,446 10,146 11,261 12,267

Discount factor 0.9456 0.8454 0.7559 0.6758 0.6042 0.5402 0.4830

Present Value of OpFCF (1,891) (8,065) (6,882) 4,356 6,130 6,084 5,925

Terminal Value

Operating FCF

118,131

Discount factor

0.4830

Present Value of OpFCF 57,060

EV 62,717 Less: Net debt 0 Minorities 0 Equity Value (Market cap) 62,717 Price/Share 7.86

We arrive at a weighted value of N10.50: We attached a 33.3% weighting to each of the

methodologies utilised in arriving at the target price and derived an intrinsic value of

N10.50. We believe THP provides a good entry point into Nigeria’s attractive hospitality

industry.

Valuation (N) Weighting

EV/EBITDA Multiple Approach 11.65 33.33%

P/E Multiple Approach 12.05 33.33%

DCF Valuation 7.86 33.33%

Average (Target Price) 10.50

Page | 19

Equity Research



Africa’s Hospitality Industry

The African continent is emerging in many regards. The continent’s burgeoning population,

rich natural resources and push for improving governance have in recent times refocused

the potentials of the continent to foreign investors who have been traditionally held back

by negative perceptions. As new foreign direct investments continue to flow into

infrastructure development, mining, power, and manufacturing on the continent, so also

we have seen a notable interest in the Africa’s hospitality sector, driven by increased travel

and tourism both for business and leisure. Hence, Africa has emerged as a major target

market for international hotel investors and operators and has affirmed the region,

particularly sub-Saharan Africa as a hot-spot for development.

Sub-Saharan Africa – the bright spot of growth

According to Ernst and Young’s 2014 hospitality insights report – approximately 30 sizeable

hotel groups operate in Africa, which represents more than 60 brands with an estimated

47% of total hotel rooms in Africa located in Sub-Saharan Africa (SSA). Clearly, the

distribution is skewed and does not reflect the continent’s geography as SSA is home to 48

countries out of 55 countries on the continent. North African countries, mainly Egypt and

Morocco, have a well established hospitality industry, as the region has long existed as

vacation spots to European visitors in view of the region’s proximity to Europe. Though

North Africa has a higher number of chain hotel development in Africa, SSA has stronger

growth prospects as the region has witnessed significant investors’ attention over the last

decade. Notwithstanding the presence of long standing risks and barriers such as poor

transport infrastructure, unreliable supply of utilities – especially electricity, the

improvements in policy making and access to financing have endeared foreign investors to

opportunities on the continent. To mitigate most of the risks investors and hotel operators

coming into Sub-Saharan Africa often collaborate with strong local partners and advisors. In

2013, the development pipeline for hotels in SSA increased 23% over the previous year (vs.

9% in North Africa), with about 80 hotels in various stages of development. In 2013, the

Hilton led in hotel development in Africa (by pipeline status) followed by Carlson Rezidor

and Accor, in that order. Best Western entered the top ranking, occupying the 9th position,

with eight signed membership agreements and almost 800 rooms.

Page | 20

Equity Research



7,644 7,470

5,178

3,160

1,469 1,441 1,441 1,359 1,320 1,128

Egypt Nigeria Morocco Algeria Kenya Ghana Tunisia Libya South Africa Gabon

Total Pipeline Rooms

Pipeline hotel deals on the rise… Nigeria remains the most active market in Sub-Saharan

Africa for hotel development in 2013, with nearly 7,500 rooms under construction – a 10%

increase from 2012 (according to E & Y Global Hospitality Insight 2014). Ghana has seen

significant interest in its hospitality industry in recent years following the emergence of the

country as an oil producing nation. However the country dropped two places to eighth place

in its ranking for hotel development as more of the deals signed are yet to commence. In

East Africa, Kenya remained a key destination for tourism despite recent terrorist activities,

entering the top 10 countries in Africa with the highest number of hotel rooms under

development. Seven global brands have recently entered the Nairobi market – Kenya’s

capital and a transit point for tourists heading out to enjoy a safari or beach holiday.

