Ready to endure amicable Tsogo Sun split
● Marcel von Aulock, who will lead the new Tsogo Hotels — the largest hotel group in the country and set to list on the JSE next month — sees Airbnb as positive for tourism in SA, but regards international hotel brands as a threat to some local hotel operators.
“Would we be sitting at 66% occupancy rather than 62% if Airbnb wasn’t here?” he asked, explaining that Tsogo Hotels does not operate in the same market as someone who wants to rent a place in Sea Point for six people during the summer holiday season.
“The international brands are much more of a threat. In their desperation to get distribution they will offer incentives and make unviable hotels viable in the short term.”
He said some hotel operators offer guarantees to owners (property companies that often want a hotel as part of a bigger mixeduse development) that after a few years cannot be met, but they undermine the market.
Tsogo Sun Holdings will next month split into two businesses, one focusing on gaming, Tsogo Casinos, the other being Tsogo Hotels. This will let shareholders choose which business they want to invest in.
Most of the group’s revenue and profit is generated from casinos. But being linked to casinos has its downside as companies that own casinos are regarded as “sin” stocks, so certain funds won’t invest in them. Also, gaming faces regulatory risks such as a complete smoking ban and the threat of more taxes.
Von Aulock, who has worked at the group since completing his articles in accounting, left Tsogo abruptly in 2017 for about a year, believed to be due to a spat between him and Johnny Copelyn, the CEO of Tsogo’s controlling shareholder, HCI. Von Aulock declined to elaborate.
He said he came back to the group without a second thought when he was asked to manage the separation and run the hotel business. “I could probably draw you the floor plan of most of our hotels and I know pretty much each one’s history,” he said.
But he conceded that he can’t run a hotel like a general manager can. “They are pretty special people”.
Tsogo’s portfolio is mainly city-based business hotels. It does have some resorts and a substantial timeshare operation. The portion of leisure travel isn’t more than 20% of the group’s business and the group’s average occupancy sits in the low 60%, due to the tough trading conditions in the African countries it operates in, which include Nigeria, Mozambique and Tanzania.
In spite of a weak economy in SA over the past decade, the industry has grown. In 2009 there were 34,000 rooms in SA and 50,000 last year. Occupancy over the same period rose from 59% to 62%.
“It shows you have this massive increase in supply but you’ve had an even bigger increase in demand, despite a draconian visa regime, a drought and a disastrous economy,” Von Aulock said.
The group retains its market share of about a third of the formal local hotel market.
“Perversely, unlike in casinos, one of our bigger risks is that there are no barriers to entry in the hotel market. Anybody with access to money can build a hotel and quite a few do. There’s new supply coming in, even though occupancies don’t currently justify it … future buying opportunities, I guess.”
Von Aulock said he expected the group to add more rooms in Sandton and Cape Town, depending on what other hoteliers open. The group would like more hotel rooms in Umhlanga, where it has timeshare resorts but only two hotels. He also sees potential in other hotel formats, such as modular-built hotels, and opportunities in resorts.
Asked how he feels about managing the split, Von Aulock said: “You get friendly separations and you get hostile divorces and this is a friendly separation, but there’s still that moment where you fight about who gets the dog and the cutlery set … so you just need to get through it.”
The businesses remain sister companies under the HCI group.
It turns out there’s very little overlap between customers who frequent casinos and those who stay in the hotels. At the Montecasino precinct, less than 10% of the business is casino-related as most casino visitors live close by. Hotel guests are there for business or leisure travel.
Growth for the casino business has been pedestrian for years, far from those heady days in the first two decades after casinos were legalised in SA in the early ’90s.
The fortunes of casinos are intertwined with the economy. “Depressed people don’t go out or buy luxury goods. It’s when people are happy that they go on holiday, buy jetskis and go to fancier restaurants. Fix the economy and casinos will boom,” he said.
Tsogo’s market cap is R25bn, having declined 20% over five years. At 25% of the group, the hotel business is worth just over R6bn.
Competitor Sun International, whose market cap of R7.6bn dropped more than 47% over the past five years, faces the challenges of having overspent on the casino at Menlyn and challenges in its South American operations. About 80% of Sun International’s revenue is from gaming.
Analysts say Tsogo’s split could unlock value for the hotel business.
Jean Pierre Verster, a portfolio manager at Fairtree Capital, said: “Tsogo’s share price might not be going anywhere, but it’s not going backwards like Sun International.
“Tourism is in a tough space, as is hospitality and gaming,” said Verster, adding that results from City Lodge and Sun International show occupancies are under pressure.
Von Aulock just wants to get the deal done, have a 50th birthday bash for the group and then get on with the business of running hotels.