GCR Ratings (“GCR”) has affirmed Transcorp Hotels Plc’s national scale long-term and short-term Issuer ratings of BBB+_(NG) and A2_(NG) respectively, with the Outlook accorded as Stable.

Rating Rationale

The ratings affirmation of Nigeria-based Transcorp Hotels Plc (“Transcorp” or “the Hotel Group”) 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.

Transcorp maintains a leading position in the Nigerian hospitality market, as 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 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 (December 2021: 588). Nevertheless, attributable income from this product will likely remain small.

The positive earnings profile reflects the demonstrated earnings recovery post COVID lockdowns. Revenue grew 114% in FY21 from the low base in FY20, and further by an annualised 38.9% in 9M FY22. This was supported by a combination of price escalation and higher occupancy rates. GCR expects these factors, combined with additional revenue from the event centre being constructed, to underpin top line growth of 20% in FY23. Furthermore, GCR expects the EBITDA margin to remain strong at around 33%-35% range over the outlook period, underpinned by premium pricing and tight cost management.

GCR takes cognisance of the overall improvement in the leverage and capital structure, albeit this remains slightly negative due to weak interest coverage. Gross debt decreased to N23.7bn in FY21 (9M FY22: N22.7bn), from N32.3bn in FY19. This, combined with the stronger earnings generated has supported wider net interest coverage of 1.8x in FY21 and 2.8x in 9M FY22. 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 9M FY22 (FY21: 2.5x; FY20: 19.7x). This is expected to further strengthen to 1.5x in FY22 and around 1x in FY23 on the back of lower debt and sustained robust earnings. Operating cash flow coverage of gross debt also improved to 26.5% in 9M FY22, compared to the negligible level in FY21. The improvement is primarily attributable to higher cash generation and well managed working capital. GCR forecasts stronger coverage of 38% in FY22 and further to 80% in FY23, supported by working capital releases and lower interest payments. 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.

Liquidity is considered 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 N3bn expected in 4Q FY22 and N14.5bn by FY23; cash holding of N4.2bn as of 30 September 2022 and an uncommitted overdraft facility of N2bn. GCR estimates that this would sufficiently meet scheduled debt repayment and modest capex spend earmarked for FY23.

GCR has factored in strong parental support from Transnational Corporation Plc. 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

Outlook Statement

The Stable Outlook reflects GCR’s expectation that Transcorp will sustain robust earnings and cash generation, while meaningfully deleveraging over the medium term.

Rating Triggers

As the ratings of Transcorp is capped below the parent’s implied risk score, an upgrade is contingent on an improvement in the financial profile of the parent. This is hinged on the ability to timeously complete the planned expansion programs at the various subsidiaries and generate robust earnings while containing debt at a comfortable level.

The ratings could be downgraded if 1) Transnational Corporation Plc’s debt escalates beyond expectations, leading to a material deterioration in the debt service metrics, or 2) earnings underperform due to delays in project completion or other exogenous factors. Significant weakness in the credit profile of the Hotel Group could also impact on the ratings as it would impact the applicable support assessment.

Ratings History

Transcorp Hotels Plc

Risk Score Summary

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Transcorp Hotels Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Transcorp Hotels Plc participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Transcorp Hotels Plc and other reliable third parties to accord the credit ratings included:

• 2021 audited annual financial statement, and prior four years annual financial statements of Transnational Corporation Plc and Transcorp Hotels Plc ;
• Unaudited management accounts for the period to 30 September 2022 of Transnational Corporation Plc and Transcorp Hotels Plc ;
• Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
• Information specific to the rated entity and/or industry was also received;