4,982

4,472

2,028 1,990 1,931

1,528 1,385

989 731 717

Hilton Worldwide

Carlson Rezidor

Accor Louvre Marriott IHG Starwood Mövenpick Best Western

Kempinski

Total Pipeline Rooms

Figure 5: Top 10 Hotel Chain Brands by Pipeline Status (2013)

Source: W Hospitality Group

Figure 6: Top 10 Countries by Pipeline Status (2013)


Page | 21

Equity Research



…Driven by travel and tourism for business and leisure: The demand driver for SSA’s

hospitality varies widely in line with the economic focus of different countries. In Nigeria for

instance, demand is strongest in Lagos – the nation’s commercial capital, Abuja – the seat of

government and Port-Harcourt – the oil rich city, and is driven by business tourism. Some

other African countries have seen improved demand for hospitality services and

investments on the back of deliberate internal focus on tourism. Tanzania for instance relies

heavily on leisure tourists as the country boasts of its pristine beach resorts and extensive

nature reserves for Safaris. Recently, the Tanzanian government has been very deliberate in

its efforts to promote domestic and international tourism as seen in the concerted efforts

to attract travelers from Asia – China and India, in view of East Africa’s relative proximity to

Asia. According to World Travel & Tourism Council, the total contribution of SSA’s travel and

tourism industry stood at N5.8 trillion (US$36.6 billion) in 2013 (2.7% of GDP) and is

projected to rise by 4.7% in 2014 and by 5.1% from 2014 – 2024 to N10 trillion (US$63

billion). As of 2013, SSA ranks 10 out of 12 world regions, in terms of total contribution of

travel and tourism to GDP. However, SSA’s travel and tourism is growing faster, ranked 6th

(out of 12 regions) only behind Asia, Middle East and Emerging Europe, in terms of real GDP

growth in 2013. SSA’s prospects are even brighter from a longer term point of view, with

long term growth forecasts ahead of the Middle East, Emerging Europe and only behind

Asia. Surprisingly, SSA also ranked higher than the Middle East, in terms of relative

contribution of travel and tourism investments to total capital investments.

Table 4: Sub Saharan Africa Estimates and Forecasts

2013

(US$’Bn)

2013 (% of Total)

2014 Growth

(%)

2024 (US$’Bn)

2024 (% of Total)

2014 Growth

(%)1

Direct contribution to GDP 36.6 2.7 4.7 63.0 2.6 5.1

Total contribution to GDP 95.7 6.9 4.3 162.6 6.8 5.0

Visitor exports 29.5 6.4 5.2 48.5 7.0 4.6

Domestic spending 39.6 2.9 4.2 68.4 2.1 5.2

Leisure spending 44.5 1.7 5.1 77.1 1.7 5.1

Business spending 24.5 0.9 3.8 39.6 0.9 4.5

Capital investment 14.9 5.7 2.5 22.5 4.9 3.9 1 2014-2024 annualised real growth adjusted for inflation (%)

Page | 22

Equity Research



Nigeria’s hospitality sector

Rapid growth, still at infancy: The hotel industry in Nigeria has gone through significant

evolution in the last 15 years – since the return to democratic rule in 1999. With the advent

of democracy came a better liberalized, thriving private sector on the back of a substantial

increase in foreign direct investments. Driven by business tourism, demand grew faster than

supply in the 2000s, with the global hotel brands concentrated in Lagos – the country’s

commercial capital, Abuja – the seat of Government and Port-Harcourt – the ‘Oil City’. The

highest numbers of global hotel brands are in Lagos but recently we are seeing some

interest in other cities. For instance Best Western and Protea already have hotels outside

the ‘three big’ cities and Park Inn (by Radisson), Four Points by Sheraton and Hilton Garden

are due to open in Abeokuta, Owerri, Benin City, Ibadan and Uyo over the next few years.

Alongside the well established global brands, the Nigerian hotel industry has a high number

of substandard hotels and guest houses that lack professional and technical know-how in

hotel management and operation of the properties – which in our view is an evidence of an

immature and growing market.

High rates despite modest occupancy: Hotel rates in Nigeria, across the plethora of global

brands and even substandard local hotels, are amongst the highest globally, despite modest

occupancy rates. For the global hotel brands across the three major cities (Lagos, Abuja,

Port-Harcourt), we estimate that average occupancy rate across the major cities will be

around 60% – 65%, from a high of c.80% in 2008. In addition to the negative impact of

heightened insecurity of the last 3 years in the Abuja market, the surge in the number of

hotels, particularly in Lagos, has raised the level of competition, thereby lowering average

occupancy rate in the industry. For instance, Radisson Blu (with 170 rooms) was

commissioned in 2011 whilst Intercontinental hotel (with 384 rooms) entered the market in

2013.

