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We take a look at the latest financial results of City Lodge Hotel Group, the owner of City Lodge, Town Lodge and Road Lodge. They have a massive footprint in the cheap to middle cost hotel and motel offerings in South Africa.
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About City Lodge Hotel Group
Through the vision of founder, Swiss-born Hans Enderle, and the financial backing of the Mine Pension Funds, the opening of City Lodge Randburg (now called City Lodge Hotel Bryanston) on 1 August 1985, became the catalyst for what today is South Africa's leading selected services hotel chain. From the start, emphasis was placed on quality accommodation, homely ambience and friendly service - and these are still hallmarks of the group today. After pioneering the quality, selected services hotel concept in South Africa, the group was incorporated in July 1986 and has since substantially grown and diversified its product offering to meet different travellers' needs.
In 1990, the second-tier Town Lodge concept was started and has proved highly popular. On 18 November 1992, the group successfully listed on the Johannesburg Stock Exchange. Then in 1995, the group acquired a 50% interest in the companies associated with the upmarket Courtyard Suite Hotel chain and also opened its first Road Lodge, a concept aimed mainly at budget conscious travellers. In 2015, the outstanding 50% in the Courtyard Joint Venture was acquired from HPF Properties Pty Ltd. On the occasion of the group's 10th anniversary on 1 August 1995, the City Lodge 10th Anniversary Employees Share Trust was launched which enabled all employees to become shareholders.
In 2013, the group acquired a 50% interest in two hotels in Nairobi, Kenya, and it has since taken full ownership of the Fairview Hotel and Town Lodge, Upper Hill, Nairobi. Town Lodge Gaborone in Botswana became the first new hotel developed by the group outside of South Africa. This development was followed by the Town Lodge Windhoek, Namibia, in 2017, the City Lodge Hotel at Two Rivers Mall, in Nairobi Kenya, in early 2018 and the City Lodge Hotel Dar es Salaam, in Tanzania, in late 2018. With 5 Courtyard Hotels (381 suites), 19 City Lodge Hotels (3 382 rooms), 13 Town Lodges (1 650 rooms) 22 Road Lodges (2 059 rooms), and the Fairview Hotel (120 rooms), the City Lodge Hotel Group has over 7500 rooms and suites and ranks amongst the 250 largest hotel chains in the world. Commitment to service excellence from a highly motivated and dedicated staff is a common thread throughout the group's hotels which have developed a loyal clientèle of both business and leisure travellers over more than three decades.
The image below shows City Lodge Hotel Group's footprint across South Africa
In 1990, the second-tier Town Lodge concept was started and has proved highly popular. On 18 November 1992, the group successfully listed on the Johannesburg Stock Exchange. Then in 1995, the group acquired a 50% interest in the companies associated with the upmarket Courtyard Suite Hotel chain and also opened its first Road Lodge, a concept aimed mainly at budget conscious travellers. In 2015, the outstanding 50% in the Courtyard Joint Venture was acquired from HPF Properties Pty Ltd. On the occasion of the group's 10th anniversary on 1 August 1995, the City Lodge 10th Anniversary Employees Share Trust was launched which enabled all employees to become shareholders.
In 2013, the group acquired a 50% interest in two hotels in Nairobi, Kenya, and it has since taken full ownership of the Fairview Hotel and Town Lodge, Upper Hill, Nairobi. Town Lodge Gaborone in Botswana became the first new hotel developed by the group outside of South Africa. This development was followed by the Town Lodge Windhoek, Namibia, in 2017, the City Lodge Hotel at Two Rivers Mall, in Nairobi Kenya, in early 2018 and the City Lodge Hotel Dar es Salaam, in Tanzania, in late 2018. With 5 Courtyard Hotels (381 suites), 19 City Lodge Hotels (3 382 rooms), 13 Town Lodges (1 650 rooms) 22 Road Lodges (2 059 rooms), and the Fairview Hotel (120 rooms), the City Lodge Hotel Group has over 7500 rooms and suites and ranks amongst the 250 largest hotel chains in the world. Commitment to service excellence from a highly motivated and dedicated staff is a common thread throughout the group's hotels which have developed a loyal clientèle of both business and leisure travellers over more than three decades.
The image below shows City Lodge Hotel Group's footprint across South Africa
So to the numbers we go
The numbers we are interested in are discussed below:
- Revenue: R1.57 billion (up 3% from R1.498 billion)
- Profit before taxes: R306 million (down 25% from R407 million)
- Profit for period: R205.45 (down 26% from R279.4 million)
- Basic diluted earnings per share: R5.60 per share
- PE ratio: 17.78
- Dividend for the year: R3.66
- Dividend yield: 3.67%
- Cash generated from operations: R492 million
- Cash generated per share: R11.31
- Cash on balance sheet: R71.04 million
- Cash on balance sheet per share: R1.63
- Net asset value per share: R44.71 (so trading at 2.23 times its net asset value)
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So any comments or guidance from management on the results?
