DIRECTORS’ REPORT
for the year ended 31 March 2020
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NATURE OF BUSINESS
The company is a South African incorporated public company domiciled in the Republic of South Africa engaged principally in the hotels industry. There have been no material changes in the nature of the company’s business from the prior year.
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STATE OF AFFAIRS AND PROFIT FOR THE YEAR
The financial results of the group for the year are set out in the consolidated annual financial statements and accompanying notes thereto. The group loss after tax for the year under review amounted to R1.2 billion (2019: R80 million).
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SUBSEQUENT EVENTS
The directors are not aware of any matter or circumstance arising since the balance sheet date and the date of this report other than the matters disclosed in note 48 of these consolidated financial statements, all of which are non-adjusting events and have no impact on the financial results for the year ended 31 March 2020.
The COVID-19 pandemic and subsequent lockdown of the economy on 27 March 2020, and particularly the hospitality sector, has had a profound impact on the group. The measures taken by government to limit the spread of COVID-19 and the resultant inability for travellers to travel internationally and inter-provincially will limit the demand for hotel rooms, which will impact the group’s revenue streams significantly for the 2021 financial year. Hotel trading is therefore expected to remain under pressure until the outlook on the South African economy improves.
Although the impact of COVID-19 is expected to have a longer-term impact on the hospitality industry and the group, management is not able to quantify the full impact at the date of this report. It is expected that the recovery of the industry will be slow due to the uncertainties around the health of travellers, and the negative economic impact on government, corporates and individuals to spend on hotel accommodation and conferences.
United Resorts and Hotels Limited disposal
The group has entered into a sale of shares and loans agreement with MH Limited, part of the Minor Hotels Group, dated 13 July 2020 in terms of which Southern Sun Africa (‘SSA’) will dispose of its entire 50% beneficial interest comprising shares and loan claims against United Resorts and Hotels Limited for aggregate proceeds of US$27.8 million being approximately R465 million.
Acquisition of additional shares in Hospitality Property Fund
The group acquired additional ordinary shares in Hospitality Property Fund Ltd. An ordinary resolution was proposed in terms of section 60 of the Companies Act to allow the board to acquire assets in exchange for ordinary shares in the group. On 10 July 2020, this ordinary resolution was duly approved by the group’s shareholders entitled to exercise more than 50% of the voting rights exercisable thereon. The group has entered into share for share agreements with Allan Gray Proprietary Limited (acting for and on behalf of numerous of their clients under discretionary mandates), and numerous clients of each of Aylett & Co Proprietary Limited, Prudential Investment Managers (South Africa) Proprietary Limited and Bateleur Capital Proprietary Limited (each of whom acted on behalf of their clients under discretionary mandates) to acquire, in aggregate, 46 137 907 Hospitality shares from their respective clients, constituting 7.98% of Hospitality’s issued share capital. The shares were acquired in exchange for the issue and allotment of 81 664 082 Tsogo Sun Hotels ordinary shares at an exchange ratio of 1.77 Tsogo Sun Hotels shares for every 1 Hospitality share acquired.
The group has also entered into share for share agreements with the trustees of the HCI Foundation and with Elsitime Proprietary Limited to acquire in aggregate 33 367 919 Hospitality shares constituting 5.8% of Hospitality’s issued share capital. These shares will be acquired in exchange for the issue and allotment of 59 061 217 Tsogo Sun Hotels ordinary shares at an exchange ratio of 1.77 Tsogo Sun Hotels shares for every 1 Hospitality share acquired, which is the same exchange ratio as applied to previous transactions concluded with other Hospitality shareholders since 3 July 2020, including the transactions notified to shareholders on SENS on 20 July 2020. The effective date of these transactions is expected to be on or about 19 August 2020 at which point Tsogo Sun Hotels‘ shareholding in Hospitality will increase to 75%. Marcel von Aulock and Laurelle McDonald hold 75% and 25% respectively of the issued share capital of Elsitime Proprietary Limited.
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GOING CONCERN
The consolidated financial statements are prepared on the going concern basis. Based on the cash flow forecasts, available cash resources and the other measures the group has taken or plans to take, management believes that the group has sufficient resources to continue operations as a going concern in a responsible and sustainable manner.
As at 31 March 2020, the group has net cash and cash equivalents of R722 million (2019: R212 million). The group has R4.0 billion (2019: R3.2 billion) of interest-bearing debt (excluding capitalised lease liabilities) and access to sufficient undrawn short-term facilities to meet its obligations as they become due.
In preparing the cash flow forecasts utilised to assess going concern, the impact of the COVID-19 pandemic on the group’s operations and liquidity was considered. The board of directors of the company has assessed the cash flow forecasts together with the other actions taken or proposed by management and is of the view that the group has sufficient liquidity to meet its obligations and to counteract the expected losses that may result from the COVID-19 impact on the group’s operations in the next financial year.
The recoverable amount for property, plant and equipment has been determined by calculating the value in use using a discounted cash flow model. The impact of COVID-19 on the cash flow forecasts reduced the value in use and the property, plant and equipment was impaired by R716 million. Refer to note 16 of the financial statements. Equally, the cash flow forecasts impacted the fair value of the investment properties negatively and consequently a fair value adjustment of R888 million was recognised. Refer to note 18 of the financial statements.
