Orascom Development Holding AG’s (ODHN) (Orascom Development) revenues increased in 1H 2014 by 2% to CHF 120.6 million (1H 2013: CHF 118.3 million), as strong Real Estate & Construction revenues compensated for a weaker hotel performance.
The net profit attributable to shareholders of the company reached CHF 31.5 million after a CHF 48.0 million loss in the same period last year.
The result was significantly impacted by delivering on the Group’s cost savings initiatives by achieving CHF 20 million of overhead savings compared to FY 2012 cost base, one-off gains related to the settlement of the Falcon case (CHF 52.6 million) and the deemed loss of control of OHC and its subsidiaries (CHF 9.4 million).
The adjusted EBITDA for the period was CHF 10.7 million (1H 2013: 1.6 million).
Revenues in Real Estate & Construction segment more than doubled compared to prior year
Revenues in the Real Estate & Construction segment significantly increased to CHF 49.5 million (1H 2013: CHF 22.3 million), equivalent to 41% of Group revenues. The increase is mainly a result of accelerated delivery of real estate units in Egypt (El Gouna, Ancient Sands and Makadi). The adjusted segment EBITDA increased to CHF 15.8 million (1H 2013: CHF -4.6 million). Contracted real estate sales increased to CHF 35.0 million (1H 2013: CHF 31.0 million), driven by a continued strong sales momentum in El Gouna and a positive contribution from Montenegro. In total, 403 units were sold at an average price of CHF 1,116/m2 including the budget housing segment.
Hotels continued to suffer from travel restrictions on Egypt and inventory loss in Taba Heights during 1H 2014, with significant improvement being witnessed during 2H 2014.
The hotel segment continued to suffer from travel bans to the Sinai Peninsula and general travel warnings on the Red Sea area issued by most Western European countries at the beginning of the year. In addition, flooding in May 2014 resulted in a 29% room capacity loss in Taba Heights. The average occupancy rate declined to 42% (1H 2013: 59%) and revenues slipped to CHF 48.8 million (1H 2013: CHF 72.0 million), equivalent to 40% of Group revenues. The adjusted segment EBITDA amounted to CHF 2.3 million (1H 2013: CHF 18.9 million). TRevPAR (Total Revenues per Available Room) declined to CHF 39 (1H 2013: CHF 60).
On the positive side, the announced cost savings measures increased operational efficiency and resulted in an improved flow-through compared to 1H 2013, despite the significant decline in revenues. The Group expects a significant improvement in the hotels operations during the second half of the year. With the presidential inauguration in June 2014 and the upcoming parliamentary elections, the road to political reforms became clearer, which boosted international and domestic confidence in Egypt’s stability.
Accordingly, most travel bans were lifted towards the beginning of the second half of 2014, with occupancy rates rising in the weeks since. Moreover, the Egyptian Ministry of Finance is working on a stimulus package to promote private sector investments in select industries, including tourism.
We also finished the restoration of 3 hotels in Taba Heights which are now fully operational and are finalizing the necessary works on the other 3 hotels which are expected to be operational by the end of the year. At the end of the reporting period, the Group operated 7,382 hotel rooms.
Carve-out of budget housing operations and construction segment in Egypt successfully completed
In June 2014 Orascom Development successfully completed the carve-out of OHC and its subsidiaries, including Red Sea for Construction, the entity overseeing most of the construction activities in Egypt. Following a capital increase of OHC by CHF 22.3 million, in which Orascom Development did not participate, the Group’s stake was diluted from 69.34% to 35.25% which resulted in a loss of control. Effective Q2 2014 the investment in OHC has been deconsolidated and is now classified as an investment in associates. The transaction led to a gain of CHF 9.4 million in Q2 2014 mainly due to the difference between fair value and carrying value of the residual interest in OHC.
The OHC transaction significantly contributes to the Group’s savings program by reducing contracted and non-contracted labor by about 2,500 FTE. Management expects first positive P&L effects to become visible in Q3 2014.
Outlook for 2014
While 1H 2014 was materially impacted by the low performance of the hotel segment, Orascom Development is already witnessing improvements in its Egyptian hotel’s operations. The Group should also be able to start recognizing revenue in Montenegro for the first real estate deliveries starting in either FY 2014 or Q1 2015.
Apart from improving operational performance, debt reduction and restructuring remain the key topics to improve the current cash flow situation. That said the Group is at advanced discussions with its lenders to reschedule all commitments from March 2014 until the end of Q1 2015. Having sustained its full activities during the period of unrest through executing on its earlier communicated strategies, the management is now capitalizing on Egypt’s improved economic and political outlook, making use of its strong hotel portfolio and real estate projects to boost the Group’s performance.