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Trading Statement for the six months ended 30 September 2020
Tsogo Sun Hotels Limited
Incorporated in the Republic of South Africa
Registration number 2002/006356/06
Share Code: TGO ISIN:ZAE000272522
(“Tsogo Sun Hotels” or “the group” or “the company”)
TRADING STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2020
Shareholders are advised that Tsogo Sun Hotels is scheduled to release its financial results for the six months ended
30 September 2020 on or about 13 November 2020. In terms of paragraph 3.4(b) of the JSE Limited Listings
Requirements, listed companies are required to publish a trading statement as soon as they are satisfied that a
reasonable degree of certainty exists that the financial results for the period to be reported upon next will differ by
at least 20% from those of the prior comparative period. In addition to providing shareholders with an update on
financial performance, the group will also be providing an update on its Covid-19 operational response as well as
funding capacity and covenants.
The company intends publishing Earnings per share (“EPS”), Headline earnings per share (“HEPS”) and Adjusted
headline earnings per share (“Adjusted HEPS”) as well as Earnings before interest, income tax, depreciation,
amortisation, property rentals, long term incentives and exceptional items (“Ebitdar”) for the six months ended 30
September 2020. The company is of the opinion that the publication of Adjusted HEPS and Ebitdar are appropriate
performance measures which will assist shareholders in understanding the group’s trading results.
Shareholders are advised that:
• Revenue is expected to be between 81% and 87% lower (R1,685 million and R1,810 million lower) compared
to the prior comparative period of R2,080 million;
• Ebitdar is expected to be between 134% and 140% lower (R749 million and R783 million lower) compared
to the prior comparative period of R559 million;
• EPS is expected to be between 24.0 cents and 29.0 cents lower compared to the prior comparative period
EPS of 9.8 cents;
• HEPS is expected to be between 48.0 cents and 53.0 cents lower compared to the prior comparative period
HEPS of 10.0 cents; and
• Adjusted HEPS is expected to be between 50.0 cents and 55.0 cents lower compared to the prior
comparative period Adjusted HEPS of 13.3 cents.
These interim results clearly reflect the devastating impact that Covid-19 and the accompanying lockdown
regulations have had on the hospitality industry in general and our group in particular. With effect from 27 March
2020, as part of the nationwide lockdown, the group’s entire portfolio in South Africa, Africa and the Seychelles was
deactivated with the exception of those hotels designated as quarantine facilities or as accommodation for essential
service providers and persons awaiting repatriation.
COVID-19 Status and Action Plan
Since then, the group has been in close communication with its lenders, employees, trading partners, suppliers,
tenants and landlords in order to arrive at mutually sustainable operating solutions in these extraordinarily difficult
times. The group has implemented the following steps to reduce costs and preserve cash:
• Reduction of payroll burden: We understand that this is an extremely stressful time for our employees and
we are committed to engaging with them openly and honestly. We have continuously communicated with
all management and staff, sharing the severe impact that Covid-19 and the national state of disaster had
and continues to have on the business. We consulted with employees to reach an agreement on the terms
and conditions for a temporary layoff of staff in order to materially reduce pay for all levels including
executive management and board members. At the end of March, a skeletal operating structure was
established and the group will continue to operate on reduced staffing levels until demand returns. In
addition, employee recruitments and training have been placed on hold while salary increases for 2021 and
accrued bonus settlements relating to 2020 have been deferred.
• The UIF Temporary Employer/Employee Relief Scheme has been of great assistance in alleviating the cash
flow burden on both the company and its employees while hotels have been closed or operating at low
occupancy levels. The group has processed R103 million in grants over the period, however with this
assistance coming to an end and with occupancy levels unlikely to improve in the short term, the group will
have to consider further operational restructuring to align headcount with trading levels.
• Rent relief: The group has received rental concessions from its various landlords and while terms varied,
these mainly involved a discount in rent due for 2021 in exchange for the extension of lease terms by one
year. In other instances, property owners agreed to forgo rent and cover operating costs including payroll,
security, utilities and rates, while hotels were closed or trading at low occupancies.
