transcorp hotels plc - fmdq group

Transcorp Hotels Plc ₦10 billion 7-Year 16% Fixed Rate Unsecured Bond Due 2022 (Series 1)

₦9.758 billion 5-Year 15.5% Fixed Rate Unsecured Bond Due 2020 (Series 2)

under its ₦30 billion Medium Term Note Programme

2018 Final Bond Rating Review Report

The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited.

2018 Corporate Bond Rating Review Report

TRANSCORP HOTELS PLC ₦10 billion 7-Year 16% Fixed Rate Unsecured Bond Due 2022 (Series 1)


Issue Rating

(Series 1&2):

Bbb

Issuer Rating: Bbb

Outlook: Stable

Issue Date: 28 September 2018

Expiry Date: 30 September 2019

The rating is valid throughout the life of

the instrument and will be subject to

annual monitoring and review.

Previous Issue rating: Bbb

Analysts:

Ikechukwu Iheagwam [email protected]

Isaac Babatunde [email protected]

Agusto & Co. Limited

UBA House (5th Floor)

57, Marina

Lagos

Nigeria

www.agusto.com

RATING RATIONALE Agusto & Co. hereby affirms the “Bbb” rating assigned to Transcorp Hotels Plc

(“Transcorp Hotels”, “Issuer”, “THP”, or “the Company”) and the ₦10 billion 7-year 16%

fixed rate unsecured bond due 2022 (“Series 1”) and ₦9.758 billion 5-year 15.5% fixed

rate unsecured bond due 2020 (“Series 2”) under its ₦30 billion Medium Term Bond

Programme.

The assigned rating reflects our opinion on the Issuer’s satisfactory financial condition,

which is characterized by good cash generating capacity, low leverage and supported

by a qualified, stable and experienced management team. Nonetheless, the Company’s

financial condition is tempered by overall working capital deficiency and profitability

which requires improvement.

Transcorp Hotels Plc issued two bonds (Series 1 & 2) totaling ₦19.758 billion in

Q4’2015 to finance the upgrade and refurbishment of Transcorp Hilton Abuja (“THA”)

as well as the construction of a 5,000 seating-capacity Multipurpose Banquet Centre

(MBC). The Series 1 Bond is a 7-year 16% fixed rate unsecured bond with a one-year

moratorium on principal, while the Series 2 Bond is a 5-year 15.5% fixed rate

unsecured bond with a 12 month moratorium on principal. The fixed coupon rates on

both bonds are payable on a semi-annual basis over the tenor of the bonds.

In line with the duly executed Series 1 & 2 Pricing Supplements and Trust Deeds, the

bonds are direct, unconditional, senior, unsecured obligations of the Issuer and rank

pari-passu with all existing and new senior, unsecured obligations of the Company.

Based on the above, the Issuer is wholly responsible for meeting the obligations of the

Series 1 & 2 bonds from its operating cash flow.

In the financial year ended 31 December 2017, Transcorp Hotels Plc recorded an

improved operating cash flow (OCF) of ₦11.2 billion, up from ₦4.4 billion in the prior

year. Following the expiration of the one-year moratorium on the Series 1 & 2 Bonds,

Transcorp Hotels Plc had paid a total of ₦12.02 billion to the Series 1 &2 bondholders

in form of coupon payments and principal repayments as at 31 August 2018.

Satisfactory quality debt with moderate credit risk; adequate capacity to pay

returns and principal on local currency debt in a timely manner

2


Transcorp Hotels Plc’s ₦10 billion 7-year (Series 1) & ₦9.758 billion 5-year (Series 2) Fixed Rate Unsecured Bonds

As at 31 August 2018, eight out of ten guest floors at THA had been completely

renovated, with the remaining two floors due for completion by end of December

2018. In addition, replacement of six guest elevators as well as external works had

also been completed as at end of August 2018. Tender for the construction of the

5,000 seating-capacity MBC has been finalized and THP’s management expects to

complete the construction within 24 months of commencement of the project.

Going forward, Transcorp Hotels Plc intends to focus on prudent cost management

practices, notwithstanding the high energy and rising operating costs, which

impacted profitability metrics in the year under review. The management of

Transcorp Hotels also plans to raise equity (circa ₦40 billion) in the short to medium

term following shareholders’ ratification at the last annual general meeting. The

proceeds of the equity raising will be used to refinance existing debts.

In the six months ended 30 June 2018 (unaudited), the Company posted a revenue of

₦7.5 billion, indicating a significant improvement in top line performance when

compared with similar periods in the last three years. This has been credited mainly

to improvement in business activities in H1’2018 as well as increased room

availability following the completion of various parts of the hotel upgrade. In the

near term, THP plans to close the 2018 financial year with a revenue of ₦15 billion

and a profit before tax of ₦5 billion.

Agusto & Co. believes that the Company is better positioned on account of the recent

facelift in facilities, which gives Trancorp Hilton Abuja a competitive advantage as

being a premier hospitality destination for business and tourism in Nigeria.

Based on the above, we attach a stable outlook to the Series 1 & 2 bonds, as we

expect the Company to continue to meet the bonds obligations as and when due.

Figure 1: Strengths, Weaknesses & Challenges

Source: Agusto & Co. Research

Strengths

•Strong brand supported by partnership with Hilton Hotels & Resorts

•Low leverage

•Good cash flow

•Qualified, stable and experienced management team

Weaknesses

•Profitability requires improvement

•Overall working capital deficiency mainly due to cost overrun on ongoing project

Challenges

•High cost of doing business especially energy and rising operating costs

•Maintaining high occupancy levels given increasing competition from other hospitality players in Abuja

3



COMPANY PROFILE Transcorp Hotels Plc (“Transcorp Hotels”, “Issuer”, “THP”, or “the Company”) is one of the leading hospitality

service providers in Nigeria, currently operating Transcorp Hilton Abuja1 (“THA”) and Transcorp Hotels Calabar2.