Strong upside from opportunities in leisure tourism: With the recent influx of more global

brands into the Nigerian hotel market, the level of competition has undoubtedly risen and it

would appear as if the potential upside for the industry is significantly reduced. However,

there is a strong and yet untapped market from local demand as a result of tourism for

leisure as opposed to business tourism which is the current key driver of demand. So far

internal tourism in Nigeria is significantly under patronized as infrastructural bottlenecks

which makes transportation to key tourist destinations cumbersome, has been a key

hindrance. As seen in the privatization of the power sector recently, we strongly believe

private sector participation in transportation will gain traction over the next few years.

Already in Lagos and Port-Harcourt, modern rail systems are currently under development,

scheduled for completion and operation in 2 – 3 years. Also, we have seen the federal

government rehabilitate the existing rail transportation system (though still the narrow

gauge as opposed to the more modern standard gauge), such that people can, to some

extent, now move by rail up north from Lagos. Added to all of these also is the fact that

there is deliberate and concerted effort to spur internal tourism – as we have seen

increased local tourist consultants and travel agents emerge. Hence, we see a strong upside

Page | 23

Equity Research



to leisure tourism spending in Nigeria, which currently stands at N672 billion (US$4.2 billion)

(US$26 million), way below South Africa’s N2.3 trillion (US$14.8 billion) as at 2013.

Currently Nigeria ranks second in Sub-Saharan Africa in leisure travel and tourism spend and

have one of the slowest rates of growth historically.

Demand Drivers – market demand for hotel in Nigeria is primarily from the corporate sector

and comes in two key forms - Corporate Travel and Group Meetings & Conferences

Corporate Travel: Lagos and Port-Harcourt typically have a large influx of

international travellers who are either on a short business stay or perhaps for an

extended period. For this category of people, the global hotel brands are the

preferred spots for accommodation during these business trips. The Port-Harcourt

market is predominantly dominated by expatriates in the oil & gas and related

industries whilst the clientele for the Lagos hotel market is much more varied as the

corporate head offices for most multinational corporations operating in Nigeria are

located in Lagos. The Abuja market is mainly driven by government-related business

travel or meetings, predominantly from domestic travelers and also from

international travelers.

Meetings and Conferences: In tandem with the rising number of new businesses

operating in Nigeria (local companies and multinationals) we have seen increased

use of hotels for conferences, retreats and meetings by local businesses and

multinationals. Some multinationals which commenced operations in Nigeria over

the last 5 years include Etisalat, Rand Merchant Bank, Old Mutual Insurance,

Wilmar International, Syngenta, AstraZeneca, Colgate, L’Oreal, amongst others.

14.792

4.237

2.746 2.527 2.402 2.169 1.448 1.422 1.231 1.165

South Africa

Nigeria Ethiopia Angola Kenya Tanzania Sudan Ghana Mauritius Namibia

Leisure Travel & Tourism Spending

Figure 7: Leisure Travel & Tourism Spending (US$’Bn)


Page | 24

Equity Research



Domestic leisure and tourism: Though domestic tourism is not a significant contributor to

the demand for hotel services in Nigeria in our view, it has no doubt had a positive impact

on the demand for hotel services in Nigeria. Government efforts through the Nigerian

Tourism Development Corporation (NTDC) have also raised the awareness on Nigeria’s

tourism potentials both locally and on the international scene. In addition, the emergence

of travel/tourism agencies like wakanow.com has further improved the patronage for local

tourist destinations. All of these, in addition to demand for hotel accommodation from

Nigerians in Diaspora when they travel home, are an emerging growth area that has the

potential to significantly raise the demand for hotel services in Nigeria.

Cultural festivals: In recent times, government (federal and state) efforts to show case

Nigeria’s cultural heritage have considerably raise the awareness and attendance levels at

Nigeria’s cultural events/festivals. Notable amongst these is the Black Heritage and Eyo

festivals organized yearly by the Lagos State Ministry of Tourism, as well as the Calabar

Festival, held at the end of the year in Calabar. Others include the Osun Oshogbo Festival in

Osun State, Argungu Fishing Festival in Kebbi State and Oju-Ode Oba in Ijebuland.

Religious tourism: A survey conducted by the NTDC has revealed that there is significant

influx of people into Nigeria for the annual conventions of some mega churches. According

to the survey, the Redeemed Christian Church of God and Mountain of Fire Ministries

attract more than 15 million people to their camp sites during conventions.