• Suppliers: The group has negotiated reduced or extended payment terms with major suppliers, particularly
those providing fixed cost services such as security and lift maintenance. Municipal rates and taxes are a
material fixed monthly cost for the group and while we currently continue to meet these obligations, we
are lobbying government through industry bodies to grant discounts or rebates, particularly on hotels that
remain closed.
• Health and safety protocols: With our culture of prioritising customer health and safety, the group was well
placed to comply with these regulations and worked closely with government and the Tourism Business
Council of South Africa to develop the health and safety protocols for the tourism industry as a whole. Since
we are already highly compliant in this area, the implementation of these protocols has not required
material capex spend. The group also has a number of health protocols and control measures to safeguard
our employees. These measures include employee training, personal protective equipment and hygiene
resources, social distancing and screening as well as increased sanitation and hygiene processes. Tsogo Sun
Hotels’ digital learning platform provides Covid-19 modules that employees can access remotely to stay
informed.
Management’s plan for the phased reopening of its portfolio as lockdown levels eased saw leisure hotels opening
earlier to cater for demand for both intra and inter-provincial travel. The current regulations on international
inbound travel are restrictive with many of the group’s key source markets, including Germany, the UK, France and
the USA, prohibited from travelling to South Africa. This has resulted in the cancellation of both Africa Oil and Mining
Indaba scheduled for the first quarter of 2021, events which have historically benefited the group’s Cape Town
hotels. Without international travel, the Cape region is expected to experience a slow recovery.
Many corporates have implemented travel restrictions and in order to limit social interaction, are likely to keep
offices closed until January 2021. Together with government limiting travel and conferencing, the group will largely
be reliant on the domestic leisure and sport segments over the coming months. Demand from these segments is
expected to contribute to the group’s coastal and outlying properties, however many of the group’s larger Gauteng
based hotels catering to corporate and government groups and conferencing business, are expected to remain
closed until the first quarter of 2021.
EPS results are impacted by exceptional gains of R250 million (2019 losses: R19 million) net of tax and non-controlling
interests, the majority of which relates to the profit on sale of the group’s 50% investment in United Resorts and
Hotel Limited which owns the MAIA Luxury Resort and Spa of R355 million (2019: nil), offset by the group’s share of
fair value losses on investment properties owned by International Hotel Properties Limited of R90 million,
restructuring costs of R7 million (2019: R15 million), transaction costs of R5 million (2019: R2 million) and pre-
opening costs of R3 million (2019: nil). Management has assessed the fair value of the group’s investment properties
and assessed goodwill, property, plant and equipment for impairment by reviewing the cash flow forecasts, which
we believe still adequately reflect the negative impact of Covid-19 on cash flows generated by the underlying hotels
for the financial years ending March 2021 and March 2022; as well as various technical inputs including the 10Y bond
yield which has declined from its peak in March 2020 of 10.51% to 9.45% as at 30 September 2020. Based on these
factors, management is of the view that the values of investment properties, goodwill and property, plant and
equipment are fairly stated at 30 September 2020 and no fair value adjustment or additional impairment is required.
The valuations of investment properties and impairment assessments of goodwill and property, plant and
equipment, will be revised at year-end to take into account any changes in the technical inputs and the impact that
changing conditions may have on the estimated future cash flows.
Excluding the impact of these exceptional items HEPS and Adjusted HEPS are expected to be between 48.0 cents
and 53.0 cents and between 50.0 cents and 55.0 cents lower than the prior period, respectively, reflecting the impact
which Covid-19 and the lockdown regulations implemented to curb its spread, has had on trading.