The Company is the hospitality subsidiary of Transnational Corporation of Nigeria Plc (“Transcorp Plc”) - a

diversified conglomerate with business interests in the Power, Agriculture, Hospitality and Oil and Gas sectors.

Figure 2: Key Milestones In Transcorp Hotels Plc’s History

Source: Transcorp Hotels Plc 2017 annual report and management presentation

Transcorp Hotels Plc has three subsidiaries namely Transcorp Hotels Calabar Limited (100%), Transcorp Hotels

Port Harcourt Limited (100%) and Transcorp Hotels Ikoyi Limited (52%). As at 30 June 2018, the hospitality

outlets for Transcorp Hotels Ikoyi Limited and Transcorp Hotels Port Harcourt Limited were still under

construction.

In 2018, the Company signed a new 20-year technical and management agreement with Hilton Hotels & Resorts

(one of Hilton Worldwide Holdings leading hospitality brands). The partnership helps strengthen the Transcorp

Hilton brand in the international hospitality market and also provides THP’s customers an opportunity to be part

of the Hilton Honours Club in order to access Hilton Hotels Worldwide at preferential rates.

As at 31 December 2017, Transnational Corporation of Nigeria Plc (83.47%) and Ministry of Finance Incorporated

representing Federal Government of Nigeria (11.02%), were the only shareholders with more than 5% of THP’s

equity. Heirs Holdings, with Mr. Tony Elumelu as the ultimate beneficiary, is Transcorp Plc’s major shareholder

with 44% equity stake, while other investors held the balance of 56% as at FYE 2017.

1 Transcorp Hilton Abuja is a leading hospitality destination situated in Nigeria’s Federal Capital Territory, Abuja with 670 rooms, a 1,200

capacity congress hall and 24 multi-purpose meeting rooms 2 Transcorp Hotels Calabar is a premier destination hotel in Calabar, Cross River State with a 146-room capacity

2015

•Issued maiden ₦19.758 billion bond in two tranches

2014

•THTSL was rebranded as Transcorp Hotels Plcand listed its shares on the NSE via an IPO

2011

•THTSL purchased a majority stake in Metropolitan Hotels & Conferencing Limited, which owned Metropolitan Hotel Calabar

2007

•NIRMSCO was renamed Transnational Hotels & Tourism Services Limited (“THTSL”)

2005

•Transcorp Plcpurchased majority stake in NIRMSCO

1994

•Acquisition of NICON Hilton Hotel Abuja by NIRMSCO Properties Limited (“NIRMSCO”)

1987

•Began operations as NICON Hilton Hotel Abuja

4



In the financial year ended 31 December 2017, Dr. Vincent Akpotaire, resigned his appointment with the Board as

non-executive director, while Mr. Alex Okoh (Director General of Bureau of Public Enterprises, representing the

Federal Government of Nigeria) was appointed to replace him. In the same period, Alhaji Baba Mohammed

statutorily resigned from the Board. Alhaji Abdulkadir Jeli Bello, who was appointed as a non-executive director

in February 2018, leads the Board of Directors as Chairman, following the statutory resignation of Olorogun

O’tega Emerhor, the erstwhile Chairman. Mr. Valentine Ozigbo is the Managing Director and Chief Executive

Officer. Transcorp Hotels Plc’s Board of Directors comprises seven non-executives and two executives.

In line with the 2011 SEC Code of Corporate Governance for Public Companies in Nigeria, THP’s Board met four

times during the 2017 financial year. The Board operates mainly through two board committees, namely Board

Audit & Governance Committee (BAGC) and Finance & Investment Committee (FIC), and maintains a Statutory

Audit Committee (SAC).

Table 1: Board of Directors

Alh. Abdulkadir Jeli Bello Chairman

Mr. Valentine Ozigbo Managing Director/CEO

Ms. Okaima Ohizua Executive Director

Mr. Emmanuel Nnorom Non-executive Director

Mr. Peter Elumelu Non-executive Director

Mr. Alex Okoh Non-executive Director

Mr. Adim Jibunoh Non-executive Director

Dr. Bakari Wadinga Non-executive Director

Hajia Saratu Umar Non-executive Director

Source: Transcorp Hotels Plc 2017 Annual Report & management response to questionnaire

The BAGC (formerly known as Nominations & Governance Committee) is chaired by Mr. Adim Jibunoh, a non-

executive director, and supported by three other non-executive directors. Mr. Emmanuel Nnorom is the FIC

Chairman and supported by five members (two executive and three non-executive directors). Transcorp Hotels

Plc’s Statutory Audit Committee is led by Mr. Sanusi Mudasiru (shareholders representative) and supported by five

other members, representing the shareholders and Board of Directors.

As at FYE 2017, Transcorp Hotels Plc’s authorised share capital stood at ₦7.5 billion, of which ₦3.8 billion were

issued and fully paid. As at the same date, THP’s shareholders’ fund stood at ₦54.9 billion, while total assets

grew by 11% to ₦97.9 billion. In the financial year ended 31 December 2017, the Company generated revenue of

₦12.9 billion and recorded a profit before tax of ₦3.6 billion (2016: ₦5.2 billion). THP had an average of 1,174

persons in its employment in 2017 (2016: 1,587 persons).

Table 2: Background Information Authorized Share Capital: ₦7.5 billion Paid-up Capital: ₦3.8 billion Shareholders’ Funds: ₦54.9 billion Registered Office: 1 Aguiyi Ironsi Street, Maitama, Abuja. Principal Business: Hospitality Auditors: Ernst & Young (replaced PricewaterhouseCoopers in March 2018 due to statutory auditors rotation)

Source: Transcorp Hotels Plc 2017 Annual Report

5



FINANCIAL CONDITION ANALYSTS’ COMMENTS

PROFITABILITY Transcorp Hotels Plc generates revenue principally from room rentals, sale of food & beverages, shop rentals and

service charge on retail outlets in the hotel premises. During the financial year ended 31 December 2017 (FYE

2017), the Company posted revenue of ₦12.9 billion, representing an 11% decline from prior year. THP’s

management attributes this decline to three prominent factors - slowdown in business activities in Abuja pre and

post closure of the Abuja Airport for maintenance in the first quarter of 2017; prolonged absence of the President

from the country which led to the cancellation of key heads of state visit to Nigeria and the impact on

government-related business activities; as well as the ongoing renovation at THA which led to fewer number of

rooms available for sale during the period. Nonetheless, Transcorp Hotels Plc reported a marginal improvement

in average occupancy rate of 63% in 2017, compared to 60% in 2016.