Industry SWOT analysis

Strengths Weaknesses

Strong business fundamentals – high average daily rates, modest occupancy

Relatively high gross margins

Limited number of skilled labour supply

Lack of an official grading system

Opportunities Threats

Growth in domestic leisure and tourism

Prospective demand from emerging corporations in new sectors (e.g. power)

High operating costs (energy in particular)

Multiple taxation

High construction costs

High interest rates and financing costs

Page | 25

Equity Research



Lagos Market - commercially driven by corporations

Lagos is unarguably Nigeria’s most populous city and the nation’s commercial capital with

most of the corporate head offices located in the city. The city is also home to the country’s

biggest international airport (measured by passenger travels) and the busiest sea ports.

Supply: According to the W Hospitality Group, Lagos is home to almost 10,000 hotel rooms

owned by recognized global brands. This number excludes small, independent hotels and

guest houses and lodging facilities that are company owned. In the last 3 years, the Lagos

metropolis has seen a significant surge in the number of hotel rooms. Notable amongst the

hotels that commenced operations in Lagos in the last 4 years are Radisson Blu, Four Points

by Sheraton, Best Western, Intercontinental Hotel, Ibis, amongst others.

Table 5: Lagos Hotel Market ( 2013)

Hotel Rooms Positioning

Amber (African Sun) 39 Midscale

Best Western 239 Midscale

Eko Hotel & Suites 654 Mid to Upscale

Federal Palace (Sun Int’l) 150 Deluxe

Four Points by Sheraton 234 Upscale

Golden Tulip 476 Upscale

Ibis 365 Economy

InterContinental 358 Deluxe

Legacy Wheatbaker 65 Deluxe

Moorhouse M Gallery 90 Upscale

Oriental 64 Upscale

Protea 380 Mid to Upscale

Radisson Blu 170 Upscale

Sheraton 332 Upscale

Southern Sun 195 Upscale

Swiss International 85 Midscale

Demand: Business demand accounts for c.75% of the demand for hotel accommodation in

Lagos, originating mostly from the banking, telecoms, as well as the oil & gas sector. Given

its location as the most commercially active West African city, the demand for conferences

from the corporate sector, government, professional bodies and Non-Governmental

Organizations (NGOs) is the second key driver of the demand of hotel services in Lagos.


Page | 26

Equity Research



Pricing and Occupancy: Lagos has one of the highest hotel rates globally, with average daily

rate at $277 as at September 2013, according to Ernst and Young. Reflecting the growth

potential of the industry, occupancy rate increased in 2011 and has remained stable

thereafter despite the significant increase in the supply of hotel rooms in the last 3 years.

Though the average daily rate (ADR) of Lagos hotels still remain one of the highest in Africa,

it has come under pressure recently, following the increase in the supply of hotel rooms. In

2008, Lagos hotels had the second highest average daily rates globally (second to Paris)

according to STR global rankings.

Table 6: Lagos Hotel Performance Data

2010 2011 2012 2013

Occupancy (%) 59.3 64.7 64.6 66.6

Average Daily Rate (US$) 300 289 298 295

Revenue per Available Room (US$) 178 187 193 196

Outlook: Over the next 3 years, the Lagos market may see an addition of about 4,600 new

hotel rooms (about 3,400 from branded hotels and 1,200 from unbranded hotels). Of this

4,600 more than half have commenced construction and are either currently in the active

construction stage or witnessed some stalling following the commencement of

construction. Most of the recent additions to the Lagos hotel market are at the top, deluxe

end of the market, which in our view will increasingly come under pricing pressure given the

surge in supply. Hence, whilst there’s still immense growth opportunity for hospitality

services in Lagos – given the city’s vibrant economy and burgeoning professional class – the

prospect for strong demand will predominantly stem from the mid-market, budget and

economy sectors.

Table 7: Lagos Future Branded Supply Hotel Market

Brand Rooms Scheduled Opening Year

African Pride 200 2014

Crown Plaza 275 2014

Golden Tulip 42 2014

Mantis 129 2014

Protea Select 126 2014

Tulip Inn 100 2014

Park Inn by Radisson 150 2015

Ramada 164 2015

Sun International 200 2015


Page | 27

Equity Research



Future Lagos Future Branded Supply Hotel Market ( 2013) contd.

Wheatbaker (extension) 41 2015

Best Western Premier 65 2016

Fairmont 230 2017

Four Points by Sheraton 191 2017

Hilton 1070 2017

Holiday Inn 600 2017

Luxury Collection 441 2017

Marriott 150 2017

Port Harcourt Market – Woven around the oil industry

Port –Harcourt is the capital city of Rivers State and is a major commercial centre of the oil

rich Niger Delta region. The city has an international airport and a manufacturing economy

tied almost entirely to the oil & gas sector. Key materials manufactured in Port-Harcourt

include aluminum products, glass bottles, paper, steel, paints, and plastics, amongst others.

