Agusto & Co assigns Bbb- rating to Smart Residences

...with pre-tax profit margins of 30.7%

Agusto & Co, has assigned a “Bbb-”rating in its recent 2022 Final Corporate Rating report to Smart Residences Limited (SRL), an hospitality company that offers flexible accommodation, hence it attaches a stable outlook to the company.

The assigned rating reflects Agusto’s opinion on SRL’s satisfactory profitability and cash flow levels which are supported by the steady growth in the company’s operating capacity since its inception in 2020 as well as the favourable terms with customers and creditors.

This is in addition to SRL’s adequate working capital and low leverage position in the period under review. However, Agusto’s rating of the company’s financial condition is constrained by the limited track record and SRL’s concentrated ownership profile.

In addition, the rating takes into consideration the susceptibility of SRL’s operations to exogenous factors such as the rising energy and other business costs exacerbated by inflationary and exchange rate pressures and the potential adverse impact on margins.

The company commenced operation at the peak of the COVID-19 pandemic in 2020, with 30 leased apartments as a provider of serviced short-let to corporate and individual clients, generating revenue and cash flows from rental income, and have doubled the same within the first two years of operations.

Smart Residences currently operates two leased properties each with a period of 10 years expiring in 2029 and 2031 respectively. SRL is owned by Safe Exchange Limited that controls an 80.5 percent equity stake.

The demand for flexible accommodation in Nigeria became pronounced in 2020, during the COVID-19 lockdown period, when many hotels across the country were shut down for months. This favourable demand has continued even after the lockdowns.

“Whilst we expect SRL’s increasing stock of apartments to bolster overall cash-generating capacity provided that the company can maintain good occupancy rates across its properties (in line with management projections).

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“SRL had no interest-bearing obligations as at FYE 2021. As such, the Company’s leverage metric – net debt (total liabilities less cash and equivalent) to total assets of 20 percent as at FYE 2021 and 12 percent as at 31 March 2022 (unaudited) were both better than our benchmarks,” Racheal Animashaun, Isaac Babatunde, Agusto & Co, analysts
stated in the report.

In the financial year ended 31 December 2021 (FYE 2021), SRL recorded revenue of N474.1 million a significant increase from N120 million in the prior year on account of the launch of additional 30 apartments and the price increases implemented in the period.

SRL recorded an operating expense to revenue ratio of 59.8 percent in 2021 (2020: 83.2percent) amid the positive impact of economies of scale, thus resulting in a much-improved operating profit margin of 30.7 percent in FYE 2021, compared to the 5 percent recorded in its first year of operation.

Overall, the company posted pre-tax profit and post-tax profit margins of 30.7 percent and 21.5 percent respectively (2020: 5 and 4.1percent). Consequently, SRL recorded higher return on assets and equity ratios of 25 percent and 29 percent respectively in 2021 (2020: 2percent, 3percent).

Although the company’s profitability metrics in FYE 2021 seemed acceptable, due to its limited track record, sustainability over the near to medium term remains to be seen, particularly amid the rising energy and maintenance costs.

SRL posted an operating cash flow (OCF) of N224.9 million in FYE 2021 to reflect the increased scale of operations during the period. The OCF represented 47 percent of revenue given that the bulk of its sales is mostly on a cash basis.

Subsequent to the 2021 year end, Smart Residences recorded an OCF of N72.9 million, representing 36 percent of sales in the three months ended 31 March 2022 (unaudited).

However, the rating agency expects the company’s debt profile to inch up over the medium term based on management’s plans to inject debt funding into its capital structure.

Accordingly, the report states that SRL had maintained an adequate working capital position since it commenced business in 2020, buoyed by the additional equity injections made by the shareholders.

The company recorded a short-term financing surplus (STFS) of N32.2 million and available working capital of N36.4 million, thus resulting in an overall working capital surplus of N68.6 million as at FYE 2021.

This continued in 2022 with the company recording an overall working capital surplus of ₦50.9 million as at 31 March 2022 (unaudited management account).

The company hopes to establish new apartments in carefully selected neighbourhoods to leverage the rising demand for luxury short-let apartments in Abuja with plans to expand to Kano and Lagos over the medium term.

In addition, SRL intends to widen its portfolio with the establishment of food and beverage retail outlets to meet customers’ demand as well as diversify its revenue stream from rental income.

“We expect the successful actualization of these initiatives to potentially enhance the Company’s earnings over the near to medium term. However, our expectation is hinged on steady patronages across the company’s apartments, barring unprecedented events that may disrupt the operations of the emerging Flexible Accommodation services in Nigeria,” Agusto & Co stated in the report.

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