Book a room and wait out the ren­o­va­tions

Financial Mail - Investors Monthly - - Analysis - Joan Muller

The split A and B share struc­ture of the spe­cial­ist ho­tel fund caters for two very dif­fer­ent types of in­vestors. The A shares are es­sen­tially a low-risk op­tion for those look­ing for a pre­dictable and steadily ris­ing div­i­dend stream as A shares have a pref­er­en­tial claim to earn­ings with growth vir­tu­ally guar­an­teed at a capped 5%/year. Hos­pi­tal­ity A is trad­ing at an at­trac­tive for­ward yield of more than 9%, a sub­stan­tial dis­count to the listed prop­erty sec­tor’s av­er­age 6,5%. But it is the more volatile B shares that are look­ing par­tic­u­larly cheap at close to 13%, which places them as the high­est-yield­ing among all 40-odd coun­ters that com­prise the JSE’s R365bn listed prop­erty sec­tor. How­ever, the B shares are suited only to in­vestors who have a high risk ap­petite as they share in the in­come only af­ter A share­hold­ers have been paid. So B shares are ef­fec­tively a geared play on ho­tel op­er­at­ing earn­ings, which tend to be highly cycli­cal.

Hos­pi­tal­ity is SA’s big­gest multi-branded ho­tel owner, with 26 ho­tel and re­sort prop­er­ties in its R4,8bn port­fo­lio. Flag­ships in­clude the Ara­bella Ho­tel & Spa in the Cape Winelands, the Mount Grace Coun­try House & Spa in the Ma­galies­berg, the Radisson Blu Wa­ter­front in Cape Town and the Crowne Plaza in Jo­han­nes­burg’s Rose­bank.

Last year, Hos­pi­tal­ity B was the JSE’s worst-per­form­ing prop­erty stock, with a to­tal neg­a­tive re­turn of -58%. The share, which used to trade around R12 dur­ing the 2010 soc­cer World Cup hey­days, dipped to a five-year low of R1,70 in De­cem­ber. That fol­lowed the re­lease of a trad­ing up­date in which Hos­pi­tal­ity CEO An­drew Rogers warned that in­dus­try con­di­tions for the six months to De­cem­ber were “tighter” than an­tic­i­pated.

Oc­cu­pan­cies came un­der pres­sure due to re­duced in­ter­na­tional travel as a re­sult of the Ebola epi­demic and fewer ar­rivals from Asian coun­tries on the back of stricter visa re­quire­ments. For­eign tourism makes up about a third of the fund’s busi­ness. Re­stricted gov­ern­ment spend­ing on busi­ness travel in line with cost-sav­ing mea­sures im­posed by the fi­nance min­istry also con­trib­uted to lower de­mand for ho­tel rooms, said Rogers.

As a re­sult, the dis­tri­bu­tion pay­out for B shares is ex­pected to be at least 45% lower than fore­cast when Hos­pi­tal­ity an­nounces its in­terim re­sults later this month. The A shares will still re­ceive the usual 5% growth in pay­outs.

Notwith­stand­ing the neg­a­tive trad­ing up­date, the B shares have re­cov­ered about 30% over the past month af­ter a num­ber of high-value trades. For ex­am­ple, Kag­iso As­set Man­age­ment and Pere­grine Eq­ui­ties in­creased their re­spec­tive stakes in the B shares.

While earn­ings growth has been tem­po­rar­ily damp­ened, there is an ex­pec­ta­tion that the lo­cal ho­tel in­dus­try will con­tinue to record a steady rise in oc­cu­pan­cies and rev­enues over the next few years.

Ac­cord­ing to re­search group STR Global’s lat­est SA ho­tel re­view, over­all oc­cu­pan­cies for the four months end­ing Oc­to­ber rose 1,8% year-on-year to 63.7%. That’s up from around 56% in 2011 when lo­cal ho­tel oc­cu­pan­cies hit a post-World Cup slump.

Av­er­age daily rates in­creased by 5,8% to R973 in the four months to Oc­to­ber, re­sult­ing in rev­enue per avail­able room grow­ing by 7,8% to R620.

In­dus­try play­ers say there is a limited num­ber of new ho­tel projects in the pipe­line for SA, which bodes well for con­tin­ued rev­enue and oc­cu­pancy growth over the next few years. For­eign tourists are also likely to re­sume travel to SA thanks to a still-weak rand and a sub­sid­ing of the per­ceived Ebola threat.

Hos­pi­tal­ity B shares are a good bet for bar­gain hun­ters who can af­ford to sit tight for the next two to three years while the for­tunes of the lo­cal ho­tel in­dus­try im­prove.

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