Supply: Relative to Lagos, Port-Harcourt has a fewer number of internationally branded

hotels. Hence the market is dominated by unbranded, owner operated hotels – most with

standards lower than the global brands. As reported by W Hospitality group, Port –

Harcourt has 16 major hotels with 1,556 rooms in total.

Table 8: Port Harcourt Hotel Market ( 2013)


Le Meridien 87 Upper-Upscale

Novotel 117 Upper Midscale

Presidential Hotel 305 Upper Midscale

Golden Tulip 102 Upscale

Best Western Premier 89 Midscale

Juanita 65 Midscale

Beverly Hills 130 Midscale

Bougainvillea 58 Midscale

Dannic Hotel 46 Midscale

Everyday Check-Inn 31 Midscale

Landmark 120 Midscale


Page | 28

Equity Research



Port Harcourt Hotel Market ( 2013) contd.

Maas Central 30 Midscale

Rachael Hotel 62 Midscale

Sasun 125 Midscale

Vee Hotel 72 Midscale

Swiss International Mabisel 117 Midscale

Demand: The demand for hotel accommodation comes from businesses – most of which

are in the oil & gas sector and the State government. Similar to the trend in Lagos, meetings

and conferences also account for a major part of the demand for hotels in the city. Hotel

demand in Port-Harcourt suffered a hit in 2009 at the onset of major unrests and militant

activities as insecurity peaked. We note however that relative stability has returned to the

city as the state government has been implementing a number of infrastructural projects.

Outlook: Over the next 3 years, a number of hotel development projects which would add

c.800 rooms to the existing supply in the city are underway. Of these, the Transcorp Hilton

Port-Harcourt, with about 250 rooms is expected to be the biggest. (See table below)

Table 9: Port Harcourt Future Branded Supply Hotel Market

Group Name Brand Rooms Scheduled Opening Year

African Sun African Sun 76 2015

African Sun Amber 196 2015

Carlson Rezidor Radisson Blu 206 2016

Transcorp Hilton Hilton 250 2017

Abuja hotel market – thriving on government related business travel

As Nigeria’s capital city, Abuja - home of the federal capital territory is the political and

administrative seat of the central government. Unlike Lagos, commercial activities are

limited in Abuja. Hence, the business activities which drive the hospitality sector in Abuja

are predominantly government-related. The city is home to about 285 government agencies

and parastatals and therefore the majority of Abuja’s workforce are civil servants. The

construction and service sectors in Abuja are vibrant and therefore provide the majority of

employment in the private sector. The city is home to the Nnamdi Azikwe International

Airport – Nigeria’s second major airport. Compared to the Murtala Muhammad Airport in

Lagos, there are fewer international flights from the Abuja airport.


Page | 29

Equity Research



Supply: The Abuja market has witnessed slower increase in the number of additional hotel

rooms since 2010, in contrast to Lagos. Currently, there are no new internationally branded

hotels under development in Abuja. The Abuja market has two big internationally branded

hotels – the Hilton and Sheraton and five smaller international hotel brands, of which three

are managed by Protea. The city also has a number of large locally managed hotels and

small boutique hotels. The large locally managed hotels include the NICON luxury, Bolingo,

and Rockview. The key brands in the Abuja market are presented in the table below;

Table 10: Abuja Hotel Market ( 2013)


Mediterranean Hotel 25 Midscale

Protea Hotel Asokoro 83 Midscale

Bolingo Hotel & Tower 350 Midscale

Chelsea Hotel 38 Midscale

Nanet Suites 52 Midscale

Reiz Continental 86 Midscale

Hawthorn Suites 110 Midscale

Protea Apo Apartment 32 Midscale

NICON Luxury Hotel 253 Midscale

Best Western Plus Ajuji Hotel 104 Midscale

Ibeto Hotel 100 Midscale

Nordic Residence/Villa 32 Midscale

Protea Maitama 28 Upscale

Summerset 26 Midscale

Transcorp Hilton Abuja 670 Upper Upscale

Chelsea Hotel 124 Midscale

Denis Hotel 84 Midscale

Immaculate Suites & Apartment 86 Midscale

Rockview Royale 210 Midscale

Sheraton Hotel 540 Upscale


Page | 30

Equity Research



Demand: The demand for hotel services comes from the companies doing business directly

or indirectly with government. Embassies also create demand for hotel services in the city.