A breakdown of THP’s revenue for FYE 2017 showed that income from room rentals remained the largest portion

accounting for 62% (2016: 63%), while the sale of food & beverages accounted for 29%. Income from shop

rentals, service charge and other related services remained low at 4.8%, 0.8% and 3.5% respectively of revenue in

FYE 2017. The bulk of THA’s customers

are business guests, which provides

some level of assurance regarding

occupancy levels, provided business

activities in the region remain upbeat.

In a bid to remain profitable and

attractive in spite of the headwinds that

impacted performance in 2017, THP’s

management periodically reviews room

rates and prices for food, beverage and

ancillary services to reflect current

economic realities and quality of

offerings.

In the year under review, the Company was able to manage cost of sales in line with revenue despite inflationary

pressures and unfavourable exchange rates, which both resulted in higher input costs. Nonetheless, THP

recorded a gross profit margin of 74% (2016: 75%), which we consider to be good.

In FYE 2017, THP’s operating expenses mainly comprising staff costs (17%), energy costs (14%), management &

incentive fees (13%) and other administrative expenses (8%), rose by 6% in absolute terms to account for a high

of 56% of revenue (2016: 47%). Notwithstanding, THP posted an operating profit margin of 17% in 2017 and

three-year (2015 – 2017) average of 26%, which we consider to be satisfactory.

62% 63% 65%

29% 29%25%

5%2%

5%1% 1% 1%

4% 5% 4%

0%

10%

20%

30%

40%

50%

60%

70%

2017 2016 2015

Room rental Food & Beverages Shop rental Service charge Others

Figure 3: Breakdown of THP's Revenue (2015 -2017)

6



Other income arising principally from net foreign exchange gains and interest income on intercompany loans,

totaling ₦1.3 billion, bolstered THP’s performance in the year under review. As a result, THP posted a profit

before tax of ₦3.6 billion, though 30% lower than the prior year. Agusto & Co. notes the downward trend in the

Company’s bottom line performance over the last three years, coming from a high profit before tax margin of

41% in 2015 to circa 27% in 2017. This is primarily due to the high input costs and rising operating expenses

which stems from the fragile macroeconomic environment.

In the financial year ended 31 December 2017, the Company did not record any interest expense given that the

interest on the Series 1 & 2 bonds as well as the commercial loans are being capitalised in line with IAS 23

Borrowing Cost, until the completion of the renovation of the hotel. THP recorded a profit after tax margin of

20%, which is lower than prior year and the three year (2015 – 2017) average of 24%.

Over the last three years (2015 – 2017), Transcorp

Hotels Plc’s average return on assets (ROA) and

return on equity (ROE) of 5% and 9% respectively,

remained below our expectations. Whilst we

recognize the impact of rising cost on historical

profit performance, we remain positive that the

Company is better positioned for the future on

account of the recent refurbishment of facilities,

which gives THA a competitive edge as a premier

hospitality destination for business and tourism in

Nigeria.

In the six months (unaudited) period ended 30 June 2018 (H1’2018), the Company reported a turnover of ₦7.5

billion, signaling a significant improvement in top line performance, when compared to similar periods in the last

three years. The management of THP has credited this to improvement in business activities in H1’2018,

moderate increase in room rates and ancillary services as well as continued increase in room availability

following the completion of various parts of the hotel upgrade.

As at 31 August 2018, eight out of the ten guest floors had been completed and added back to inventory, while

the external works covering two gate houses, drivers’ village, car parks and general landscaping had also been

completed. The Company estimates that the upgrade of THA will be completed before the end of 2018, barring

any unforeseen contingencies. Based on these estimates, THP plans to close the 2018 financial year with a

revenue of ₦15 billion and a profit before tax of ₦5 billion.

Based on H1’2018 unaudited accounts, direct and operating costs for full year 2018 (when annualized) are

expected to remain around FYE 2017 levels, with key profitability metrics improving marginally by FYE 2018 due

to increase in top line performance. Going forward, Agusto & Co. expects to see the full impact of the hotel

upgrade as well as cost containment measures reflect positively in the 2019 profitability.

4% 4%

6% 6%7% 7%

10% 10%

0%

2%

4%

6%

8%

10%

12%

H1'2018 2017 2016 2015ROA ROE

Figure 4: Return on Asset & Return on Equity (2015 – H1’2018)

7



CASH FLOW Transcorp Hotels Plc generates cash from room rentals, sale of food & beverages and shop rentals. THP’s sales

are largely on cash basis, while about 30 days credits are granted to select corporate customers who meet

stringent internal risk classification requirements.

During the financial year ended 31 December 2017, the Company recorded an improved operating cash flow

(OCF) of ₦11.2 billion, up from ₦4.4 billion in the prior year. This improvement was principally driven by

significant reduction in amounts due from related parties3 as well as rise in deferred income4 in the year under

review. In 2017, THP’s OCF was sufficient to cover returns to providers of finance, wholly comprising dividend of

₦3 billion. In 2017, following the expiration of the one-year moratorium on the Series 1 & 2 Bonds, Transcorp

Hotels Plc paid a total of ₦6 billion comprising coupon of ₦2.99 billion and principal repayment of ₦3 billion to

the Series 1 & 2 Bondholders.

On the back of an improved operating cash flow in

2017, THP’s posted a stronger OCF to sales ratio of 86%

(2016: 30%), which outstrips our benchmark.

In the six months (unaudited) ended 30 June 2018

(H1’2018), Transcorp Hotels Plc reported a positive OCF

of ₦4.4 billion, which was sufficient to cover dividend

payment as well as repayment of Series 1 & 2 Bond

obligations due in the period. In the same period, OCF

to sales ratio surpassed our benchmark at 59%, laying

credence to THP’s good operating cash position which

thrives on its strong cash and carry hospitality business

model.

