No sweat for IFA Hotels as Dubai teeters

SA luxury resort group’s R350m debt to shareholder is “more like equity”. WHEN alarm bells ring for Dubai, sirens sound for IFA Hotels & Resorts (JSE:IFH) - but all is well say CEO Werner Burger and head of Africa Wessel Witthuhn.
 
The JSE-listed company that owns Zimbali, part of Boschendal and other upmarket properties in SA, is owned 85% by IFA Kuwait. Rumour had it that the source of IFA’s funding, though, was Dubai, not Kuwait.
 
The grandiose style and the high prices of the company’s resorts have a Dubai resonance to them. Having paid R9,6m for an extra 5,2% of Boschendal, for instance, it intends to rip up the Cape winelands to build 19 founder estates, an upmarket retirement home of 400 units, 500 residential stands and a 120-room boutique hotel.
 
By cellphone I tracked Burger to a boat off Dubai on Friday. He pooh-poohed all concerns about Dubai, insisting that the holding company is very rich and domiciled and owned from Kuwait.
 
Said Burger: “You are looking at the SA operation. That is only a part of a much bigger portfolio, some of it inside, and some of it outside the SA company, owned by the top company in Kuwait.”
 
Concern about IFA Hotels & Resorts, the JSE-listed entity, arose when parts of Boschendal were auctioned off recently “to repay R200m owing to Nedbank”.
 
Witthuhn told Moneyweb by email: “The decision to auction some of Boschendal’s Phase 1 inventory was taken by the shareholders (JCI 62,7% and IFA 37,3%).”
 
He said this was the “normal realisation of inventory”. The debt was being serviced by the shareholders.
 
He added that IFA has no connection or dealing with either of Dubai’s troubled entities, Dubai World or Nakheel Property.
 
I asked Witthuhn about the most recent results. The balance sheet showed a loan to the Kuwaiti holding company of R350,1m and other loans of R250,3m, making total debt R600m. Subtract the cash of R63,6m, gave net debt of R534m against R290m of equity.
 
Witthuhn explained:  “Although shareholder loans are defined as debt, they are regarded by us as “equity” for analysis purposes, as shareholder loans will not be called in by IFA Kuwait. This makes total ‘equity’ in the company R290m equity plus R350m shareholder loan, or R640m. We should compared R250,3m external debt to R640m ‘equity’ ”.
 
Projects are still in the development phase, hence we will only see the increase in equity in future expected profits.”
 
While IFA Kuwait might regard the loans as equity, it does charge interest on the loans for income statement purposes. But, according to Witthuhn, not from a cash flow perspective. The only interest actually paid is on other group loans.
 
He explains the loss of R51,8m before tax: “The main contributions to the loss are IFA Zimbali (Fairmont Zimbali Lodge” caused  by once-off transitional costs, IFA Zimbali delays in obtaining development rights and a lack of sales at IFA Legends because of the recessionary climate.”
 
On the asset side of the balance sheet are loans to associates (Legends and Boschendal). Witthuhn assured me that “both investments are sound and will realise future profits once development phases are over”.
 
He also assures me that debtors of R45m are sound. These relate to land sales.
 
“Zimbali has exceeded expectations in this recessionary climate, having broken its R650m all-sales year in a calendar year in October 2009.”
 
While Zimbali sales were going well, Boschendal will realise major profits only after Phase 2 rights have been obtained, which is expected to coincide with an improved economy in about 18 months.
 
Witthuhn said much of the negative sentiment being flung at IFA has been caused by, inter alia the legal fracas between an IFA Kuwait subsidiary (IFA Fair-Zim Hotel & Resort) and Liviero relating to the construction of the new Fairmont Zimbali Hotel at Zimbali.
 
“The Liviero issue is sub judice and we are confident that despite the legal issues, the project will be completed in the early part of 2010.”
 
The share price has retreated from an all-time high of 400c plus in early 2008 to the present 124c. It is off an all-time low of 76c. As Pinnacle Point and other upmarket property developers have shown, this is not a good time to be flogging luxury property. SA seems to be running out of zillionaires. Perhaps the World Cup might lure some into IFA’s Cape and Zululand pleasure domes.

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