April 11, 2018

UAC of Nigeria plans to sell its investment in UPDC Hotels (UHL)

Onajite Obrutse

  • The board of UAC of Nigeria as at the end of Q4;2017 classified interest in its real estate subsidiary UPDC Hotels (UHL) as held for sale.
  • Reuters reported the group’s CEO, Abdul Akhor Bello confirmed the sale of UHL last Thursday and the sale is expected to be completed within a year from the reporting date.
  • UPDC Hotels currently owns the Festac 77 Hotels, also known as Golden Tulip Hotels located in the Amuwo Odofin area of Lagos State.
  • UPDC Hotel is the UPDC’s hotel division where Golden Tulip (Festac 77 Hotels) reports its earnings.

UAC of Nigeria stated in its 2017 Annual Report published on the NSE last Thursday that it has decided to sell its investment in UPDC Hotels (UHL) after the subsidiary accrued back to back losses for the past 7 years. The Golden Tulip owned by UHL is located in a small mixed-use hub that also includes a 10,071sqm shopping mall anchored by Shoprite and Silverbird Cinemas as well as a 192 unit residential property called The Residences.

The sale is expected to be completed within a year from the reporting date, however, demand from prospective investors is uncertain. Consequently, UHL has been classified as a disposal group held for sale and will discontinue operations in accordance with the IFRS 5.

Losses for the hotel were N293.6 million in 2017 compared to a loss of N552.2 million in 2016. In 2015, the hotel reported losses of N773 million compared to N160 million in 2014.

The board of UACN has stated that the cost of funding the hotel business remains a big concern. The proceeds of the sale are primarily to reduce the percentage of debt in the firm’s balance sheet. UPDC Hotels currently owes UACN N14.4 billion, this amount was settled by converting UPDC’s intra-group loan to equity in UPDC in May 2017. The group now holds 64.2% of the equity share capital of UPDC Plc.

The carrying value of the net asset of UPDC Plc on the date of acquisition was N31.3 billion whilst the book value of the hotel is reported to be N12.29 billion according to its financial statement for the period. UPDC owns about 97% of UPDC Hotels.

UPDC also diversified its portfolio in 2013 through the floating of the UPDC Real Estate Investment Trust (REIT) at a capital value of N26.7 billion listed on the Nigerian Stock Exchange (NSE) on 1 July 2013.

The REIT’s income comprised of rental income from the property assets and interest earned from short-term investments in money market instruments and other real estate related assets.

If we exclude the real estate businesses from UACN’s Q1;2017 results, the performance was actually decent, with a PBT growth 14% y/y. Given the weak macroeconomic environment, it is unsurprising that UACN’s property business continues to struggle.

On an annual basis, UACN’s PBT tracks well behind consensus PBT estimate of N9.2bn. We expect a negative reaction by the market to these numbers, especially because UPDC continues to be a drag on the group’s performance.

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