In terms of tourism, Abuja has next to nothing and thus tourism fuels very minimal demand

for hotel services in the city. Following the key terrorist attack on the United Nations

building in 2011 and subsequent attack at various locations in the Abuja metropolis,

occupancy rate of Abuja hotels diminished quite remarkably given negative international

travel advisory into Abuja city that followed such attacks. According to the Research

conducted by W Hospitality Group, room occupancy was down in 9 out of 12 months in

2012, with average occupancy rate for the year at 51% (versus 59% in the prior year).

Transcorp Hilton represents over 50% of available rooms sample in determining occupancy

rates.

Outlook: A number of agreements for the development of international hotels have been

signed for the Abuja markets. However, none of these is under construction yet. Table 10

below summarizes the expected new hotel supply from international brands by signed

agreement in the Abuja market.

Table 11: Abuja Future Branded Supply Hotel Market

Group

Name Brand Rooms Scheduled Opening Year

Best Western Best Western 84 2015

Carlson Rezidor Park Inn by Radisson 150 2015

Carlson Rezidor Park Inn by Radisson 125 2017

Carlson Rezidor Radisson Blu 200 2017

Marriott Courtyard 250 2017

Marriott MEA 100 2017

Page | 31

Equity Research



Other emerging cities

Hotel demand in Nigeria’s secondary cities (Ibadan, Benin, Abeokuta, Asaba, Uyo, Owerri

etc) is driven by domestic travel. Currently the dominating global brand in these cities is

Protea which has hotels in Benin and Warri. Others such as Best Western, Radisson, Four

Points by Sheraton, Golden Tulip, and African Sun have hotel development pipelines to take

advantage of the nascent market in these cities. The Park Inn by Radisson, Hilton Garden

Inn, Best Western Plus and Golden tulip (see table below) are actively under construction.

Table 12: Secondary Cities Future Branded Supply Hotel Market

Group Name Brand Location Rooms Scheduled Opening Year

Best Western Best Western Plus Asaba 90 2014

Best Western Best Western Plus Makurdi 135 2014

Carlson Rezidor Park Inn by Radisson Abeokuta 173 2014

Louvre Golden Tulip Ibadan 80 2014

Hilton Hilton Garden Inn Uyo 240 2015

African Sun African Sun Warri 100 2014

Louvre Golden Tulip Warri 192 2014

African Sun African Sun Owerri 170 2015

Louvre Tulip Inn Owerri 79 2016

Starwood Four Points by Sheraton Ibadan 150 2017

Starwood Four Points by Sheraton Benin City 188 2017

Hilton Hilton Garden Inn Owerri 150 2017

Page | 32

Equity Research



Financial Statements and Ratios (N)

Income Statement (N'Mn) 2011 2012 2013 2014E 2015F 2016F

Revenue 13,725 13,258 15,349 16,323 17,466 18,688

Cost of sales (Excluding Depreciation) (3,028) (3,439) (3,317) (3,312) (3,643) (4,008)

Gross Profit 10,697 9,819 12,032 13,011 13,823 14,681

Admin Expenses (4,220) (4,887) (5,056) (5,387) (5,764) (5,980)

Other Operating Income 59 24 47 47 47 47

EBITDA 6,537 4,957 7,022 7,671 8,106 8,748

Depreciation and Amortisation (1,371) (1,361) (1,303) (1,253) (1,285) (1,316)

EBIT 5,166 3,596 5,719 6,419 6,821 7,431

Net interest income/(expense) 260 454 403 1,362 2,196 2,608

Profit Before Tax 5,426 4,050 6,122 7,781 9,017 10,039

Taxation 1,531 (1,140) (1,713) (2,179) (2,525) (2,811)

