The Don Group quits hotel sector to get out of the red

hotel sector

The Don Group Limited, a company listed on the Johannesburg Stock Exchange, said in a statement released on 6 October 2011 that due to the depressed economic conditions and plummeting profits, it had turned three hotels into residences and had to retrench a number of staff. The report follows:

“Trading conditions in the hotel and leisure industry have been depressed in the last two years. The 2010 Soccer World Cup (SWC), which had a welcome positive impact on the industry, did not however, attain the levels expected. Instead of seeing an influx of visitors post the SWC, a sudden decrease was experienced. In addition, the overall lack of economic activity in South Africa, the trend by many companies towards consolidation and cost-cutting (with minimal expansion taking place) and an oversupply of hotel rooms affected occupancies and room rates for the entire hotel and leisure industry.

“Despite the lower occupancies, the positive after effects of the SWC still continued up to the end of September 2010, which saw the Don meeting its budgeted revenues for the first quarter of the current reporting period. However in the following months leading up to the end of the current reporting period, revenues began to decline resulting in the Group achieving revenues of R90-million.

“The tour operator subsidiary, iKapa Tours & Travel (Pty) Ltd contributed R39.6-million towards the current reporting period`s Group revenues, down from R112.8-million, which was as a result of the SWC in the prior reporting period, whereas the hotel segment achieved revenues of R50.3-million.

“Generally, within the hotel segment, costs remained below budget as a result of lower than expected occupancies and changes in business operations that resulted in three hotels being converted to residential apartments. However, persistent declining revenues forced the hotel segment to implement cost cutting measures and management controls that contributed to materially lower expenses in comparison to the previous reporting period. These measures included retrenchments across the board, salary cuts for management and relocation of the head office to the Don Isando Hotel.

“Even with the efforts of the Group to improve trading conditions through various cost cutting exercises and alternative revenue generating ventures, losses are still being generated by the Group. Losses of R35.7-million, before devaluation of property, were incurred by the Group in comparison to the prior reporting period loss of R2.4-million.

“Ikapa reported unprecedented pre-tax profits exceeding R19.3-million in 2010 as a result of the SWC. In the current reporting period, Ikapa`s pre-tax losses were R3.4-million and the hotel segment`s pre-tax losses were R19.1-million. The above losses are attributable to extraordinary factors that could not be avoided as a result of depressed trading conditions, retrenchments and the provision for bad debts.

“The board, during the current reporting period, assessed the valuations of the properties in light of the change in use as a result of the conversion to rental apartments and probable sale of the properties. Certain properties were assessed as impaired whilst others retained their prior reporting period values consistent with sale offers received. The director`s valuation resulted in a net devaluation of property of R17.5-million, increasing the Group loss to R53.2 million.

“During the current reporting period the Don acquired a further 6% interest in iKapa, thereby increasing its shareholding to 57%. The Group`s non-current asset base is currently at R275-million. The Group`s net asset value per share is 47.9 cents (30 June 2010: 66.3 cents).

“The management contract in respect of Heritage Square in Krugersdorp and the rental agreement for the Sir Lowry Restaurant in Cape Town terminated as at 31 March 2011, by mutual agreement as a result of continued losses that were being incurred from both these properties. The management contract in respect of the Don Savoy in Kimberly was also terminated by mutual agreement effective 30 June 2011.

“The Board and management acknowledged in the 2011 interim report that they confronted a significant task in recovering from recent losses. Efforts were doubled to contain operational costs in the face of large increases in electricity, other municipal charges, fuel and decreasing occupancies.

“Due to a saturated Hotel market, the Group was forced to consider alternative revenue generating ventures. In light of this, the Group moved towards leveraging on the suite configuration of a Don apartment by converting three hotels to residential apartments as of 1 April 2011. The affected properties were Arcadia 1, Sandton IV and Eastgate.

“It was envisaged that the letting of the above properties as residential properties would see an improvement in the occupancies of the hotels that are in the vicinities of the affected properties i.e. the clientele from the affected properties mentioned above will move to the properties that will continue to be operated as hotels, therefore improving these properties revenues. However, this expectation did not materialise subsequently.

“Furthermore, the hotel segment reviewed its Head Office structure and its effectiveness and further reduced staffing in this cost centre. General cost cutting measures were implemented by way of a 20% salary cut for EXCO members and retrenchments across the board that have seen the staff complement reduce considerably since the prior reporting period.

“In addition, the Head Office was relocated with effect from 7 March 2011, to the Don Isando hotel. This move resulted in a cost saving of approximately R4.8-million per annum on Head Office costs.

“In spite of the efforts of the Group to improve trading conditions through various cost cutting exercises and alternative revenue generating ventures, losses are still being generated by the Group. The loss is attributable to uncollectable debtors of R2.5-million that were written off in the current reporting period, retrenchment costs of R1.4-million, higher interest incurred on the IDC loans as a result of late payment, interest and penalties incurred on late payment of certain liabilities, large increases in electricity tariffs and increases in food costs and fuel costs.

“The write-off of the deferred tax assets in two of the Group`s subsidiaries of R3.6-million also contributed to the Group`s losses. Similarly, iKapa, in an effort to reduce costs, underwent retrenchments resulting in an annual saving of R1.2-million towards their expenses.

“A marketing agent was appointed in North and South America from June 2011. It is envisaged that the returns of this appointment will reflect in the June 2012 reporting period.

“The strain on the cash flows of the Hotel segment resulted in various liabilities remaining unpaid as at 30 June 2011 including payments to the Provident Fund and certain payments to SARS. This has resulted in interest and penalties being levied for non-payment.

“The Group`s auditors, as detailed below have reported these irregularities to the Independent Regulatory Board for Auditors. Management is currently resolving this matter with the relevant fund administrators and all monies due will be settled in full.

“The Don, in light of continuing weak trading conditions, has been forced to reconsider its future in the Hotels industry. A number of alternative profitable strategies have been considered in order to unlock value for its shareholders. The Board has decided to dispose of certain of its properties and pursue residential letting for remaining properties.

“Shareholders are referred to the renewal of cautionary released on SENS on 5 October 2011 and are advised to continue to exercise caution when dealing in The Don`s securities until a further announcement is made.

“Contingent liabilities relating to retrenchment and down-scaling provisions which were in existence at year end amounted to R7.9-million. The potential disposal of certain properties is intended to settle all liabilities owing by the hotel segment, including any costs that will be incurred in winding down of the hotel operations and the IDC debt.

“With a debt-free hotel segment, should disposals be successfully concluded, minimal Group expenses, rental revenues from remaining, unencumbered hotel segment properties, the appointment of a marketing agent in the Americas in the travel and tourism segment, the second half of the 2012 reporting period is set to be in line with the goals of the Board for the Group to return to profitability.”

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