What hasn’t killed City Lodge managers has made them stronger

City Lodge Hotel Group (CLHG) has been through the mill since the Sars-CoV-2 pandemic struck in 2020. Since then, it has had to contend with most of its hotels being closed for long periods, a highly dilutive rights offer, the completion of its BEE deal, the sale of its East African operations and reorganising of bank covenants.

Many management teams would have folded under such sustained pressure, but City Lodge has adapted to the new normal and has survived.

Now it is on the gradual path to recovery, but the market does not fully believe it. The share price is trading well below its replacement value, a value that attaches nothing to the value of group management.

The original business model targeted corporate travellers as its main income source and leisure travel was the cream on top. But the pandemic changed this significantly, as corporate travellers have preferred to stay at home and conduct meetings virtually.

According to CEO Andrew Widegger, leisure travellers now account for about 38% of total revenue, up from a figure of nearer 25%-30% prepandemic.

But that is changing, albeit slowly, as corporates return to the office and begin travelling again. Already there are distinct signs of life, as many of the mining and associated industries get back to work. Financial services will probably be one of the last sectors to get back to “normal”, but even here there are signs of this happening.

The average occupancy level for the year to end-June 2021 was only 19%, down from 38% the previous year. This is a direct reflection of intermittent lockdowns throughout the year, which have been especially damaging to the hospitality industry. City Lodge’s breakeven occupancy level is a very low 37%-38% and current occupancy levels are not far from break even. But it is a very uneven split throughout the country, with certain areas such as KwaZulu-Natal enjoying higher levels than that.

Revenue slumped from R1.159bn to R508m and while operating costs fell 22% to R570m, earnings before interest, taxation, depreciation and amortisation fell from R331m in June 2020 to a loss of R138m in June 2021.

A headline loss per share of 91c was made, compared with a headline loss per share of 128c the previous year.

Post the year-end, on July 23 the company announced the disposal of the Fairview Hotel in Kenya for R140.9m, while CLHG Tanzania, comprising one hotel, will be disposed of for an aggregate consideration for shares of R1m and repayment of its shareholder loan claims of R318.2m to City Lodge Hotels (Africa).

The sale is expected to be completed within 22 weeks of the signing date and the proceeds from disposal will be used to reduce debt levels, increase liquidity and support the group’s working capital requirements.

At September 9, the group had 51 out of 56 hotels open in SA and five out of seven hotels open in the rest of Africa, and by year-end, barring any more lockdowns, it should have a full hotel offering for the summer holiday season.

City Lodge’s fortunes depend on leisure travel continuing to gradually improve and on corporate travel making a comeback. Leisure travel will be given a noticeable boost if SA is removed from Britain’s “red list” of countries that require 10 days of quarantine on arrival back in the UK.

British travellers comprise the largest single grouping of tourists to SA and it is thus critical that SA comes off the red list as soon as possible.

Corporate travel is already showing nascent signs of improvement and as 2022 progresses, it seems reasonable to believe this segment will also continue growing.

City Lodge’s net asset value on a replacement cost basis, which doesn’t attribute any value to its brands for which it doesn’t pay any licence or royalty fees, is R10.44.

At the current price of 3.89, the share is therefore trading at a discount of about 63%, which seems high for a company of such high quality.