Profit After Tax 6,957 2,910 4,409 5,602 6,492 7,228

Statement of Financial Position (N'Mn) 2011 2012 2013 2014E 2015F 2016F

Assets

Land 0 30,873 31,359 31,359 31,359 31,359

Property Plant and Equipment 5,560 17,550 16,209 23,118 37,727 52,296

Intangible Assets 0 2,047 2,037 2,037 2,037 2,037

Inventory 763 986 924 1,089 1,198 1,318

Receivables, Prepayments and Trade 1,538 1,687 2,119 2,236 2,393 2,560

Bank and Cash Balance 6,711 5,130 8,639 18,600 25,313 26,839

Due from related parties 4,439 3,462 5,304 5,304 5,304 5,304

Total Assets 19,010 61,735 66,590 83,742 105,330 121,712

Liabilities

Defined benefit obligation 0 715 0 0 0 0

Income Tax Payable 4,445 3,881 5,225 5,849 6,615 7,446

Payables and Accrued Expenses 3,265 3,263 2,396 2,722 2,994 3,294

Due to related companies 34 2,254 3,857 3,857 3,857 3,857

Deposit for shares 0 0 4,000 4,000 4,000 4,000

Deferred Tax Liability 901 7,279 7,598 7,598 7,598 7,598

Borrowings Falling After one Year 0 0 0 0 15,680 25,872

Retirement Benefit Obligation 1,309 1,038 0 0 0 0

Total Liabilities 9,954 18,430 23,076 24,026 40,745 52,068

Capital and Reserves

Share Capital 5 5 5 4,391 4,391 4,391

Share Premium 0 0 0 7,614 7,614 7,614

Reserves 1,401 43,300 43,509 47,711 52,580 57,639

Capital Reserves 7,650 0 0 0 0 0

Shareholders' funds 9,057 43,305 43,514 59,716 64,585 69,644

Total liabilities and equity 19,010 61,735 66,590 83,742 105,330 121,712

Key Ratios 2011 2012 2013 2014E 2015F 2016F

Profitability

Return on Average Equity 153.6% 11.1% 10.2% 10.9% 10.4% 10.8%

Return on Average Assets 36.6% 4.7% 6.6% 6.7% 6.2% 5.9%

EBITDA Margin 47.6% 37.4% 45.7% 47.0% 46.4% 46.8%

EBIT Margin 37.6% 27.1% 37.3% 39.3% 39.1% 39.8%

Pretax Profit Margin 39.5% 30.5% 39.9% 47.7% 51.6% 53.7%

Net Profit Margin 50.7% 21.9% 28.7% 34.3% 37.2% 38.7%

Valuation Multiples

P/E (x) 0.0 0.0 0.0 14.2 12.3 11.0

P/B (x) 0.0 0.0 0.0 1.3 1.2 1.1

Dividend Yield (%) 0.0% 0.0% 0.0% 1.8% 2.0% 2.7%

Page | 33

Equity Research



Financial Statements and Ratios (US$)

Income Statement (N'Mn) 2011 2012 2013 2014E 2015F 2016F Revenue 90 85 99 102 106 110

Cost of sales (Excluding Depreciation) (20) (22) (21) (21) (22) (24)

Gross Profit 70 63 77 81 84 86

Admin Expenses (28) (31) (32) (34) (35) (35)

Other Operating Income 0 0 0 0 0 0

EBITDA 43 32 45 48 49 51

Depreciation and Amortisation (9) (9) (8) (8) (8) (8)

EBIT 34 23 37 40 41 44

Net interest income/(expense) 2 3 3 8 13 15

Profit Before Tax 36 26 39 49 55 59

Taxation 10 (7) (11) (14) (15) (17)

Profit After Tax 46 19 28 35 39 42

Statement of Financial Position (N'Mn) 2011 2012 2013 2014E 2015F 2016F Assets

Land 0 198 201 195 190 184

Property Plant and Equipment 35 113 104 144 228 307

Intangible Assets 0 13 13 13 12 12

Inventory 5 6 6 7 7 8

Receivables, Prepayments and Trade 10 11 14 14 14 15

Bank and Cash Balance 43 33 55 116 153 158

Due from related parties 28 22 34 33 32 31

Total Assets 121 396 428 522 637 715

Liabilities

Defined benefit obligation 0 5 0 0 0 0

Income Tax Payable 28 25 34 36 40 44

Payables and Accrued Expenses 21 21 15 17 18 19

Due to related companies 0 14 25 24 23 23

Deposit for shares 0 0 26 25 24 24

Deferred Tax Liability 6 47 49 47 46 45

Borrowings Falling After one Year 0 0 0 0 95 152

Retirement Benefit Obligation 8 7 0 0 0 0

Total Liabilities 64 118 148 150 247 306

Capital and Reserves

Share Capital 0 0 0 27 27 26

Share Premium 0 0 0 47 46 45

Reserves 9 278 279 297 318 339

Capital Reserves 49 0 0 0 0 0

Shareholders' funds 58 278 279 372 391 409

Total liabilities and equity 121 396 428 522 637 715

Key Ratios 2011 2012 2013 2014E 2015F 2016F

Profitability

Return on Average Equity 153.6% 11.1% 10.2% 10.9% 10.4% 10.8%

Return on Average Assets 36.6% 4.7% 6.6% 6.7% 6.2% 5.9%

EBITDA Margin 47.6% 37.4% 45.7% 47.0% 46.4% 46.8% EBIT Margin 37.6% 27.1% 37.3% 39.3% 39.1% 39.8%

