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Ever heard of Capital Hotels Plc? Well, they own Abuja Sheraton Hotels. Capital Hotels is in turn owned by Ikeja Hotels Plc, the owners of Sheraton Lagos. They are currently quoted on the Nigerian Stock Exchange and were one of the worst performers in the last one year, in a market where the bulls are running wild.

The company’s share price is around N3.15 and has remained at this price since August last year. No one seems interested in the stock, despite the fact that it has consistently posted profits and even paid dividends.

Capital Hotels, owners of Abuja Sheraton Hotels Plc released their 2017 Annual report revealing a profit after tax of N935.9 million compared to N1.27 billion the year before. Top line revenue, however, grew 5.6% to N5.6 billion compared to N5.3 billion the year before. Room Revenue stood at N3.1 billion or 55% of total revenues.

For Abuja Sheraton, Revenue has not always been the problem as it has now gone from earning N4.6 billion in revenues 5 years ago to N5.6 billion in 2017. If it had a problem it was managing overheads charged to cost of goods sold and services. For every N100 in revenue it gets from its customers, N70 is spent on the cost of servicing its customers. Another 73% of what is left is shared between other salaries, taxes and other costs. This is why only 16% of the company’s revenues are earned as profit.  Despite these low margins, Ikeja Hotels is sitting pretty on some solid cash.

The company has no debt and currently sits on a total cash balance of N3.4 billion. In 2016, it closed with a healthy cash balance of N3.9 billion and the year before N2.6 billion. In fact, it generated a cash from operations of N1.3 billion this year compared to N1.8 billion the year before. To put this into perspective its balance sheet size of N6.1 billion is made up of N3.4 billion in cash, about 55% of total assets in percentage terms.

When a company like Capital Hotels with only one asset sits on plenty cash, it is forced to do something with it. In 2016, the company decided it was going to embark on a refurb of its rooms and facilities. This follows a previous renovation of one of its floors to cater for Starwood Preferred Guest (SPG) members of Starwood Loyalty Rewards Schemes. This scheme cost the hotel N121 million this year and N118 million the year before.

So, in 2017, it decided to spend some of its cash channeling over N1.7 billion to the renovation of Tower 1 and Tower 3 as well as work on its Cabana building and furniture and fittings. The company believes these renovations will help it attract more customers under the Starwood franchise while also improving some of the negative ratings it currently has on major review websites.

The recent resurgence in the economy also provides additional incentives for hotels who expect increased foreign visits into the country. Abuja being the center of power is also expected to bounce back as a beehive of government business just as politicians sharpen their wallets ahead of the 2019 elections taking place in May of that year. There is the risk that investments like these could also leave room for money to move along related party lines as contracts are hammered out and executed. This is Nigeria so we can learn to live with that.

Despite spending this much, the company still has over N3.4 billion going into 2018. So what does it do with this cash? Build a new hotel or return some to shareholders? The latter it is doing even though a 5kobo dividend this year amounts to a paltry N76.6 million. If this company was looking to increase shareholder returns then perhaps it could be looking at returning more cash as dividends or thinking of buying a choice hotel in Abuja or any major city in the country. A refurb is welcomed but please spend more. That N5 billion plus in your retained earnings is for who?

Bottom Line

As strategic as this investment may seem, history suggests it is plausible that only the operators, majority owners and management of the hotel may benefit. For minority shareholders, the stock is as dead stone. It has no impetus to rise except it gets more ambitious by opening up itself to new investors that know how to create value.


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