Commentary
Average occupancies for the group in the 12 months to 30 June, 2019 declined from 59% in the previous financial year to 55%. In South Africa, occupancies decreased from 61% to 58%, in line with the three percentage points decline in the six months to 31 December 2018. Low levels of business and consumer confidence, high unemployment, uncertainty around Eskom's sustainability and land expropriation, as well as negative growth in the first quarter of 2019, resulted in difficult trading conditions. Down by three percentage points at the half year,
Botswana occupancies improved slightly in the second half, with the improvement continuing into the current year. Town Lodge Windhoek performed below expectations on weak economic growth in Namibia, but the hotel is improving on a month-by- month basis. After a welcome improvement in the first half with occupancies up by four percentage points, Kenyan operations experienced a weaker second half due to increased hotel supply and economic growth not translating into commercial activity. Occupancies were two percentage points lower for the full year. City Lodge Hotel at Two Rivers Mall continues to improve, but at a slower pace than expected.
In Tanzania, City Lodge Hotel Dar es Salaam had a disappointing first few months of trading due to increased hotel supply, a challenging business environment and a shift in some commercial activity as a result of government administration offices relocating to the capital of Dodoma.
Total revenue increased by 3% to R1,5 billion. In South Africa, achieved room rates rose by less than inflation due to increased competitor discounting. On a normalised basis, total operating costs increased by 11,4%, but by 7,2% in South Africa where the majority of the group's operations are located. The total normalised headline EBITDA margin decreased by six percentage points to 32%, resulting in normalised headline EBITDA for the group decreasing to R489,5 million.
Depreciation and amortisation increased by 12%, while interest income was R1,8 million lower and interest expense was R1,2 million lower as a result of borrowing costs being capitalised during construction activities. Normalised headline profit before tax for the group decreased by 19,5% to R369,6 million, while normalised headline earnings decreased by 19,3% to R267,1 million.
Diluted normalised headline earnings per share decreased by 19,4% to 613,4 cents. In line with the group's established policy of paying out 60% of normalised earnings adjusted for unrealised foreign exchange gains and losses, a gross final dividend of 137,0 cents per share has been declared, bringing the total dividend for the year to 366,0 cents, which is a decrease of 19,4% on the previous year.
The group's application for an investment deduction allowance on the development of the City Lodge Hotel at Two Rivers Mall in Nairobi awaits finalisation by the Kenya Revenue Authority. On 18 August 2018, and in line with the Kenyan Central Bank's announcement, 38% of the cash deposits previously held with Chase Bank Kenya (in receivership) were repaid to the company. As a result of the partial receipt of these deposits, half of the impairment charge previously recognised in other investments amounting to R9,4 million (net of tax) was reversed. The cash received was reclassified to cash and cash equivalents. The remaining 38% of deposits remain as other investments, and will be repaid in three equal instalments between August 2019 and August 2021 , with a portion being classified as current.
Development activity South Africa The first 76 rooms have opened at the 154-room Town Lodge Umhlanga, with the balance expected to be opened in early September. Construction of the 168-room Courtyard Hotel Waterfall City is progressing well with the first rooms on track for opening in November 2020 and the balance becoming available at the beginning of 2021. Southern Africa The completion of the 148-room City Lodge Hotel Maputo has been delayed due to contractor-related delays and disputes. Final timelines are uncertain at this stage.
With the opening of this hotel in due course, the group will have completed its initial targeted expansion into Southern Africa and East Africa. It will then comprise 63 hotels with 8 070 rooms in six countries (South Africa, Botswana, Namibia, Mozambique, Kenya and Tanzania). The focus now is on ensuring the success of the recently opened hotels through effective sales and marketing campaigns and building brand preference in the markets where we operate.
Outlook
Given the current economic situation in South Africa, the weaker trend of the past year has extended into the new financial year. New catalysts are needed to boost investment confidence and spur economic growth. Against this backdrop, there are some encouraging signs, such as the notable efforts by the National Department of Tourism to develop and grow this industry that is so important to the future of South Africa.
Our portfolio of hotels in South Africa, Southern Africa and East Africa is in excellent shape after ongoing refurbishments and the addition of exciting new properties. Our entire operational team is highly motivated to deliver on our brand promise and grow market share in a depressed environment, ideally positioning the group to benefit from better trading conditions as they arise.
Average occupancies for the group in the 12 months to 30 June, 2019 declined from 59% in the previous financial year to 55%. In South Africa, occupancies decreased from 61% to 58%, in line with the three percentage points decline in the six months to 31 December 2018. Low levels of business and consumer confidence, high unemployment, uncertainty around Eskom's sustainability and land expropriation, as well as negative growth in the first quarter of 2019, resulted in difficult trading conditions. Down by three percentage points at the half year,
Botswana occupancies improved slightly in the second half, with the improvement continuing into the current year. Town Lodge Windhoek performed below expectations on weak economic growth in Namibia, but the hotel is improving on a month-by- month basis. After a welcome improvement in the first half with occupancies up by four percentage points, Kenyan operations experienced a weaker second half due to increased hotel supply and economic growth not translating into commercial activity. Occupancies were two percentage points lower for the full year. City Lodge Hotel at Two Rivers Mall continues to improve, but at a slower pace than expected.