In our opinion, Transcorp Hotels Plc’s overall cash flow position is good.

3 In 2017, Transnational Corporation of Nigeria Plc and Transcorp Power Limited, repaid about ₦2.7 billion and ₦1.5 billon respectively to

THP as part of outstanding receivables due to Transcorp Hotels Plc. 4 In 2017, Hilton Worldwide Manage Limited contributed $10 million towards the refurbishment of THA as “key money”. This contribution is

interest free and not repayable by THP, but is being amortised over the duration of the 20-year technical agreement.

59%

86%

30%35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

H1'2018 2017 2016 2015

Figure 5: OCF to Sales (2015 -H1'2018)

8



FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL Transcorp Hotels Plc’s working assets declined by 52% to etch at ₦4.6 billion as at 31 December 2017. This

decline is linked to the significant reduction in amounts due from related parties such as Transnational

Corporation of Nigeria Plc and Transcorp Power Limited. The breakdown of THP’s working assets as at FYE 2017

shows that amounts due from related parties accounted for the largest portion at 63% (2016: 76%), while other

debtors & prepayment and trade receivables represented 18% and 12% respectively.

As at FYE 2017, the Company’s spontaneous financing remained around the same level with last year at circa

₦14.9 billion and mainly consisted of deferred taxation (48%), other creditors and accruals (36%) and taxation

payable (7%). THP’s spontaneous financing as at FYE 2017 was adequate to fund the working assets, leaving a

short term financing surplus of ₦10.3 billion. Akin to the last three years, THP has consistently recorded short

term financing surpluses, which we consider to be good.

As at the financial year ended 31 December 2017, Transcorp Hotels Plc’s long term assets, largely consisted of

property, plant and equipment (88%) and long term receivables5 (5%), amounted to ₦89.8 billion. As at the same

date, THP’s long term funds, comprising equity (72%) and long term borrowings6 (28%), stood at ₦76 billion. As

at FYE 2017, THP’s long term funds were insufficient to cover the long term assets, resulting in a long term

financing need of ₦13.8 billion. THP’s short term financing surplus was inadequate to cover the long-term

financing need, thus resulting in an overall working capital deficiency of ₦3.5 billion – this is the second

consecutive year of recording overall working capital deficiency.

In addition to the ₦5 billion six-year term loan obtained from a commercial bank in H1’2017 to fund the ongoing

upgrade of THA, THP also secured a USD$5 million 8-year interest-free term loan from Hilton Worldwide Manage

Limited in the year under review. As at FYE 2017, the $5 million loan remains undrawn. Furthermore, the

management of Transcorp Hotels Plc plans to raise equity (circa ₦40 billion) in the short to medium term

following shareholders’ approval at the last Annual General Meeting. The proceeds of the equity raising will be

used to refinance existing debts and fund new projects.

The unaudited accounts as at the six months ended 30 June 2018 (H1’2018) shows that the Company’s

spontaneous financing of ₦16.5 billion was sufficient to cover working assets of ₦4.5 billion, leaving a short

term financing surplus of ₦12 billion. As at the same date, THP’s long term funds of ₦79.8 billion could not cover

the long term assets of ₦94.6 billion, leaving a long term financing need of ₦14.7 billion. Overall, Transcorp

Hotels Plc recorded a working capital deficiency of ₦2.7 billion as at the end of H1’2018.

In our opinion, the Company’s overall working capital is inadequate and requires improvement.

5 This refers to intercompany receivables related to total amount incurred on ongoing projects at Transcorp Hotels Port Harcourt and

Transcorp Hotels Ikoyi 6 THP’s Long term borrowings as at FYE 2017 includes the outstanding obligation on the Series 1 & 2 Bonds, remaining balance on a ₦5

billon term loan obtained from a commercial bank and amounts due from the drawn portion of a ₦5 billion fixed term investment note

obtained from a related party.

9



LEVERAGE As at 31 December 2017, Transcorp Hotels Plc’s total liabilities stood at ₦42.9 billion (2016: ₦35 billion),

comprising interest bearing liabilities (65%) and non-interest bearing liabilities (35%). The Company’s interest

bearing liabilities as at FYE 2017 consist of the outstanding balances on the Series 1 & 2 bonds in issue (59%),

amounts outstanding on the commercial bank 5-year term loan and fixed term investment note (37%) and bank

overdrafts (3%). As at the same date, THP’s non-interest bearing liabilities mainly comprised deferred taxation

(48%), other creditors and accruals (36%) and taxation payable (7%).

In line with IAS 23 Borrowing Cost, Transcorp Hotels Plc capitalised all borrowing costs in 2017, given that these

costs are directly attributable to the acquisition, construction or production of a qualifying asset7. Similar to 2016,

the Company did not record any interest expense, as coupon payments and principal repayment on the Series 1

& 2 Bonds were capitalised. In addition, the borrowing cost on the term loans are being capitalised in line with

IAS 23 Borrowing Cost, as the proceeds of the loans were utilized for the renovation of THA.

As at FYE 2017, the Company’s total assets was

funded by shareholders’ equity (56%) and total

liabilities (44%), thus depicting a satisfactory equity

cushion. As at the same date, Transcorp Hotels Plc’s

total liabilities to equity ratio of 78%, interest

bearing liabilities to equity ratio of 51% and net

debt to total assets of 33%, were in line with our

expectations.

In the six months ended 30 June 2018 (unaudited),

Transcorp Hotels Plc’s leverage metrics such as

equity cushion, total liabilities to equity ratio and

net debt to total assets, were all in line with our

expectations.

In our view, Transcorp Hotels Plc’s leverage is low.

7 According to IAS 23, a qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. This could

refer to property, plant and equipment during the construction period such as Transcorp Hilton Abuja currently undergoing major renovation.

