adminYvonne Murwira
The past two years have seen the operating environment tightening. This has seen growth rates for corporates slowing down whilst others have recorded negative growth rates. Disinflation trends and the negative 0,49 percent February 2014 annual inflation rate have been a result of the slowdown in aggregate demand.
In such trying times, it appears much easier for economic agents to heap all the blame on the economy, mainly tight liquidity.
While this may be true to a certain extent, effective strategy formulation and implementation to avert or rather minimise the adverse macro-economic effects is lacking within economic agents.
Few lessons can be taken from RTG’s latest financial performance.
RTG’s improved set of financial results for the full year to December 31, 2013 reflect that mismanagement and poor capital budgeting may be key issues leading to poor performance compared to the macro-economic environment.
Revenue grew by 6 percent to $29,3 million attained through a combination of growth in occupancy and revenue per available room.
A profit-after-tax of $1,1 million was recorded compared to a loss of $5,9 million. Worth noting is that this was the first profit recorded by the hospitality firm since dollarisation.
An analysis of the income statement and balance sheet reflects some of the initiatives that decision makers can make use if they are to achieve feasible results rather than being overwhelmed by the operating environment.
Firstly, the company undertook cost cutting initiatives as a way of coming up with the right or appropriate cost structures.
Most of the measures if not all, which were implemented by the new chief executive and his team were not unusual. The company simply began by identifying major cost items especially utilities and developed methods to reduce them.
For instance, use of generators, gas stoves and installation of energy bulb savers saw electricity bill dropping by 15 percent from $1,3 million to $1,1 million.
Installation of boreholes led to the water bill being reduced by 32 percent from $0,5 million to $0,2 million.
Use of Skype and Voice over Internet Protocols as a way of managing the telephone bills internally and with the outside world led to a $78 000 saving.
Resultantly, RTG recorded a cost saving of $0,5 million from these measures impacting positively on profitability.
As can be seen, these measures are common to all corporates, however, implementation or non-implementation of such measures separates winners from losers.
In addition, tightening operational controls as a way of plugging leakages also supported cost cutting initiatives.
For RTG’s new management team, this was a way of addressing some irregularities and legacy issues that had been left by the previous team.
Centralisation of procurement for raw materials was one such measure and this led to a 16 percent cost saving or a $500 000 saving.
While the centralisation was a reactive response, management action must be lauded as most companies and even parastatals have adopted a “do-nothing” strategy despite being aware of the irregularities.
Further to centralising, the group dismissed more than 20 employees in relation to fraud cases which had cumulatively led to leakages of $1,5 million in the past three years.
Such bold moves are necessary evils in these trying times as they aim to create value for the shareholder.
This area is key especially with the high level of corruption being witnessed at all levels within the economy.
Another important area that RTG addressed relates to lowering the finance bill. RTG resolved this area through the retirement of short-term expensive debt.
The debt reduction came through a combination of a $4,5 million rights offer and a $10 million 3-year loan facility at a 10 percent interest rate per annum.
Overall, the interest bill was reduced by 51 percent or $1,9 million to $1,8 million.
The average cost of capital was also reduced by 8 percentage points from 19 percent to 11 percent. Most listed corporates have either failed to account for the utilisation of rights issue funds or to show the financial benefits of such capital calls.
Examples of such include ART, PG and starafrica just to name a few. Therefore the visible financial benefits by RTG on interest bill and accountability of funding had a positive impact on profits.
Further to this, capital restructuring is another area that other corporates can utilise as a way of lowering finance costs.
Turnall and Cottco (formerly Aico) are such companies among others, which may need to consider this route as a way of avoiding the choking effects of huge finance bills.
Whilst addressing costs structures, RTG management also focussed on ways to generate revenue. Worth noting is that RTG’s revenue growth did not come about as a result of improving market conditions.
It had more to do with choosing the appropriate marketing strategy through lower prices and higher volumes.
Also, aggressive and direct marketing of the group’s hotels to international visitors seems to have worked like a charm.
All these measures signal that despite worsening economic fundamentals, corporates have avenues that they may engage in as survival tactics.
With the recovery plan for RTG set, sustainability of the turnaround remains in question. Management team at the hospitality firm may need to continuously plan on this area, chiefly on revenue generation as costs can only go lower up to a certain point.
The “Enjoy now, pay later’ model may need to be reviewed in light of the surge in defaults rates within the economy.
This is critical as the domestic market accounts for more than 92 percent of total turnover.
An improvement in the turnover mix such as the one witnessed where foreign mix rose from 21 percent to 28 percent will be a game changer.
Fast tracking the refurbishment exercise remains vital but profitable centres must be given priority rather than embarking on an aggressive move in all hotels.
Diversifying income streams across national borders appears to be another avenue that most business are considering as the domestic market remains depressed.
However, for hospitality firms this does not always pay off. Mozambique operations for RTG were dismal with revenue declining by 27 percent to $1,6 million.
The revenue drop was attributed to the emergence of competition and stalled refurbishments. Management may need to focus on the core operations in Zimbabwe as most management contracts have not paid well.
African Sun at one point in time embarked on a regional expansion drive which turned out to be costly. RTG may also need to reconsider this area as it may prove ineffective in as far as value creation for shareholders is concerned.
Another key area despite the improvement witnessed relates to debt reduction as the total debt to total equity ratio which stood at 136 percent compared to 181 percent in prior year.
Such a ratio remains huge and requires immediate and continuous attention, which may allow the company to be able to take advantage of future viable projects and also for further reduction of the interest bill.
As has been demonstrated by RTG, companies can turn the corner despite weakening economic fundamentals.
Corporates need to re-examine their cost structures mainly on plugging leakages and crafting leaner structures as possible ways addressing profitability.
Revenue generation is also key. While RTG’s performance in 2013 was a step in the right direction only time will tell whether this turnaround will be sustained.
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