City Lodge Hotels:
Rest assured, a breakout could be underway
The surge in the hospitality industry began in 2004, after news that South Africa would be hosting the 2010 FIFA World Cup. By 2007 City Lodge’s share price had ballooned by almost 170%. The world was coming to town, and accommodation was needed. However, in 2011 the industry faced declining occupancy rates, which impacted greatly on profits. In fact, City Lodge Hotels topped out during 2009 and 2010, and subsequently lost about 34% of its value.
After the World Cup times were tough for hotels, which suffered from both a reduction in overseas visitors and domestic travel. The added pressures of the global recession, together with higher costs from increases in electricity prices, rising labour costs and increased tariffs for municipal services, all had a negative impact on travel and tourism. In 2010, City Lodge, which operates hotel brands like Courtyard, posted a 12% to 17% decline in full-year, normalised headline earnings per share. City Lodge, however, fared better than its rivals due to its reasonable accommodation to value-conscious travellers.
By 2011, City Lodge managed to declare a 135c/share dividend and reported a 10% rise in normalised headline earnings. In addition, it announced its f irst move into the rest of Africa through a lease and development agreement in Gaborone, the capital of Bo- tswana. Investors warmed up to its plans to expand into the rest of the continent, which appreciated the share price to new highs. In 2012, City Lodge acquired a 50% stake in Fairview, which owned two hotels in Nairobi. It aimed to expand further to East Africa, and identified Kenya, Tanzania, Rwanda and Uganda as potential sites. Last year, the JSElisted City Lodge Hotels announced that its plans to develop its 150-room City Lodge Waterfall City had begun, with the hotel scheduled to open towards the end of this year.
POSSIBLE OUTCOME: City Lodge retraced after peaking at 14 300c/share but has managed to hold f irmly at 11 200c/share. A falling-wedge, which is a bullish continuation pattern, is in the making and upside above 12 400c/share would confirm a positive breakout, and present a buying opportunity − a move that should trigger an advance to the 19 300c/share objective level of the pattern in the medium term. ALTERNATIVE SCENARIO: A lack of investor confidence would be signalled below 10 100c/share − thereby triggering a sell signal and support at 7 400c/share could then be tested.