Look­ing for rev­enue in other parts of Africa

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

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.

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