34% 33%38%

30%

83%78%

66%69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

H1'2018 2017 2016 2015

Net Debt to Total Assets Total Liabilities to Equity

Figure 6: Net Debt to Total Asset & Total Liabilities to Equity

10



BOND REPAYMENT AND UTILIZATION OF PROCEEDS Transcorp Hotels Plc has two bonds in issue (Series 1 & 2) totaling ₦19.758 billion under its ₦30 billion Medium

Term Bond Programme. The net proceeds of the Series 1 & 2 bonds are being used to finance the upgrade and

refurbishment of several parts of the Transcorp Hilton Abuja in line with the duly executed Series 1 & 2 Pricing

Supplements and Trust Deeds. The Series 1 & 2 bonds are direct, unconditional, senior, unsecured obligations of

the Issuer and rank pari passu without any preference among themselves with all other existing senior,

unsecured obligations of the Issuer from time to time outstanding except for obligations mandatorily preferred

by law applying to companies generally as provided for in the Series 1 & 2 Trust Deed. In accordance with Series

1 & 2 executed Transaction Documents (Pricing Supplements & Trust Deeds), the bond obligations shall be met

from the Company’s operating cash flow.

Update on Bond Repayment

₦10 billion 7-Year 16% Fixed Rate Unsecured Bond Due 2022 (Series 1)

The ₦10 billion 7-year 16% fixed rate unsecured bond due 2022 (Series 1) was issued in October 2015 under the

₦30 billion Medium Term Bond Issuance Programme. The Series 1 bond was fully underwritten on a firm basis by

United Capital Plc and FSDH Merchant Bank Limited, and is listed on the Nigerian Stock Exchange (NSE) and

Financial Markets Dealers Quotation (FMDQ). The Series 1 Bond principal enjoyed a moratorium of 12 months

from the date of issuance, and is now being amortized semi-annually over its remaining life. The fixed rate

coupon of 16% is being paid half-yearly on a reducing balance basis over the tenor of the Bond. As at 31 August

2018, THP had paid a total of ₦5.56 billion to the Series 1 bondholders covering principal repayment amounting

to ₦1.68 billion and coupon payment of ₦3.87 billion.


Transcorp Hotels Plc issued a ₦9.758 billion 5-year 15.5% fixed rate unsecured bond due 2020 (Series 2) in

December 2015, under the ₦30 billion Medium Term Bond Issuance Programme. The Series 2 bond was issued to

the public for subscription through a book building process and is listed on the NSE and FMDQ. The Series 2

bond principal also enjoys a 1-year moratorium from the date of issuance, after which it is being amortized semi-

annually until the maturity of the bond in December 2020. The fixed rate coupon of 15.5% is also being paid

semi-annually on a reducing balance basis over the five-year period. As at 31 August 2018, Transcorp Hotels Plc

had paid a total of ₦6.56 billion to the Series 2 bondholders in the form of coupon payments (₦2.99 billion) and

principal repayment (₦3.56 billion).

Agusto & Co. has reviewed the financial covenants enshrined in the Series 1 & 2 Pricing Supplements and Trust

Deeds and affirm that THP has complied with the relevant financial covenants. In our opinion, Transcorp Hotels

Plc has sufficient capacity to meet the Series 1 & 2 bonds obligations as and when due.

Update on Utilization of Bond Proceeds

In accordance with the duly executed Series 1 & 2 Transaction Documents, the net proceeds are earmarked for

the upgrade and refurbishment of several parts of the Transcorp Hilton Abuja. As at 31 August 2018, eight out of

ten guest floors at THA had been renovated, with the remaining two floors due for completion by end of

December 2018. Replacement of six guest elevators as well as external works covering two gate houses, drivers’

village, car parks and general landscaping had also been completed. Tender for the construction of the 5,000

seating-capacity Multipurpose Banquet Centre has been completed and management expects to complete the

construction of the MBC within 24 months of commencement of the project.

11



OWNERSHIP, MANAGEMENT & STAFF Transcorp Hotels Plc had 7,600,403,900 ordinary shares issued and fully paid as at 31 December 2017. According

to the register of members as at that date, Transnational Corporation of Nigeria Plc (83.47%) and the Ministry of

Finance Incorporated representing the Federal Government of Nigeria (11.02%) held more than 5% shareholding

in the Company. The balance of 5.59% is held by other individuals & institutions. Transcorp Hotels Plc is a

subsidiary of Transnational Corporation of Nigeria, which is in turn controlled by Heirs Holdings, with Mr. Tony

Elumelu as the ultimate controlling party.

The Company has a nine-member Board of Directors comprising two executives and seven non-executives. Alhaji

Abdulkadir Jeli Bello, who was appointed as a non-executive director in February 2018, leads the Board of

Directors as Chairman, following the statutory resignation of the erstwhile chairman - Olorogun O’tega Emerhor.

In 2017, Dr. Vincent Akpotaire and Alhaji Baba Mohammed resigned from the Board as non-executive directors,

while Mr. Alex Okoh (Director General of Bureau of Public Enterprises, representing the Federal Government of

Nigeria) was appointed as a non-executive director. Mr. Valentine Ozigbo is the Managing Director and Chief

Executive Officer.

THP’s executive management team comprise six members, with four of the members reporting directly to the

MD/CEO, while the Head of Internal Audit reports directly to the Board of Directors. In the year under review,

there were no changes to the executive management team. Members of the management team have requisite

experience in the management of hospitality businesses, having garnered sufficient knowledge from the

operational and management support of Hilton Worldwide Holdings Inc. In our opinion, THP’s management team

is qualified, stable and experienced.

Mr. Valentine Ozigbo is the Managing Director / Chief Executive Officer of Transcorp Hotels Plc. He holds a B.Sc. in

Finance and MBA from University of Nigeria, Nsukka. Mr. Ozigbo also holds an M.Sc. in Finance (with distinction)

from Lancaster University, UK. Prior to joining the Company in 2011, he was the General Manager and Divisional

Head in charge of Global Transaction Banking at Keystone Bank Plc. He was also Divisional Head of International

Banking and Head Global Strategic Alliances at United Bank for Africa. His banking experience spans over twenty

years having worked with FSB International Bank Plc (now part of Fidelity Bank Plc), Continental Trust Bank

Limited (now part of UBA) and Diamond Bank Plc. Mr. Ozigbo is a fellow of the Institute of Chartered Accountants

of Nigeria (ICAN), Chartered Institute of Taxation of Nigeria (CITN) and the Institute of Credit Administration (ICA).

