City Lodge HY numbers - occupancy down

City Lodge reported numbers for the half year to end December last week. This is the affordable segment of the market, it is not the "cheap" end of the market, in other words, a nice balance between quality and price. 900 Rand for the Tower Lodge on Special, per night, 1500 Rand a night for the Courtyard hotels, that is the going "Sandton" rate. Cape Town, the walk in rate for the V&A Waterfront is 1850 Rand per night, that is hardly "cheap".

The inland properties cater for the business market, offering exactly what you need. Friendly staff, the same offering at the selected levels regardless of whether you are in Port Elizabeth or Cape Town, Durban or Potchefstroom, Polokwane or George. You book this hotel for a reason, you know exactly what you are going to get, there are to be very few surprises. The way that the business has evolved is very slowly, the company is selective with their sites (very) and take time to finance and own the hotels. They are not only an operator, they are an owner, they are both. The company operates (as at the end of the last financial year), 57 locations with over 7000 rooms.

The very first hotel is near St. Stithians, the Sandton Mediclinic and I think wedged between a Chicken Licken (I think), that was founded in 1985. Here is something interesting about the CEO, Clifford Ross. Did you know that he will, this year in May be at the helm of City Lodge for 30 years. That is basically unheard of in corporate. Perhaps as a result of the business not really being a corporate entity for a long, long time. Ross and Enderle (Hans) ran the show, Enderle has since retired since 2012, I think to Somerset West if I recall right.

This is a relatively small business, with half year revenues of 791 million Rand. They managed to generate profits after tax of 166 million Rand, minus a forex headwind of nearly 23 million Rand, total income for the period (6 months) was 143 million Rand. Or 783 thousand Rand per day in profits, roughly 112 Rand per room per day. It is certainly a tough business, not the worst. The replacement costs of all the hotels is 1.856 billion Rand, relative to a market capitalisation of 6.74 billion Rand, roughly 27.5 percent of the market capitalisation is represented by the buildings themselves. And because the company picks their spots carefully, you can bet these are mostly prime spots.

The company has always had a pretty generous dividend, the dividend cover is 1.7 times. The interim dividend is normally bigger than the final, due to including the "holiday period". The total dividend will possibly be around 5.20 ZAR to 5.30 ZAR, with a share price of 155 Rand that is a dividend yield of three and one-third of a percent before tax. The stock trades on a multiple of just less than 18 times, which for a company that is not really growing, is tough to justify. It is what it is, the properties are worth more than the replacement cost.

Occupancies have fallen to 66 percent, it has been tough going out there in terms of business travel, their core market for the inland properties. They certainly do maintain good standards, their 2016 annual report points to 14 TripAdvisor excellence certificates. We did some deep dives across their properties and their respective ratings, across Hotels.com and TripAdvisor. The truth is that the customer likes their offering, they like value for money and what you get, from a service point of view. Check out their ratings online.

We however are not buying the stock for any of our new accounts, and prefer to hold, if you have them. We do think that disruptions will take hold, and prefer investments in the likes of Priceline.com, which has less exposure to physical properties. There certainly are country risks and lower growth scenarios, at least in the short term. I suspect with their slow and steady expansion plans across the east of our continent (as well as looking at Nigeria), the company is just OK for now.