Pamodzi Hotel: Opulence Meets Value

When a guest wakes up from a smooth soft bed and soothing pillows, one of the first things that comes to mind is the bang for buck he or she got from paying the daily rate of sleeping in a luxurious hotel room. Pamodzi Hotel, a house hold name in Zambia has opulence that has had many craving to host everything from a wedding to conference over the years.

It’s no wonder this hotel enjoyed a fantastic year in 2015-2016. Revenues were up 46% and earnings increased by 126% from the previous financial year. But how is it possible that despite many of the premier companies we have covered so far have loathed of excruciating macro conditions and unwavering financial crisis from faraway lands? Shouldn’t Pamodzi be suffering the same fate as many? On the contrary, the macro conditions actually worked in their favor. In addition, they occupy a segment that is in oligopoly (5 or less players in a market segment). You see for the hotel industry that is positioned on the luxury end, macro decisions such as flexibility in room rate charges based on daily exchange rates, means that these type of businesses can protect themselves from foreign currency haircuts when “Katondo street” decides to change their rates. Therefore, employing hedging has been the secret of protecting value for Pamodzi shareholders.

What is also impressive about this hotel was that management signals improvement in performance. Their operating profit increased from 8% in 2015 to 20% in 2016. They made better use of their capital employed by 35% which gave shareholders an increase in return on equity by 10%. This is what promoted an increase of 50% in dividends from the previous financial year. Music to shareholders no doubt.

However, there are concerns in the hotel’s efficiency. Although a hotel room can hardly be considered as inventory, it’s everything else that makes it up that shows the hotel carrying more inventory for the same number of rooms (check your stores). Receivable, payable and inventory days (how quickly they collect cash from customers) were therefore inflated in the period under review leading to a negative working capital cycle. In addition, this may also signal the need for more aggression in debt collection as a hotel of such standing must maintain a lot of corporate accounts who on the back of the “global” may have had problems in footing their bills with the hotel.    

In tough economic times, having a strategy such as exchange rate fluctuation is only one of the few ways companies can protect themselves from value destruction. Pamodzi has passed the test on this one and as a result has made shareholders happy. With improved efficiency, the hotel will continue to bring value to those that invest in it. This stock is worth being in one’s portfolio.