Traditional hospitality giant Cresta Marakanelo Group which operates hotels and lodges in Botswana & Zambia continues to be negatively affected by the increasing hospitality industry competition.
As signaled by the Group at half year ended June 2017 results presentation, the chain hotel outfit collectively registered shrunk profits for the complete 2017 trading year ended December last year. According to the annual report released last week the Botswana Stock Exchange (BSE) listed hotels Group performance was subdued, with depressed overall financial performance compared to the prior year.
The prior year also recorded lapses in governance processes within the Group, which resulted in a restructuring of the leadership and a complete review of the internal control system, which was completed in 2017. Cresta Marakanelo Limited Chairman of Board of Directors Moatlhodi Lekaukau explains that the overall decline in profitability was by in large attributed to increased competition in the markets the Group operates in, coupled with significant reduction in Government spending.
Cresta has been predominantly a household name in the hospitality and related industries such as conferencing for several years; however of recent the Botswana market which is Cresta’s main operating space has been receiving new entrants who bring to the game exciting and diversified products, amongst other elite’s hospitality outfits internationally reputable market nectarines.
This has in turn taken the competition to Crestar’s door step. The Group also takes blows from reduced government spending from time to time. Government business especially civil servant’s official trips hospitality contributes significantly to Cresta’s bed occupancy. During the year under review the company recorded an overall profit before tax of P26.2 million mirroring a 29 percent decline from the result recorded for the previous year.
The Group recorded a marginal 1 percent increase in revenue to P 337 million. Total overheads decreased marginally, despite the inclusion of the costs related to the new hotel in Maun for the second half of the year. Lekaukau notes that the reduction was as a result of cost rationalization measures across the Group.
Despite shrunk profits as compared to the previous year, Cresta’s total assets for the year under review climbed by 2 percent, while equity increased by 4 percent compared to the same period last year. According to Lekaukau the Group continued to be cash generative despite downward trajectory on profitability, a total 6% increase in net cash generated from operating activities compared to the year ended December 2016.
Net cash generated from operating activities was P65.3 million compared to P61.8 million in 2016. “The Group has a robust and stable base, with cash resources of P65.3 million more that the P61.8 million in 2016, this is satisfactory going forward, the cash will be utilized to fund the payment of dividends to shareholders, refurbishments and expansion activities,” explained Lekaukau.
The group’s operating profit decline of 26 percent comes about from P33 million raked in during the 2017 trading year compared to P44.9 million in 2016. Earnings per share also registered a decline of 29 percent from 20.32 thebe in 2016 to 14.47 thebe in 2017, while the total dividend of 14 thebe per share for the 2017 financial year represents an 8 percent growth on the prior year.
The dividend yield for 2017 of 13 percent compares favourably to the average dividend yield of approximately 5.5% for counters listed on the Botswana Stock Exchange. At year end, the Group had negligible debt amounting to P8.4 million, a significant reduction from the over 12 million debt registered at the end of 2016.
Cresta Marakanelo Managing Director Mokwena Morulane notes that his company‘s declined performance is attributable to sluggish economy and contracted expansion opportunities due competition brought about by new entrant in the market. He however submits that Cresta Marakanelo Group is able to generate cash flows from operations of approximately P65 million per year.
“The Group is adequately positioned for ongoing operations and macro-economic shocks that may occur, we have debt carrying capacity and we are also able to take advantage of significant expansion opportunities,” he said. Amongst the two operation markets for Cresta, Botswana operations were significantly affected by the increased competition. According to the report Botswana’s overall occupancy declined from 63 percent in 2016 to 57 percent in 2017, also weighed down by the low occupancies of the new Cresta Maun Hotel, which opened in May 2017.
Three of the 11 Cresta hotels in Botswana incurred losses for the year as a result of flat revenue growth in a competitive environment. However on the Zambian Market the group performed satisfactorily with the division raking in operating profit of P987 million for the year, compared to a loss of P57 million in the previous year. “This was achieved in spite of the subdued business environment in Lusaka during the first half of 2017” observes Morulane.
The Cresta MD notes that cost optimization for the Zambian operations beard fruits as division’s revenue increased by 2 percent in Kwacha compared to the prior year, with the overall increase in profitability. To emerge from the declined profitability and remain the leading hotel Group predominantly in Botswana Cresta Marakanelo commenced the implementation of its new strategic plan aimed at repositioning the group and revamping its performance.
The strategic plan will run for the five year period from 2018 to 2022. The five main pillars of the Strategic Plan covers the broad areas of human resources and capacity building; growth; information communication and technology; marketing; and cost optimization. “We are working on initiatives to drive down costs without compromising the quality of product offering at the hotels, while also improving the value proposition,” explained the Group MD.
The Group has embarked on significant refurbishment projects of properties in 2018 with over P40 million earmarked to be spent on three properties this year. “This drive for product refreshing and improvement will continue into 2019, and we expect improved occupancies across all our properties,” observed Group Chairman. Lekaukau also notes that Cresta Marakanelo continues to explore regional growth opportunities in order to diversify its portfolio and further unlock shareholder value.
Managing Director Mokwena Morulane says the growth prospects of the Global Travel and Tourism industry as well as possible policy review by different stakeholders on the part of local industry sparks growth forecasts for the sector and ultimately profitability for the Cresta Grou. “The renewal and turnaround at Cresta Hotels will be premised on a solid platform of enhanced customer experience and strong commercial delivery. We are therefore on track to transform the Group into a stronger commercial and financially sustainable company whose central focus is the guest,” he said.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”