In the financial year ended 31 December 2017, Transcorp Hotels Plc had an average staff strength of 1,174

persons (2016: 1,587 persons). In FYE 2017, the Company’s average cost per employee was ₦2.2 million, while

the net contribution per staff declined by 6% to ₦3.1 million in the same period, due to reduction in revenue. The

Company’s net earnings is 1.3 times the staff cost, which is lower than our benchmark of 1.5 times.

Other members of Transcorp Hotels Plc’s Management Team

Ms. Okaima Ohizua Executive Director (Customer Services)

Mr. Adekunle Elumaro Chief Financial Officer

Mrs. Helen Iwuchukwu Company Secretary

Mr. Peter Donnellan Project Director

Mrs. Irene Nwankwo Head of Internal Audit

12



OUTLOOK Since the issuance of the Series 1 & 2 Bonds in Q4’2015, Transcorp Hotels Plc has consistently met all the bonds

obligations in a timely manner. As at 31 August 2018, THP had paid a total of ₦5.56 billion to the Series 1

bondholders covering principal repayment amounting to ₦1.68 billion and coupon payment of ₦3.87 billion. As

at the same date, the Company had paid a total of ₦6.56 billion to the Series 2 bondholders in the form of

coupon payments of ₦2.99 billion and principal repayment of ₦3.56 billion. Predicated on the THP’s good cash

generating capacity and satisfactory financial condition, we expect the Series 1 & 2 bond obligations to continue

to be met as and when due.

The management of Transcorp Hotels Plc remains committed to completing the ongoing renovation works at the

Transcorp Hilton Abuja and has set 31 December 2018 as the due date for completion of all outstanding

renovation works. As at 31 August 2018, eight out of ten guest floors at THA had been completed, with the

remaining two floors due for completion by 2018 year end. In addition, replacement of six guest elevators as well

as external works have also been completed, while THP’s management expects to complete the 5,000 seating-

capacity Multipurpose Banquet Centre construction within 24 months of commencement of the project. To

further buttress this commitment, THP secured a ₦5 billion term loan from a commercial bank as well as a ₦5

billion fixed investment note in 2017, with all the drawn amounts channeled towards timely completion of the

ongoing renovation at THA.

Agusto & Co. believes that Transcorp Hilton Abuja is well positioned as a leading hospitality destination for

business and tourism in Nigeria, due to the recent refurbishment in facilities. The Company plans to close the

2018 financial year with a revenue of ₦15 billion and a profit before tax of ₦5 billion. This estimates are based

on assumptions of over 70% occupancy and average room rates in excess of ₦80,000.

Based on FYE 2017 and H1’2018 unaudited accounts, THP recorded improvements in the management of trade

and other receivables, nonetheless amounts due from related parties accounted for the largest portion of working

assets. We note that the Company’s long term financing structure remains deficient and believe that injection of

long term funds in form of equity8 or tenured debt can resolve the overall working capital deficiency.

Furthermore, Agusto & Co. expects the Company’s key profitability metrics to improve in the near term on

account of efficient cost containment measures. We also expect increase in patronage following the completion

of the ongoing upgrade at THA. Following the Issuer’s improved operating cash flow position as well as strict

adherence to the financial covenants enshrined in the Series 1 & 2 transaction documents, we believe that THP’s

leverage will remain low in the short term.

Based on the aforementioned, we expect Transcorp Hotels Plc to continue to meet the obligations of the Series 1

& 2 bonds in a timely manner.

8 Transcorp Hotels plans to raise about ₦40 billion in equity to refinance existing debts in the short to medium term

13



FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION AS AT 30-Jun-18

(UNAUDITED)

