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The Don Group on Wednesday reported a headline loss per share of 3.55 cents for the six months ended December 2009 from HEPS of 0.15 cents a year ago. No dividend has been declared or paid.

The group incurred a headline loss of R10.5 million in the period compared with a profit of R454,000 in the previous comparative period. This follows a headline loss of R9.17 million incurred at financial year ended June 2009.

"This swing in fortunes underlined the considerable fears consistently voiced by the Board in previous reporting periods of the poor economy impacting negatively on the Group's performance," it said.

The Board had held out high hopes for the business based on the expansion beyond its core base of nine suite hotels through the acquisition of a 51% stake in iKapa Tours and Travel as well as control, through the new subsidiary Bay Drive Trading 84, of the 45-room Don Savoy and Conference Centre in Kimberley and the 36-suite Don Hyde in Sea Point, Cape Town.

"Unfortunately, these expectations were not met," it said.

Growth prospects and profitability throughout 2009 were limited by a hotel base of only nine hotels and 424 suites competing in a declining hospitality market, heavy competitive discounting of tariffs and increased competition from new hotels on its own turf and increased municipal charges, with electricity bills rising by 20%, it said.

The Board considers it unfortunate that the recession caught the group well into its extensive refurbishment programme of all its suite hotels, the suspension of which was deemed non-negotiable in terms of the Don's Fifa World Cup commitments.

Likewise, the Don's long-planned expansion programme to widen its business model had just begun to gain traction. The additional Kimberley and Cape Town hotels contributed revenue for four and three months, respectively.

The phased withdrawal of suites during upgrading and the industry-wide decline of the corporate market, in particular, resulted in a 25% decline across the board in average suite rate occupancies and a sharp reduction in revenue.

Income from hotels dropped 24% to R26.9 million. This was offset by iKapa's contribution to revenue of R19.5 million, which boosted half-year revenue to R46.47 million - a 31% improvement on the R35.45 million recorded at end December 2008.

However, iKapa, with its focus on the tourism industry, did not escape recession ravages, and incurred a R2.1 million loss to 31 December 2009.

The applications for the re-zoning of the Group's Sandton properties are nearing resolution. Once this is achieved, new opportunities will open to transform the group's scope for growth, it said.

The hotel upgrading project is conducted in-house, using a special team to reduce labour costs. Initially, the programme was financed from internal resources.

The decline in revenue as occupancies fell, led the Don to enter into a R15 million sale and leaseback agreement with Rentworks Africa to ensure completion of refurbishment.

With the deterioration in market conditions showing no sign of abating, the Group sought alternative relief through a R36 million arrangement with the Industrial Development Corporation. This funding is to be used to settle and cancel the Rentworks deal, with the balance being allocated to completion of hotel refurbishment. All hotels will be fully refurbished in time for the Fifa World Cup.

The Board believes the enhanced quality of the hotels will add considerable value to the asset base and will strengthen the appeal of the suite hotel product in post World Cup marketing.

Looking to the immediate future the financial year to 30 June 2010 will incorporate nine months of income streams from Don Savoy in Kimberley.

The 36-room Don Heritage Square in Krugersdorp came under Group control in March.

The objective of seeking similar lease/management opportunities to expand its hotel division will continue without exposing its asset base to risk.

The complementing synergies of the Don and iKapa are yielding new opportunities for mutual benefit.

iKapa is expanding its well-established sales representation in key overseas markets and now incorporates the Don accommodation in its iKapa three-star tour packages.

The Don now has the capacity to offer hotel guests improved airport shuttle services and day tours.

The Group has also identified new opportunities to partially unlock capital in the Don properties by deriving benefit from its suite accommodation through time share.

It has entered an agreement with a time share company to exchange Don Hotel suites at Don
Isando with similar accommodation in a Durban timeshare establishment and it sees further potential growth by widening timeshare to hotels in other centres.

The management contract in respect of The Hyde in Cape Town was terminated at 31 March 2010, by mutual agreement as a result of differences in operational direction between both parties.

Looking ahead, the group said the potential for an economic recovery, no matter how sluggish, is encouraging. Suite hotel occupancies for the last quarter of the 2010 financial year show an improvement and are expected to gather momentum with the approach of the Fifa World Cup.

The Group is set to benefit considerably from healthy contracts for the Fifa World Cup signed by iKapa and the hotel division. This stimulus should be positively reflected in the financial results at year-end 30 June 2010 and in the first half of the financial year 30 June 2011.

Source: I-Net Bridge