Pretax Profit Margin 39.5% 30.5% 39.9% 47.7% 51.6% 53.7%

Net Profit Margin 50.7% 21.9% 28.7% 34.3% 37.2% 38.7%

Valuation Multiples

P/E (x) 0.0 0.0 0.0 14.2 12.3 11.0

P/B (x) 0.0 0.0 0.0 1.3 1.2 1.1

Dividend Yield (%) 0.0% 0.0% 0.0% 1.8% 2.0% 2.7%

Page | 34

Equity Research



Disclosure Analyst Certification

The research analyst(s) denoted by an “*” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for

this report, the research analysts denoted by an “*” on the cover or within the document individually certifies, with respect to each security or

issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report accurately articulate the research

analyst(s) independent views/opinions, based on public information regarding the companies, securities, industries or markets discussed in this

report. (2) The research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific

recommendations, estimates or opinions expressed in this report.

Analysts’ Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon various factors,

including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from,

among other business units, Investment Banking and Asset Management.

Investment Ratings

CardinalStone employs a 3-step rating system for equities under coverage: Buy, Hold, and Sell.

Buy ≥ +15.00% expected share price performance

Hold +0.00% to +14.99% expected share price performance

Sell < 0.00% expected share price performance

A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least +15.00% between the current price and the

analyst’s target price.

An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of +0.00% and +14.99%,

A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns of less than 0.00% is expected,

between the current price and analyst’s target price.

CardinalStone Research distribution of ratings/Investment banking relationships as of July 9th, 2014

Rating Buy Sell Hold

% of total recommendations 41% 21% 38%

with investment banking relationships 15% 6% 3%

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any

security recommended herein. You can contact the analyst named on the front of this note for further details.

Frequency of Next Update: An update of our view on the company (ies) would be provided when next there are substantial

developments/financial news on the company.

Conflict of Interest: It is the policy of CardinalStone Partners Limited and its subsidiaries and affiliates (individually and collectively referred to as “CardinalStone”) that research analysts may not be involved in activities that suggest that they are representing the interests of Cardinal Stone in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts’ reporting lines are structured to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in CardinalStone’s Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, based on the research analyst’s published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests.

Page | 35

Equity Research



Company Disclosure: CardinalStone may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally,

affect the objectivity of this report. Material interests, which CardinalStone has with companies or in securities discussed in this report, are

disclosed hereunder:

Company Disclosure

Transnational Hotels Plc

a. The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company b. The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company c. CardinalStone is a market maker in the publicly traded equities of the Company d. CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly disclosed offer of securities of the Company e. CardinalStone beneficially own 1% or more of the equity securities of the Company f. CardinalStone holds a major interest in the debt of the Company g. CardinalStone has received compensation for investment banking activities from the Company within the last 12 months h. CardinalStone intends to seek, or anticipates to receive compensation for investment banking services from the Company in the next 3 months i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution j. The Company is a client of CardinalStone k. The Company owns more than 5% of the issued share capital of CardinalStone l. CardinalStone has other financial or other material interest in the Company

Important Regional Disclosures

The analyst(s) involved in the preparation of this report may not have visited the material operations of the subject Company (ies) within the past

12 months. To the extent this is a report authored in whole or in part by a Non-U.S. analyst and is made available in the U.S., the following are

important disclosures regarding any Non-U.S. analyst contributors: The Non-U.S. research analysts (denoted by an * in the report) are not

registered/qualified as research analysts with FINRA; and therefore, may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on

communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by

an *) is a Non-U.S. Analyst and is currently employed by Cardinal Stone.

Legal Entities

Legal entity disclosures: CardinalStone Partners is authorized and regulated by the Securities and Exchange Commission (SEC) to conduct

investment business in Nigeria.

Documents

Nigeria’s Largest Hospitality Provider · Nigeria’s Largest Hospitality Provider A leading franchise: Transcorp Hotels Plc (THP) is a hotel developer, owner and asset manager