African Sun prepares to ride the wave

Hospitality group African Sun Limited believes the Covid-19 induced crisis is far from over, but after stress testing of its scenarios, its management concluded that even under the worst case scenario, the group will continue to operate in the foreseeable future.

In a going concern note accompanying the group’s results for the year ended December 31, 2020, chairman Mr Alex Makamure said the worst case scenario forecast the group to close 2021 with occupancy levels slightly better than the 2020 occupancy.

Mr Makamure described last year’s performance as unprecedented after the group’s occupancy levels tumbled by 25 percentage points to 23 percent resulting in inflation adjusted revenue dropping by a significant 55 percent.

He however, said even if the decline in volumes remains a threat to the going concern of the business, the group has reasonable cash resources to ride the worst case scenario.

In addition, the group has put in place compensating business survival strategies ranging from cost containment, cash preservation to deferment of capital expenditure.

African Sun has two undrawn facilities amounting to $312 million split as US$2 million and $150 million and these will only be used if need be.

Due to the prevailing Covid-19 uncertainties, these strategies have been factored in our 2021 Group budgets and Group cash flow forecasts, Makamure said.

“Coming from what has been the most challenging year in the history of travel and tourism, the 2021 budget process required management to plan for a wide range of financial performance and cash flow scenarios to try and address the Covid-19 related uncertainties.

In the going concern assessment, management considered several possible outcomes for the next 12 months as Covid-19 remains a critical factor in our business.

Due to the evolving nature of the pandemic, African Sun’s worst case scenario assumed a second wave and for the pandemic to sustain for a better part of the first quarter and into the second quarter of 2021.

“Despite the second wave, we do not expect 2021 to be worse than 2020 mainly due to the experience the group gained navigating the effects of Covid-19 first wave in 2020,” the group said.

The worst-case scenario forecast a re-introduction of stricter travel restrictions which include, in some cases a complete closure of borders, all weighing on the resumption of international travel.

It had also assumed no vaccine during first half in 2021.

However, governments around the world started the gradual roll-out of a Covid-19 vaccine as early as the beginning of January 2021, and this should only improve 2021 recovery prospects for the Group.

African Sun expects the early global vaccine roll-out in its key source markets to help restore consumer confidence contributing to the easing of travel restrictions in the short term and slowly normalising travel during second quarter into third quarter of 2021.

“Under the worst case scenario international business is forecast to gradually start around Q3 2021 with domestic business largely driven by Government and non-governmental organisations programmes anchoring performance during H1 2021.”

The Group also said the recent easing of the lockdown restrictions to level two, under which inter-provincial travel is allowed brings hope to domestic tourism.

“Compared to the base case scenario, foreign market performance during first half, we expect to see volumes improvement during third quarter going into fourth quarter of 2021,” the ZSE listed company said.

In this worst case scenario, the Group expects Covid-19 to continue impacting the business during H1 2021 putting pressure on the ADR which is forecast to ease by 19 percent from the base case scenario as the Group promotes rebound business.

It said as the outbreak continues to evolve, there remains uncertainty surrounding the timing of the key Covid-19 related interventions and the likely impact to the business.

At the corporate level, the Group continues to implement business contingency plans in response to the ever-evolving situation.

Some of the contingency plans, which are meant to significantly reduce expenses and preserve liquidity, including carving out of and deferment of some capital expenditure programmes; engagement with tour operators to defer bookings as opposed to cancellation; a situation that may call for refunds in foreign currency that was already liquidated.

The group has also agreed on reduced remuneration structures with its employees as well as reducing the work force to align to volumes of business.

The hotel operator has also engaged landlords on revised sustainable rental formulas until this phase is gone.

“Based on the aforementioned, the directors have assessed the ability of the Group and the Company to continue operating as a going concern.-heraldcl.zw