BY BONNIE MODIAKGOTLA
The Botswana Stock Exchange listed property company, Letlole La Rona, says profit will dip following its decision to offload some of its properties to Cresta Holding, the company warned on Thursday.
Letlole La Rona (LLR) cautioned its shareholders that the interim financial results for the year ended December 2018 will record a drop in profit before tax (PBT) – which is expected to be between 20 and 30 percent ÔÇô knocking off between P10.9 million and P16.4 million from profit.
At best, the company is expecting PBT of P43.1 million and at worst, PBT of P37.6 million. Either way, this will be lower than the P54 million in profit before tax realized in the corresponding period in 2017.
“This is as a result of impairment on the carrying value of the four hotels which are currently in the process of being sold to Cresta Marakanelo Limited, combined with the non-recurrence of a once-off valuation gain on one of the properties accounted for in the previous reporting period,” the company said in a cautionary announcement.
“The results for the period under review will be published by the end of March 2019. Profit before fair value adjustments remains on an upward trajectory with a growth of 15 percent from December 2017.”
In a deal that has already been approved by LLR and Cresta Holdings shareholders, together with regulatory approval from Competition Authority, Cresta will acquire properties owned by LLR and Botswana Hotel Development Company (BHDC) in an inter-party related transaction.
The transactions are party related since Botswana Development Corporation (BDC) wholly owns BHDC, and a significant 66 percent stake in LLR, as well as a 27 percent shareholding in Cresta Marakanelo Limited, the owners of Cresta hotels.
The deal was made public in December 2018, with a detailed statement released to shareholders, announcing that Cresta intends on acquiring a plot in Maun owned by BHDC. The plot is currently being leased to Cresta Riley’s Hotel, one of the 12 hotels owned by Cresta. The price consideration for the prime land comes at about P25 million.
Moreover, Cresta will also acquire some properties owned by LLR which have been housing some Cresta business: Cresta Lodge, Cresta Thapama, Cresta President and Cresta Bosele. These four properties acquisition will set Cresta back by around P235 million.
The hotel chain company says it will fund these transactions through debt financing, and added it will have no bearing on the net asset value. “The interest expense in the first year will be less that then current rental expense, therefore the transaction will have significant positive effect on the net profit of the company,” said Cresta in a circular sent to shareholders.
It appears that the transaction will benefit Cresta in the long term as it will no longer pay rental fees to BHDC and LLR, something Cresta says it will decrease overhead costs.
On the other hand, LLR says it will use the sales proceeds to further expand its property portfolio. The property investment company with exposure to the industrial sector has said that it has identified future growth in the retail sector, and intends to pursue these opportunities.
“The benefits which are expected to accrue to LLR include reduced exposure to the hospitality industry’s operational risk. The transaction will also enable the company to acquire new properties that can provide appropriate diversified returns to the property portfolio,” said LLR in a prepared statement to its shareholders.
The LLR board has in the past showed concern on the health of the leisure property sector. In its 2018 annual report, the hospitality industry was flagged for being too competitive, with mushrooming of new hotels and lodges, leading to low occupancy rates.
LLR has since expressed its interest in the retail market as springboard for future growth. The company’s property portfolio is currently dominated by the industrial sector. In the 2017 financial year, LLR bumped its retail portfolio from 10 percent to 24 percent after its big purchase of the Mahalapye based Watershed Piazza mall at a cash consideration of P149 million.
Meanwhile, both share prices for LLR and Cresta have not moved in response to the market news. When the deal was made public last year, Cresta was trading at P1.20, while LLR’s share price was P1.76, and three months later the share price has remained the same.