Funding Capacity and Covenants
The group’s liquidity and access to facilities are of paramount importance and as previously reported, the group has
received covenant waivers from all its lenders for the minimum covenant requirements (leverage and interest cover
ratios) as at 30 September 2020. The group has finalised the terms of March 2021 covenant waivers with its lenders
who have requested revised covenants as a means of measuring trading and liquidity. In order to address this,
revised covenants have been introduced at Tsogo Sun Hotels level which establishes a maximum rolling 12-month
negative Ebitda (“Earnings before interest, income tax, depreciation, amortisation, IFRS 16 rent adjustments, long
term incentives and exceptional items”) level. This Ebitda threshold excludes the Covid-19 interventions undertaken
by the group as discussed earlier. In addition, a minimum liquidity level of R500 million is required which includes
available facilities and cash on hand. These covenants will be measured quarterly at December 2020 and March
2021. An event of default will occur if both the Ebitda and liquidity covenants are breached in one of the
measurement periods or the Ebitda covenant is breached for two consecutive measurement periods. Management
believes that there is adequate headroom currently in place to achieve these revised covenant thresholds and is in
continuous contact with lenders. At a Hospitality Property Fund Limited (“Hospitality”) level, lenders have introduced
a minimum liquidity covenant of R125 million including available facilities and cash on hand.
The lenders to both Tsogo Sun Hotels and Hospitality have been very supportive of the group during this challenging
period and have approved the covenant waivers for March 2021.
The group has an unutilised R600 million facility which will be due for renewal within the next 12 months.
Global Credit Ratings downgraded Hospitality’s long and short-term credit rating to BBB(ZA)/A3(ZA) respectively.
Concurrently, the ratings assigned to the Senior Secured Notes issued by Hospitality have been downgraded to
A+(ZA)(EL) from AA(ZA) (EL). The outlook on all the ratings has been maintained on Rating Watch Negative. The
downgrade to Hospitality reflects the uncertain operating environment in which it operates, with its income severely
reduced due to the economic impact of the Covid-19 pandemic.
Prospects
While we are encouraged by the recent move to level 1 of the national lockdown and the group now trading
approximately 68% of the hotels in its portfolio, the recovery of the hospitality industry is expected to be slow due
to the uncertainties around the health of travellers, and the negative economic impact on government, corporates
and individuals leading to reduced spend on hotel accommodation and conferences.
On 30 September 2020 the board of directors of Hospitality and the board of directors of Tsogo Sun Hotels approved
a transaction by which Tsogo Sun Hotels will offer to acquire all of the ordinary shares with no par value in the issued
share capital of Hospitality, other than the Hospitality shares already owned by Tsogo Sun Hotels, its subsidiaries
and treasury shares (“Offer”). An application will be made for the delisting of all Hospitality shares from the main
board of the Johannesburg Stock Exchange, being the securities exchange operated by the JSE Limited. Consideration
in respect of the Offer will be settled by the issue of no par value ordinary shares in the issued share capital of Tsogo
Sun Hotels at a ratio of 1.77 TGO shares for every one HPB share acquired by Tsogo Sun Hotels. A general meeting
of Tsogo Sun Hotels’ and Hospitality shareholders will be held on Thursday, 19 November 2020 to consider and, if
deemed fit, pass the resolutions required to approve and implement the Offer.
In this low revenue environment, where Hospitality is increasing its debt burden and building on its assessed loss
through covering the fixed property- related costs of the hotels, such as administered costs, insurance and security
via the working capital facility catered for in the lease agreements, the preference going forward is to retain cash
resources. The successful implementation of the Offer will eliminate the pressure for Hospitality to declare pre-tax
cash distributions, post the recovery of activity levels in order to retain its REIT status and will allow the group to
focus on rebuilding the balance sheet and protecting the livelihoods of the many stakeholders who depend on the
Tsogo Sun Hotels group – from our employees and suppliers to our communities and investors.
The financial information in this trading statement has not been reviewed and reported on by the group’s external
auditors, PricewaterhouseCoopers Inc.
10 November 2020
JSE Equity Sponsors
Investec Bank Limited
Date: 10-11-2020 05:30:00
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