GCR Affirms Transcorp Ratings, Cites Improve Leverage, Cash Flows
GCR Ratings has affirmed Transcorp Hotels Plc.’s national scale long-term and short-term Issuer ratings of BBB+ (NG) and A2 (NG) respectively, with a stable outlook, according to its latest rating note.
It said the rating affirmation of Nigeria-based Transcorp Hotels Plc weighs the solid earnings trajectory and the consequent improvement in leverage and cash flows against the geographical concentration of earnings.
The ratings were also supported by parental support from Transnational Corporation Plc, GCR said, adding that Transcorp maintains a leading position in the Nigerian hospitality market.
GCR said the flagship Abuja hotel continues to attract premium customers, which underpins the above-peer performance in respect of occupancy rates, average daily rates and profitability.
The rating said competitive position is constrained by the concentration of Transcorp’s operations and earnings to the Abuja property, albeit the property does have diverse product offerings including rooms, foods and beverages, banqueting and conference centre amongst others.
Transcorp’s Aura product is entrenching the Transcorp brand in the Nigerian hospitality market, with over 1,000 franchisees onboarded as of September 2022 as against 588 in December 2022.
Nevertheless, attributable income from this product will likely remain small, according to the rating note, saying the positive earnings profile reflects the demonstrated earnings recovery post-COVID lockdowns.
In its assessment, GCR said the company’s revenue grew 114% in 2021 from the low base in 2020, and further by an annualised 38.9% in 9-month results in the financial year 2022. READ: Fitch Downgrades Russia, Cites Imminent Default
“This was supported by a combination of price escalation and higher occupancy rates”. Thus, GCR expects these factors, combined with additional revenue from the event centre being constructed, to underpin topline growth of 20% in 2023.
Transcorp’s earnings before interest tax depreciation and amortization (EBITDA) margin is expected to remain strong at around 33%-35% range over the outlook period, underpinned by premium pricing and tight cost management.
According to the rating note, GCR takes cognizance of the overall improvement in the leverage and capital structure, albeit this remains slightly negative due to weak interest coverage. In 2021, Transcorp’s gross debt decreased to N23.7 billion, then printed at N22.7 billion in the 9-month results for 2022, from N32.3 billion in 2019.
This, combined with the stronger earnings generated has supported wider net interest coverage of 1.8x in 2021 and 2.8x in 9m-2022, according to GCR Ratings. It said although further improvement is anticipated, the metric will likely remain constrained within the low range of 2x-4.7x over the rating horizon.
Similarly, net debt to EBITDA improved to 1.8x in 9-2022 from 2.5x in 2021 and 19.7x in 2020.
The rating note said this is expected to further strengthen to 1.5x in 2022 and around 1x in 2023 on the back of lower debt and sustained robust earnings.
The company’s operating cash flow coverage of gross debt also improved to 26.5% in 9m- 2022, compared to the negligible level in 2021. GCR said the improvement is primarily attributable to higher cash generation and well-managed working capital.
The rating firm forecasts stronger coverage of 38% in 2022 and further to 80% in 2023, supported by working capital releases and lower interest payments.
In addition, GCR also positively views Transcorp Hotel’s access to diverse funding sources and the smoothed maturity profile, with a weighted average maturity of five years. The rating firm hints that it considers the company’s liquidity moderate, with GCR’s estimated sources versus uses of funds of 1.37x over the next 15 months.
“This reflects robust operating cash flows of N3 billion expected in 4Q-2022 and N14.5 billion by 2023; cash holding of N4.2 billion as of 30 September 2022 and an uncommitted overdraft facility of N2 billion”.
GCR estimates that this would sufficiently meet scheduled debt repayment and modest capital expenditure (CAPEX) spend earmarked for the financial year 2023. The rating said it has factored in strong parental support from Transnational Corporation Plc into its assessment.
The rating note reads that Transcorp Hotels is considered an important member of the wider group, accounting for 23.5% of group revenue and 30% of the asset base.
There is also close operational integration and a good history of funding support from the parent company. GCR affirms the relatively strong standalone credit fundamentals of Transcorp Hotels Plc, it added.
It said the stable outlook reflects GCR’s expectation that Transcorp will sustain robust earnings and cash generation, while meaningfully deleveraging over the medium term. # GCR Affirms Transcorp Ratings, Cites Improve Leverage, Cash Flows