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OTHER SIGNIFICANT TRANSACTIONS
5.1 Expansion-related expenditure
Southern Sun Pretoria
Effective 1 October 2019, the group entered into an agreement with Ozmik Property Investments Proprietary Limited, to acquire the Southern Sun Pretoria hotel building for R200 million. The Southern Sun Pretoria hotel was operated by the group and the property leased. The building acquired has been recognised in property, plant and equipment.
Riverside Conference Centre
Tsogo Sun Hotels entered into an agreement to acquire the Riverside Conference Centre in Durban that can accommodate day conference delegates of up to 400 people for a consideration of R27 million of which R8 million was related to acquiring the conferencing business and R19 million relates to the acquisition of the conference property. An initial payment of R11 million was made in May 2019 which includes the acquisition of the conferencing business as well as a R3 million prepayment towards the acquisition of the property. Refer note 44 for more detail regarding the business acquisition.
5.2 Maintenance capex spend
Tsogo Sun Hotels spent R169 million on refurbishment at six of the hotels. A further R158 million was spent on maintenance capex.
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SHARE CAPITAL
Tsogo Sun Hotels (known previously as Southern Sun Hotels Proprietary Limited), incorporated as a private company and converted to a public company on 15 May 2019 in accordance with the laws of South Africa and which shares were listed on the JSE. The pre-listing authorised share capital of Tsogo Sun Hotels is 2 000 000 000 ordinary no par value shares and the issued share capital of the company is 1 060 895 712 ordinary no par value shares remained unchanged after the listing date, with a stated capital of R4.6 billion.
Tsogo Sun distributed all of the TGO Shares, comprising 100% of the issued share capital of Tsogo Sun Hotels, to Tsogo Sun Shareholders in the ratio of one TGO Share for every Tsogo Sun Share held, in terms of section 46 of the Income Tax Act, section 46 of the Companies Act and the Listings Requirements as part of the unbundling.
The JSE agreed to the listing of the entire issued share capital of Tsogo Sun Hotels in the ‘Hotels’ sector on the Main Board of the JSE with effect from the commencement of trade on Wednesday, 12 June 2019.
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DIVIDENDS
As outlined in the pre-listing statement, the group had intended to apply cash resources generated during the initial 15 months post the listing towards the settlement of the offshore division’s Dollar denominated interest-bearing debt. Given the anticipated extended period of minimal revenue due to the COVID-19 pandemic, the directors considered it prudent to retain cash resources in order to ensure that the group is able to navigate this difficult period until trading resumes. Accordingly, the directors have not declared a final cash dividend for the year ended 31 March 2020.
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ASSOCIATES, JOINT VENTURES AND SUBSIDIARIES
Refer notes 21 and 22 of the consolidated annual financial statements for details of associates and joint ventures respectively, note 52 of the consolidated annual financial statements for details of subsidiary companies with material non-controlling interests and note 53 to the consolidated annual financial statements for details of subsidiaries.
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DIRECTORATE
The following are the directors of the company:
Appointed Resigned Non-executive JA Copelyn (Chairman) 10 May 2019 JR Nicolella 10 May 2019 Independent non-executive MH Ahmed (Lead Independent) 10 May 2019 SC Gina 10 May 2019 ML Molefi 10 May 2019 JG Ngcobo 10 May 2019 CC September 15 August 2019 Executive MN von Aulock (‘CEO’) 10 May 2019 L McDonald (‘CFO’) 30 September 2011 J Booysen 10 May 2019 PJ Boshoff 10 May 2019 FV Dlamini 10 May 2019 RB Huddy 10 May 2019 R Nadasen 10 May 2019 -
DIRECTORS’ AND PRESCRIBED OFFICERS’ EMOLUMENTS
No material contracts in which the directors have an interest were entered into during the year under review. Refer note 45.3 of the consolidated annual financial statements for details of the group’s key management compensation.
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COMPANY SECRETARY
Southern Sun Secretarial Services Proprietary Limited
Business address:
Palazzo Towers West
Montecasino Boulevard, Fourways, 2055Postal address:
Private Bag X200
Bryanston, 2021 -
AUDITORS
PricewaterhouseCoopers Inc. will continue in office in accordance with section 90 of the Companies Act of South Africa until the forthcoming annual general meeting.
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MAJOR SHAREHOLDERS AND SHAREHOLDER ANALYSIS
The company’s ultimate majority shareholder is Hosken Consolidated Investments Limited (‘HCI’) (a company listed on the JSE) which, at the balance sheet date, directly and indirectly owned 49.4% (2019: 49.3%) of the company’s issued share capital (excluding treasury shares). HCI directly owned 10.1% (2019: 9.7%) and is the majority shareholder of Tsogo Investment Holding Company Proprietary Limited (‘TIHC’) and TIHC directly owned 39.3% (2019: 39.3%) of Tsogo Sun Hotels. These percentage shareholdings exclude treasury shares.
