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Wednesday, September 27, 2023

Nigerian Hotel Companies are Running Out of Cash

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Nigeria’s largest hotel companies are struggling to make ends meet as they are not converting enough sales into cash.

The average cash margin for the largest listed hotel firms listed on the bourse – Transcorp Hotel Plc, Tourist company of Nigeria, Ikeja Hotel, and Capital Hotel- was (111.38 percent) in December 2020, from 34.85 percent the previous year.

Negative cash margin means these firms do not have the financial strength to settle debt, pay dividend and fund future expansion plans.

It is important to note that the operating cash flow is not negative because they have invested in capital expenditure to build more hotels across the country; rather, it is simply because of protracted declining sales as lodgings have twiddled during the lockdown period.

Of course, the Hospitality industry is the hardest hit from the Covid-19 crisis that forced the government to shutter bars, restaurants, and casino houses.

Hotel occupancy was down 30 percent, as international travels were restricted, while jobs were lost, and analysts say the current crisis is more menacing than the Ebola outbreak of 2014 and the recession of 2015.

Before the outbreak of the virus from Wuhan City in China in early 2020, companies were contending with a difficult business environment as policy maker’s flip-flops forestalled foreign direct investment.

Additionally, the bedlam occasioned by nefarious activities of bandits and Boko Haram means foreign investors will not find the country an investment destination.

Nigeria’s gross domestic product shrank 3.6 percent in the third quarter of 2020 on the back of prolonged lockdown imposed by the government to curb the spread of a virus that disrupted the demand and the supply side of the market.

The country’s inflation figure for the month of January hit a 17-month high of 16.47 percent despite the reopening of the land borders.

The country’s unemployment rate jumped to an all-time high of 27.10 percent in the second quarter of 2020 as against 23 percent recorded in the third quarter of 2018, according to the statistics body.

To surmount the headwinds and ride out the waves, the owners of hotel companies will have to inject more capital into the business and consent to mergers and acquisition. A scheme of capital reduction and reorganization could be carried out to purge huge liability from the balance sheet.

Some firms are already taking advantage of the low interest rate environment while contemporaneously keeping the debt market busy.

Transcorp Hotels Plc, owners of the iconic Transcorp Hilton Abuja and Transcorp Hotels Calabar, is set to raise the sum of N10 billion in its proposed Rights Issue to fortify its balance sheet.

Drilling down the books of companies shows Tourist Company of Nigeria has a negative cash flow from operating activities of N6.52 billion as at December 2020, from a loss position of N1.20 billion the previous year.

Ikeja Hotel Plc has a negative cash flow from operating activities of N326.15 million as at December 2020 from a positive figure of N3.22 billion the previous year.

Capital Hotels has negative cash flow from operating activities of N82.03 million from a cash position of N1.96 million the previous year.

However, Transcorp Hotels bucked the trend as it has a positive cash flow from operating activities of N7.95 billion in the period under review, albeit lower than the 2019’s figure of N8.07 billion.

MoneyCentral reported last week that operators in the industry are zombie firms whose earnings cannot cover interest expenses and that their recurring losses expose them to going concern issues.

Analysts say they do not see operators in the industry reverting to pre pandemic growth given a resurgence of a second wave of the virus and changing lifestyles adopted by people who had been under lockdown for a period.

“The change of lifestyles in terms of movement of people across the region will reduce drastically in the post pandemic era,” said Gbolahan Ologunro, equity research analysts at Cordros Capital Securities Limited.

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