31-Dec-17 31-Dec-16

₦'000 ₦'000 ₦'000

ASSETS

1 IDLE CASH 4,031,168 3.9% 3,467,847 3.5% 1,757,974 2.0%

2 MARKETABLE SECURITIES & TIME DEPOSITS

3 CASH & EQUIVALENTS 4,031,168 3.9% 3,467,847 3.5% 1,757,974 2.0%

4 FX PURCHASED FOR IMPORTS

5 ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS - - -

6 STOCKS 306,862 0.3% 346,204 0.4% 321,810 0.4%

7 TRADE DEBTORS 574,034 0.6% 553,538 0.6% 747,934 0.8%

8 DUE FROM RELATED PARTIES 2,030,675 2.0% 2,905,754 3.0% 7,300,113 8.3%

9 OTHER DEBTORS & PREPAYMENTS 1,558,829 1.5% 818,943 0.8% 1,217,270 1.4%

10 TOTAL TRADING ASSETS 4,470,400 4.3% 4,624,439 4.7% 9,587,127 10.9%

11 INVESTMENT PROPERTIES 2,068,576 2.0% 2,068,576 2.1% 1,751,576 2.0%

12 OTHER NON-CURRENT INVESTMENTS 3,529,781 3.4% 3,529,781 3.6% 3,529,781 4.0%

13 PROPERTY, PLANT & EQUIPMENT 83,275,747 80.8% 78,607,254 80.3% 66,143,308 74.9%

14 SPARE PARTS, RETURNABLE CONTAINERS, ETC 285,623 0.3% 319,946 0.3% 361,805 0.4%

15 GOODWILL, INTANGIBLES & OTHER L T ASSETS 5,445,084 5.3% 5,284,663 5.4% 5,157,779 5.8%

16 TOTAL LONG TERM ASSETS 94,604,811 91.8% 89,810,220 91.7% 76,944,249 87.2%

17 TOTAL ASSETS 103,106,379 100.0% 97,902,506 100.0% 88,289,350 100.0%

Growth 5.3% 10.9% -0.7%

LIABILITIES & EQUITY

18 SHORT TERM BORROWINGS 558,409 0.5% 902,357 0.9% -

19 CURRENT PORTION OF LONG TERM BORROWINGS 6,170,216 6.0% 6,050,746 6.2% 6,116,876 6.9%

20 LONG-TERM BORROWINGS 23,592,822 22.9% 21,073,346 21.5% 14,571,848 16.5%

21 TOTAL INTEREST BEARING LIABILITIES (TIBL) 30,321,447 29.4% 28,026,449 28.6% 20,688,724 23.4%

22 TRADE CREDITORS 480,041 0.5% 114,430 0.1% 199,264 0.2%

23 DUE TO RELATED PARTIES 1,182,849 1.1% 120,731 0.1% 21,160 0.0%

24 ADVANCE PAYMENTS AND DEPOSITS FROM

CUSTOMERS

142,922 0.1% 127,203 0.1% 126,573 0.1%

25 OTHER CREDITORS AND ACCRUALS 6,039,971 5.9% 5,448,488 5.6% 2,377,768 2.7%

26 TAXATION PAYABLE 1,474,320 1.4% 1,009,199 1.0% 1,424,231 1.6%

27 DIVIDEND PAYABLE - 947,000 1.0% 3,040,161 3.4%

28 DEFERRED TAXATION 7,163,338 6.9% 7,163,338 7.3% 7,158,798 8.1%

29 OBLIGATIONS UNDER UNFUNDED PENSION SCHEMES - - -

30 MINORITY INTEREST - - -

31 REDEEMABLE PREFERENCE SHARES

32 TOTAL NON-INTEREST BEARING LIABILITIES 16,483,441 16.0% 14,930,389 15.3% 14,347,955 16.3%

33 TOTAL LIABILITIES 46,804,888 45.4% 42,956,838 43.9% 35,036,679 39.7%

34 SHARE CAPITAL 3,800,202 3.7% 3,800,202 3.9% 3,800,202 4.3%

35 SHARE PREMIUM 4,034,411 3.9% 4,034,411 4.1% 4,034,411 4.6%

36 IRREDEEMABLE DEBENTURES - - -

37 REVALUATION SURPLUS

38 OTHER NON-DISTRIBUTABLE RESERVES - - -

39 REVENUE RESERVE 48,466,878 47.0% 47,111,055 48.1% 45,418,058 51.4%

40 SHAREHOLDERS' EQUITY 56,301,491 54.6% 54,945,668 56.1% 53,252,671 60.3%

41 TOTAL LIABILITIES & EQUITY 103,106,379 100.0% 97,902,506 100.0% 88,289,350 100.0%

14



STATEMENT OF COMPREHENSIVE INCOME 30-Jun-18

(UNAUDITED)

31-Dec-17 31-Dec-16

₦'000 ₦'000 ₦'000

42 TURNOVER 7,564,573 100.0% 12,962,580 100.0% 14,559,553 100.0%

43 COST OF SALES (1,950,481) -25.8% (3,438,087) -26.5% (3,625,369) -24.9%

44 GROSS PROFIT 5,614,092 74.2% 9,524,493 73.5% 10,934,184 75.1%

45 OTHER OPERATING EXPENSES (3,714,236) -49.1% (7,303,294) -56.3% (6,858,464) -47.1%

46 OPERATING PROFIT 1,899,856 25.1% 2,221,199 17.1% 4,075,720 28.0%

47 OTHER INCOME/(EXPENSES) 96,899 1.3% 1,387,446 10.7% 1,126,067 7.7%

48 PROFIT BEFORE INTEREST & TAXATION 1,996,755 26.4% 3,608,645 27.8% 5,201,787 35.7%

49 INTEREST EXPENSE - - -

50 PROFIT BEFORE TAXATION 1,996,755 26.4% 3,608,645 27.8% 5,201,787 35.7%

51 TAX (EXPENSE) BENEFIT (640,933) -8.5% (968,648) -7.5% (1,468,194) -10.1%

52 PROFIT AFTER TAXATION 1,355,822 17.9% 2,639,997 20.4% 3,733,593 25.6%

53 NON-RECURRING ITEMS (NET OF TAX) - - -

54 MINORITY INTERESTS IN GROUP PAT - - -

55 PROFIT AFTER TAX & MINORITY INTERESTS 1,355,822 17.9% 2,639,997 20.4% 3,733,593 25.6%

56 DIVIDEND - (947,000) -7.3% (3,040,161) -20.9%

57 PROFIT RETAINED FOR THE YEAR 1,355,822 17.9% 1,692,997 13.1% 693,432 4.8%

58 SCRIP ISSUES

59 OTHER APPROPRIATIONS/ ADJUSTMENTS - - -

60 PROFIT RETAINED B/FWD 47,111,055 45,418,058 44,724,626

61 PROFIT RETAINED C/FWD 48,466,877 47,111,055 45,418,058

ADDITIONAL INFORMATION 30-Jun-18 31-Dec-17 31-Dec-16

62 Staff costs (₦'000) 1,404,567 2,609,259 2,547,399

63 Average number of staff 1,137 1,174 1,587

64 Staff costs per employee (₦'000) 1,235 2,223 1,605

65 Staff costs/Turnover 18.6% 20.1% 17.5%

66 Capital expenditure (₦'000) 5,083,892 13,383,002 12,940,722

67 Depreciation expense - current year (₦'000 415,399 919,056 866,083

68 (Profit)/Loss on sale of assets (₦'000) - - -

69 Number of 50 kobo shares in issue at year end

('000)

