Ikeja Hotel Revisited
Sector: Hotel and Tourism
Current Price: N7.14
Shares outstanding: 1.73 billion
Market Cap: N12.35 billion
PAT: N556 million
Estimated PAT (2008FY): N1.11 billion
Estimated EPS (2008FY): 64K
Forward PE: 11.16x
Fair value: N13.44
Ikeja Hotel released its half year results on the floor of the Nigerian Stock Exchange a few days ago. This company is in charge of Sheraton Hotel and Federal Palace Hotel in Nigeria.
The price is currently frozen on technical suspension on account of an imminent public offer, which they want to float barely a year after listing on the floor of the exchange. The management/board of directors of the company decided to waive rights issues for existing shareholders without the consent of the general shareholders. The offer proceeds will be used to upgrade existing hotels and to also pay off some liabilities, which will end up increasing the shareholder’s equity.
The results released shows a 29% increase in turnover from the corresponding period of the previous financial year from N2.496 billion to N3.225 billion; profit before tax grew by 40% from N585.065 million to N817.075 million and profit after tax also grew by 40% from N397.844 million to N555.611 million within the period under review.
Although the company has achieved some cost control as shown in the result by 11%, it was not as good as they did in the first quarter where they were able to control costs by 22%. This may not be unconnected with the expenses associated with the public offer.
Based on pre-existing 1.73 billion shares in issue, the current earning per share comes to 32K indicating 113% growth over the 15K earned in the first quarter. The estimated year end earnings have therefore been marginally reviewed upward from 60K to 64K. This means that at the current technical suspension price of N7.14K, the forward price earning multiple comes to 11.16x, which is not too bad.
Using the price earning multiple as a benchmark, Ikeja Hotel has an intrinsic value of N13.44. Although one should bear it in mind that the earning per share will be diluted as soon as the new capital has been raised; this could in the short run dilute the earnings but has the potential to increase the profitability index in the medium to long run.
The marginal revenue of Ikeja Hotel is not presently high as shown by the 40% increase in PAT but paying off debts and upgrading existing infrastructures will give them the opportunity to reduce average total costs and increase price respectively and may just provide the impetus to push them into the high growth zone. Time will tell.