25 September 2024

At first glance, the latest results from City Lodge Hotel Group (CLHG) appear uninspiring.

Average group occupancies only increased marginally and diluted headline earnings per share (HEPS) rose only 10%, a far cry from the robust figures coming out of this group in the past few years since recovering from the devastating effects of the Covid-19 pandemic.

But there’s a lot more going on just below the surface and there were some extenuating headwinds in the results that seem unlikely to recur in the near future. Therefore these results should probably be seen in the context of a poorer-than-expected local economy and the next few years should be stronger, all things being equal.

The first quarter of the previous financial year (July to September 2023) was especially strong, with average occupancies about 8 percentage points higher than in the prior year. However, the group was then confronted by a crisis for hotel occupancies during the next nine months. Consumers buckled under the corrosive impact of frequent, intense load-shedding, with historically high interest rates.

In addition, corporates did what they always do in the run-up to general elections: cut back severely on corporate travel. And the final coup de grâce was the application of austerity measures by the National Treasury before the general election, that caused significantly less government employee travel.

For the year to end-June average occupancy level was 58% compared with 56% in the prior year. Revenue rose 13%, from R1.7bn to R1.9bn due to an 8% overall improvement in room rate.

Room revenue rose 11%, while food & beverage revenue rose 22% to R363.3m. Food and beverage now accounts for 19% of total revenue. HEPS rose 10% to 33.2c and the total dividend was increased 15% to 13c per share. Adjusted HEPS, which excludes unrealised foreign exchange gains and losses, and one-off exceptional accounting adjustments, increased 37% for the year.

No debt

The balance sheet is clean, with no debt. This is quite an achievement, considering how indebted the group was in the depths of the pandemic. It now has access, if required, to R600m in debt facilities and R115m in overdraft. The group bought back 11.7-million of its own shares for a total consideration of R51.5m during the year.

CLHG has been investing in solar power for many years, even before load-shedding became such an everyday occurrence in recent years. It is now benefiting by being able to access cheaper power in many of its properties.

Regionally, the Western Cape continues to show the best growth in the group, while KwaZulu-Natal , which was traditionally a strong element within CLHG, has suffered from frequent beach closures, higher than normal crime rates and migration of businesses away from beachfronts.

The outlook for 2025 and beyond is encouraging. The formation of the government of national unity (GNU) removes the uncertainty that pervaded corporate travel for much of last year. The trend of persuading people to return to the workplace post the pandemic continues and corporate travel is likely to rise as a greater degree of “normality” returns to corporate SA.

Regarding leisure, consumers should soon start feeling the benefit of lower interest rates as the year progresses. Interest rates should fall further next year and in 2026.

The corrosive impact of load-shedding on consumer spending appears to have receded, but the maintenance of power stations will no doubt increase in intensity during the next few months.

SA hotels and hospitality generally remain among the best value for money worldwide and it must surely only be a question of time before more foreign tourists come flocking back to SA to take advantage of it.

At the current share price of 482c, the historic PE ratio is 14.5 times and the dividend yield is 3.1%. If the group can get back to occupancy levels in the mid 60s, with strong room rate increases, that rating will be seen as more than fair.

https://www.businesslive.co.za/bd/opinion/columnists/2024-09-25-chris-gilmour-city-lodge--the-pause-that-refreshes/