I thought the question and answer session would be short and over quickly but some insightful questions came from the gallery as they explored different aspects of our business model and investment story.
I thought I would use my blog to provide some additional insights into the presentation that we posted online on www.AfricanSunInvestor.com. In this blog I cover Ghana, Zimbabwe growth, 2010, our margins, Angola and Namibia and capital markets/financing initiatives.
Ghana is a growth story for African Sun
Our hotel in Accra, Ghana, Holiday Inn Accra Airport is doing very well and it is the only hotel we have launched that recorded a profit in the first month of operation. Ghana is a good story. We like Ghana and we believe that opportunities there are sustainable and it is for this reason that our long stay brand, MyPlace is looking for a second hotel in Ghana.
By June 2010 Ghana will be an oil producing nation. Ghana has been stable and growing for many years. Business travel to Ghana is growing. Barack Obama is expected to visit Ghana. We expect occupancy rates in Ghana to remain above 70% for the next 3 – 5 years.
Zimbabwe growth based on current bookings
The statistics shown in your presentation record that Vic Falls Hotel occupancies are due to double but Elephant Hills occupancies are static. Let me put this into perspective. In 1998 we had occupancies at Elephant Hills of about 62% throughout the year driven by incentive groups and conferencing. This year we have had COMESA and the Government retreat. Typically the lead times to booking and utilising our hotels for these sorts of events are short and so the booking system statistics (shown in the presentation) may not be a true reflection of the possible growth for the remainder of the year. This is because the booking statistics and occupancies assumed in my presentation assume that only the current bookings in the system come to fruition and no other bookings are made for the remainder of the year.
2010, the story is about what’s beyond
African Sun is already a part of the 31,000 rooms already booked by FIFA in South Africa and negotiations are still underway for African Sun to understand fully the terms possible relating to the deficit of rooms that FIFA still has to allocate.
We have a global distribution system PACRO and we pursue a variety of other distribution channels to ensure that we participate meaningfully in the region. This mosaic of marketing initiatives is needed in order for us to fully leverage 2010.
Another channel is attendance at trade shows. We attended Indaba – the biggest travel show in Africa – which attracts the whole world to Durban. Online and website reservations are a growing part of our distribution channel and we plan to grow this area fully to maximize the capture of new online booking trends.
Construction is under way for a new hotel in Gaborone prior to the commencement of 2010 and our strategy for hosting teams generally is to avoid gambling with some of the highly risky conditions that can come with hosting teams in the World Cup. The terms and conditions of hosting can be particularly damaging and whilst the opportunity of hosting 2010 teams and supporters we are going to do this in a responsible manner.
There is a lot of focus on 2010 but we look beyond this. Post- 2010 we expect a general level of increase in travel to the sub-region. This has been experienced in every recent World Cup and the post-2010 period is expected to be no different.
Margins in a recovery phase
Last year in September our EBITDA margin was 27%. Our operations of January – March this year were reduced to Greenfield operations on account of the collapse of the currency. Our business is break even at 25 – 27% occupancy. Recent estimates show that for every increase in 1% occupancy EBITDA grows by over U$1m assuming that rates stay the same. African Sun is currently in a period of recovering from the extraordinary times of the beginning of this year.
Angola and Namibia on the radar
The language barriers in Angola can be overcome. We see a bigger issue however in property rights. Property rights is a sticking point and this issue has to be dealt with through the President’s office. Namibia is another area of opportunity as uranium has been discovered near Walvis Bay.
We plan to launch a new safari brand before the end of the year to cater for the lodge market which really needs a separate business model to the traditional hotels.
Capital raising and capital markets initiatives are a GO
Given the global meltdown we have had to re-look at the future and our strategy for growth and financing. In December last year we were seeking US$60m (for the cash flows of our property developers as well as African Sun). Those initiatives did not come to fruition and we are now working with multi-lateral institutions for finance.
We have publicly stated our intention to list on the JSE’s Africa Board. The Africa Board is a stepping stone to our stated objective of a listing on a major bourse but this initiative is not going to be carried out for the sake of it. It will coincide with a capital-raising and we intend to offer 20% of our share capital on the Africa Board to achieve this.
The timing is not yet confirmed but we hope that by the end of the year this initiative will have been confirmed. Consider that our business model is hedged geographically and from a currency and business model perspective so investor interest might be there. Add to this my previously mentioned comment on debt levels. Our gearing is less than 2% at the moment and the stability referred to in my presentation above has prompted us to seek finance from multilateral lending agencies in order for us to refurbish 60% of our hotels in Zimbabwe. We expect to make an announcement in the near future on this and estimate our funding requirement to be approximately US$15m.
Debt levels are undemanding and more than matched by growth
With African Sun coming from a very low occupancy base its tempting to reduce prices to increase occupancies but we feel that low occupancies are due to factors other than pricing. They are due to the general global slowdown. So it is not our strategy to price cut at this time.
It is however our strategy to leverage our growth through borrowing. You may question this as we are currently experiencing negative cash flows and you may ask is it wise to take on more debt when occupancies are so low. Our gearing is at 2% and we have a US$670,000 5 year loan in Rand at SA prime less 2%.
In my presentation I showed that occupancies are due to more than double based on current bookings in the system. For example, occupancies at Victoria Falls are expected to be around 48% so the increase in debt is going to be more than covered by the cash flows arising from our core business growth.
Shingi
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