Looking for revenue in other parts of Africa

City Lodge has set its sights on expansion in Africa. It is a strategy set to transform the 30-year-old hotel group.

“When African hotel projects are completed in five years from now, 35% of our revenue will be from outside SA,” says Clifford Ross, the group’s CEO since 2002 and a 42-year industry veteran.

In the context of a group with 52 hotels and 6 572 rooms in SA, City Lodge’s current African footprint is small. In Nairobi, Kenya its Fairview Hotel and Town Lodge weigh in with a combined 158 rooms and in Gaborone, Botswana Town Lodge offers 104 rooms.

Despite representing only 3,8% of City Lodge’s total room capacity, African hotels punch above their weight in revenue terms, generating R126m (9,7%) of a group total of R1, 3bn in the year to June 2015. Now on City Lodge’s agenda are five new hotels in Africa. In Nairobi a City Lodge due to open in 2017 will add 169 rooms. The group will extend its reach with a 147-room City Lodge in Dar es Salaam, Tanzania, a 150-room City Lodge in Kampala, Uganda, a 148-room City Lodge in Maputo, Mozambique and a 151-room Town Lodge in Windhoek, Namibia.

It adds up to a hefty 765 rooms, suggesting African revenue contribution could eventually go well over 35%.

With City Lodge’s focus on African expansion the pace of hotel development in SA will slow but not grind to a halt. “We see

opportunities in SA over the next five years,” says Ross. Three are nearing completion: a City Lodge in Midrand, a City Lodge in Johannesburg’s Newtown and a Road Lodge in Pietermaritzburg. They will add 387 rooms or nearly 6% to capacity in SA.

Financially City Lodge is well prepared for its expansion drive involving capex of over R1bn. An R890m bank facility is in place and cash flow is strong: R232m after tax and dividends in the latest financial year. Capex will be spread fairly evenly over the five years, says Ross.

City Lodge’s gearing, now at 104% of shareholders’ funds, will rise. It must be seen in the context of fixed property standing in the balance sheet at cost — R1, 74bn. The market value of properties is R5bn-R5, 5bn, says Ross. At a market value of R5bn it would slash gearing to 13%.

However, room capacity is not the secret of success in the hotel game. Filling rooms is.

Here City Lodge is faring well, lifting room occupancy to 67% in its year to June from 63% and 61% respectively in the two previous years. It is impressive in a South African hotel sector where average room occupancy is running at just on 55%. “Rising occupancy has continued into the new financial year,” says Ross. “We will eventually get to 70%.”

The hotel industry is a volume game in which high fixed costs make profitability sensitive to occupancy levels. City Lodge, which has also had solid room rate growth, lifted headline earnings 18,2% in its year to June.

Its focus on South African business travel has shielded it from damage to inbound tourist numbers by home affairs’ new visa and birth certificate regulations. “Only 12% of our business is foreign,” says Ross.

Also playing into City Lodge’s hands as a medium-priced hotel group is the price war waged by low-cost domestic airlines since the advent of FlySafair in October 2014. “It is boosting our weekend occupancies,” says Ross.

However, he does not play down the potential threat posed by tumbling foreign tourist numbers. “It could spark a downward spiral of rates if fourand five-star hotel groups drop their rates to buy market share.”

Deputy president Cyril Ramaphosa is heading an interministerial committee appointed to resolve the foreign travel debacle. Doing so should pave the way for what PwC believes will be solid growth in the hotel industry.

In its Hospitality Outlook 2015-2019 PwC forecasts hotel industry revenue to rise at an average of 8,1%/year between 2014 and 2019. This will be against the background of a low 0,7%/year rise in room numbers.

City Lodge, on a 19,9 PE, is not at bargain levels. However, it is only just above its 10-year 19,1 mean PE and it is a rating reflecting market confidence in Ross’s proven ability to deliver what it wants: dependable earnings growth.