City Lodge half year number

One of our other recommended stocks, City Lodge (two in one day) reported interim numbers yesterday afternoon late. They were pretty much telegraphed to the market. First things first, the group now operates 52 hotels with 6440 rooms across the country. The first hotel was opened back in 1985 opposite the Sandton Clinic, you know, behind the Chicken Licken and opposite the new developments diagonally across from the Sandton Clinic. Those familiar with the area should know where I am talking about. The first manager of that hotel, Clifford Ross, now runs the group, having taken over the reins from founder Hans Enderle. Enderle still owns 10.5 percent of the company. As per the City Lodge website, the company is in the top 250 hotel chains in the world.

The stock price is down over 15 percent from their recent highs, the trading update was not favourable at all. OK, so here goes, lets jump straight into a period that in their words a "slowdown that reflects the overall lack of economic activity in South Africa, a lack of confidence emanating from our core business travel market and an oversupply of hotel rooms in certain parts of the country." You heard that a while back I guess.

Including new hotels, occupancy levels have fallen to 59 percent, excluding that number is 65 percent. You must remember that City Lodge like many hospitality and hotel groups ramped up for the World Cup and those plans were in place long before the global economic downturn. So the two events coinciding with each other was not the best outcome.

Sales for the period, 405 million Rand, were twenty percent higher than in the previous comparable period, profits for the period were 28 percent lower at 54 million Rand. Operating costs have ramped up sharply, up 42 percent. There are some pointed comments about costs specifically:

"Considering that the operating costs now reflect a R24,6 million rental charge in respect of six of the new hotels, overheads were very well controlled. This is evident in the fact that although operating costs increased by 42% overall, they increased by only 25% excluding the rental, which is well in line with the 26% increase in rooms available. Municipal charges continued to show large increases with electricity in particular increasing by 41% on a per room sold basis."

Normalised earnings per share was 204 cents per share, 124 cents worth of dividends, both of which are comfortably lower than this time last year. Margins were flat. That is actually good news. The start of the year has not been great: "Trading conditions in January and the first half of February remain soft and are unpredictable for the remainder of the financial year. Whilst we will continue to manage costs and overheads as tightly as in the past, management will remain focused on providing our guests with a superior product, warm hospitality and efficient service.".

So, what to do? I guess first is to recognise that we got the timing wrong on this one. It would have been better if we were only looking now. I suspect that patience holding the stock will turn out to be the best thing to have done. Quality of company remains, share price is another matter and reflective of the operating environment.