7,600,404 7,600,404 7,600,404

70 Market value per share of 50 kobo (year end) 745 721 498

71 Market capitalisation (₦'000) 56,623,010 54,798,913 37,850,012

72 Market/Book value multiple 1 1 1

73 Non-operating assets at balance sheet date (₦'000) 5,598,357 5,598,357 5,281,357

74 Market value of tradeable assets (₦'000)

75 Revaluation date - Investment properties

76 Revaluation date - Other properties

77 Average age of depreciable assets (years) 7 7 6

78 Sales at constant prices - base year 1985 (₦'000) 24,451 44,296 57,393

79 Auditors PWC PWC

80 Opinion UNAUDITED CLEAN CLEAN

15



CONSOLIDATED STATEMENT OF CASHFLOWS 30-Jun-18 31-Dec-17 31-Dec-16

=N='000 =N='000 =N='000

OPERATING ACTIVITIES

Profit after tax 1,355,822 2,639,997 3,733,593

ADJUSTMENTS

Interest expense - - -

Minority interests in Group PAT - - -

Depreciation 415,399 919,056 866,083

(Profit)/Loss on sale of assets - - -

Other non-cash items 1

Potential operating cash flow 1,771,221 3,559,053 4,599,677

INCREASE/(DECREASE) IN SPONTANEOUS FINANCING:

Trade creditors 365,611 (84,834) (84,435)

Due to related parties 1,062,118 99,571 (63,782)

Advance payments and deposits from customers 15,719 630 3,329

Other creditors & accruals 591,483 3,070,720 (668,492)

Taxation payable 465,121 (415,032) (1,488,741)

Deferred taxation - 4,540 (63,091)

Obligations under unfunded pension schemes - - -

Minority interest - - -

Cash from (used by) spontaneous financing 2,500,052 2,675,595 (2,365,212)

(INCREASE)/DECREASE IN WORKING ASSETS:

FX purchased for imports - - -

Advance payments and deposits to suppliers - - -

Stocks 39,342 (24,394) (88,875)

Trade debtors (20,496) 194,396 346,025

Due from related parties 875,079 4,394,359 2,353,541

Other debtors & prepayments (739,886) 398,327 (454,026)

Cash from (used by) working assets 154,039 4,962,688 2,156,665

CASH FROM (USED IN) OPERATING ACTIVITIES 4,425,312 11,197,336 4,391,130

RETURNS TO PROVIDERS OF FINANCING

Interest paid - - -

Dividend paid (947,000) (3,040,161) (3,105,101)

CASH USED IN PROVIDING RETURNS ON FINANCING (947,000) (3,040,161) (3,105,101)

OPERATING CASH FLOW AFTER PAYMENTS TO

PROVIDERS OF FINANCING 3,478,312 8,157,175 1,286,029

NON-RECURRING ACTIVITIES

Non-recurring items (net of tax) - - -

CASH FROM (USED IN) NON-RECURRING ACTIVITIES - - -

INVESTING ACTIVITIES

Capital expenditure (5,083,892) (13,383,002) (12,940,722)

Sale of assets - - -

Purchase of other long term assets (net) (126,098) (402,025) (1,722,338)

Sale of other long term assets (net) - - -

CASH FROM (USED IN) INVESTING ACTIVITIES (5,209,990) (13,785,027) (14,663,060)

FINANCING ACTIVITIES

Increase/(Decrease) in short term borrowings (343,948) 902,357 -

Increase/(Decrease) in long term borrowings 2,638,946 6,435,368 1,136,629

Proceeds of shares issued - - -

CASH FROM (USED IN) FINANCING ACTIVITIES 2,294,998 7,337,725 1,136,629

CHANGE IN CASH INC/(DEC) 563,320 1,709,873 (12,240,402)

OPENING CASH & MARKETABLE SECURITIES 3,467,847 1,757,974 13,998,377

CLOSING CASH & MARKETABLE SECURITIES 4,031,167 3,467,847 1,757,975

16



STATEMENT OF CASH FLOW UNAUDITED

FOR THE YEAR ENDED Jun-18 Dec-17 Dec-16

₦'000 ₦'000 ₦'000

Operating cash flow (OCF) 4,425,312 11,197,336 4,391,130

Less: Returns to providers of finance (947,000) (3,040,161) (3,105,101)

OCF after returns to providers of finance 3,478,312 8,157,175 1,286,029

Non-recurring items - - -

Free cash flow 3,478,312 8,157,175 1,286,029

Investing activities (5,209,990) (13,785,027) (14,663,060)

Financing activities 2,294,998 7,337,725 1,136,629

Change in cash 563,320 1,709,873 (12,240,402)

PROFITABILITY Jun-18 Dec-17 Dec-16

PBT as % of Turnover 26% 28% 36%

Return on equity 4% 7% 10%

Real sales growth -44.8% -22.8% -8.2%

CASH FLOW

Interest cover (times) - - -

Principal payback (years) 14.1 4.1 774.6

WORKING CAPITAL

Working capital need (days) - - -

Working capital deficiency (days) 130 98 109

LEVERAGE

Interest bearing debt to Equity 47% 45% 36%

Total debt to Equity 76% 72% 62%

17



RATING DEFINITIONS Aaa Highest quality debt issue with minimal credit risk; strongest capacity to pay returns

and principal on local currency debt in a timely manner.

Aa High quality debt issue with very low credit risk; very strong capacity to pay returns and

principal on local currency debt in a timely manner.

A Good quality debt issue with low to moderate credit risk; strong capacity to pay returns

and principal on local currency debt in a timely manner.

Bbb Satisfactory quality with moderate credit risk; adequate capacity to pay returns and

principal on local currency debt in a timely manner.

Bb Below average quality with moderate to high credit risk; speculative capacity to pay

returns and principal on local currency debt in a timely manner.

B Weak quality with high credit risk; speculative capacity to pay returns and principal on

local currency debt in a timely manner.

C Very weak capacity to pay returns and principal. Debt instrument with very high credit

risk.

D In default.

Rating Category Modifiers

A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category.

Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating

with the - (minus) sign.

18



THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY

19

2018 Corporate Bond Rating Report

www.agusto.com

© Agusto&Co.

UBA House (5th Floor)

57 Marina Lagos

Nigeria.

P.O Box 56136 Ikoyi

+234 (1) 2707222-4

+234 (1) 2713808

Fax: 234 (1) 2643576

Email: [email protected]