City Lodge, a recent addition to our portfolios, released a very iffy trading statement

City Lodge, a recent addition to our portfolios, released a very iffy trading statement. I guess poor could be the better way to describe it, here is the official release: "diluted / undiluted headline and basic earnings per share for the six months ended 31 December 2010, which include the costs and effects of the BEE deal, are anticipated to be between 25% and 30% lower than the previous year." And without that impact: "Normalised headline earnings per share, which excludes the costs and effects of the BEE deal, are however anticipated to be between 15% and 20% lower than the previous year."





Oh dear, that does not sound too good at all. The broader market participants felt the same way, sending the stock 4 percent lower. These results are for the first half of the year to end December, so it included the holiday period. Interestingly if you scroll back in time, the first half is actually the worse half for City Lodge and not the current half that we are in. So look for the first half for 160 to 175 cents worth of earnings per share. At this level the stock trades at around what the board values all their properties at. As per a footnote in the SENS release from their full year results: "Net asset value is calculated using the depreciated historical cost of buildings and not the directors' current estimated replacement cost of R3,5 billion."





And at current levels of 73.75 ZAR the company's market capitalisation is 3.16 billion ZAR. The company is a good cash generator, return on shareholders funds has increased roughly 26 percent per annum for the last five years. Dividend cover has on balance over the same period stayed at 1.4 times, so they are a generous dividend payer. There is cause for concern, but we will evaluate when the results are released in three weeks time.