In Tanzania, City Lodge Hotel Dar es Salaam had a disappointing first few months of trading due to increased hotel supply, a challenging business environment and a shift in some commercial activity as a result of government administration offices relocating to the capital of Dodoma.
Total revenue increased by 3% to R1,5 billion. In South Africa, achieved room rates rose by less than inflation due to increased competitor discounting. On a normalised basis, total operating costs increased by 11,4%, but by 7,2% in South Africa where the majority of the group's operations are located. The total normalised headline EBITDA margin decreased by six percentage points to 32%, resulting in normalised headline EBITDA for the group decreasing to R489,5 million.
Depreciation and amortisation increased by 12%, while interest income was R1,8 million lower and interest expense was R1,2 million lower as a result of borrowing costs being capitalised during construction activities. Normalised headline profit before tax for the group decreased by 19,5% to R369,6 million, while normalised headline earnings decreased by 19,3% to R267,1 million.
Diluted normalised headline earnings per share decreased by 19,4% to 613,4 cents. In line with the group's established policy of paying out 60% of normalised earnings adjusted for unrealised foreign exchange gains and losses, a gross final dividend of 137,0 cents per share has been declared, bringing the total dividend for the year to 366,0 cents, which is a decrease of 19,4% on the previous year.
The group's application for an investment deduction allowance on the development of the City Lodge Hotel at Two Rivers Mall in Nairobi awaits finalisation by the Kenya Revenue Authority. On 18 August 2018, and in line with the Kenyan Central Bank's announcement, 38% of the cash deposits previously held with Chase Bank Kenya (in receivership) were repaid to the company. As a result of the partial receipt of these deposits, half of the impairment charge previously recognised in other investments amounting to R9,4 million (net of tax) was reversed. The cash received was reclassified to cash and cash equivalents. The remaining 38% of deposits remain as other investments, and will be repaid in three equal instalments between August 2019 and August 2021 , with a portion being classified as current.
Development activity South Africa The first 76 rooms have opened at the 154-room Town Lodge Umhlanga, with the balance expected to be opened in early September. Construction of the 168-room Courtyard Hotel Waterfall City is progressing well with the first rooms on track for opening in November 2020 and the balance becoming available at the beginning of 2021. Southern Africa The completion of the 148-room City Lodge Hotel Maputo has been delayed due to contractor-related delays and disputes. Final timelines are uncertain at this stage.
With the opening of this hotel in due course, the group will have completed its initial targeted expansion into Southern Africa and East Africa. It will then comprise 63 hotels with 8 070 rooms in six countries (South Africa, Botswana, Namibia, Mozambique, Kenya and Tanzania). The focus now is on ensuring the success of the recently opened hotels through effective sales and marketing campaigns and building brand preference in the markets where we operate.
Outlook
Given the current economic situation in South Africa, the weaker trend of the past year has extended into the new financial year. New catalysts are needed to boost investment confidence and spur economic growth. Against this backdrop, there are some encouraging signs, such as the notable efforts by the National Department of Tourism to develop and grow this industry that is so important to the future of South Africa.
Our portfolio of hotels in South Africa, Southern Africa and East Africa is in excellent shape after ongoing refurbishments and the addition of exciting new properties. Our entire operational team is highly motivated to deliver on our brand promise and grow market share in a depressed environment, ideally positioning the group to benefit from better trading conditions as they arise.
City Lodge Hotel Group (CLH) share price history
The image below (taken from Sharenet) shows the share price performance of Curro over the last 3 years. And as the image shows the group's share price has been in almost constant decline over the last 3 years.
The summary below shows the share price performance of City Lodge Hotel Group (CLH) over various time periods:
- 1 week: -4.60%
- 1 month: -17.14%
- Year to Date (YTD): -24.69%
- 1 year: -30.15%
- 3 years: -42.43%
- 5 years: -23.10%
So should you buy their shares?
They have a strong brand and footprint in South Africa, but with the subdued economic climate and activity in South Africa their business will remain under pressure with less travel taking place for work related matters and less people going on holidays and staying in their hotels. While the South African government is targeting the tourism industry as a driver of economic growth, growth in international tourists visiting South Africa needs to increase substantially to offset the lower levels of travel from South Africans . The financial results released by the group is pretty solid and they have proved to be pretty resilient to the weak economic climate, but an occupancy rate of 58% is not where they would want it to be. For them to be extremely profitable they would like to see the occupancy rates closer to and above 70%
City Lodge Hotel Group shares valuation
So what are City Lodge Hotel Group shares worth when all things are considered? Based on their current financial results and their short to medium term prospects we value their shares at R99.20 a share. Thus at its current price we believe that the group's shares are fully valued right now. We would therefore not recommend buying at the current levels but rather look to buy into the group's shares at around R90 a share or at least 10% less than our valuation price.