City Lodge results, "things" getting better

We saw results from one of our recommended stocks yesterday after, City Lodge reported their interim numbers to end December 2011. Reminder, the group has 52 hotels with 6440 rooms across four different brands. They opened two new hotels during the period, the Port Elizabeth Town Lodge and a City Lodge in Hatfield. There are some encouraging signs at last, we were aware that the general backdrop for the hotel industry was improving, but this confirms that. Occupancies rose ever so slightly from 59 to 60 percent. What the group points out, is that the corresponding period (six months to end December 2010) included two weeks of World Cup trade. City Lodge say that their hotels continue to gain market share and wait for it: "...the last quarter of calendar 2011 produced stronger occupancies than in the same months a year earlier, the first time that this has happened since early 2008."

Costs have been contained, with operating costs per room increasing only 5.4 percent, even though electricity costs per room sold increased a whopping 17.3 percent. But, this electricity increase "is well below the official tariff increase and reflects the success of the various energy saving initiatives introduced by the company over the past year." See, companies innovate and save money.

Normalised headline earnings rose 10 percent to 96.6 million Rand, this translated to 223.8 cents per share. The dividend payout ratio of 60 percent means that the interim dividend translates to 135 cents per share. If you annualise both numbers (I know you shouldn't) then you get close to 450 cents worth of earnings per share and 270 cents of dividends. With the stock at just over 72 ZAR a share, that means the yield is 3.75 percent and the earnings multiple is 16 times. Hardly the best metrics in the world, but let us flesh that out.

What you do also get as a shareholder however is the property underpin. At the end of every financial year the directors give their replacement cost of the property portfolio, because they own most (not all) of their sites. On their balance sheet however property, plant and equipment is valued at 1.1 billion Rand, around 35 percent of their market cap. In the note section in the full year numbers, we come across this line: "Net asset value is calculated using the depreciated historical cost of buildings and not the director's current estimated replacement cost of R3,6 billion." The current market cap is just shy of 3.1 billion ZAR. If someone alone wanted to buy the property assets, that is more or less what they could pay.

The group states in the outlook that they are not currently building any hotels, but are always on the lookout for opportunities to increase their domestic footprint. Here is something exciting, the group have for the first time ventured into the rest of Africa, just over the border in Gaborone, or just Gabs as my Bots friends used to call it. Gabs. The Town lodge (two star no frills) is expected to open in December and is expected to cost 61 million ZAR. And expect more of these announcements, the company says as much, they are exploring other African countries. I suspect Mozambique (Maputo), Zambia (Lusaka), Kenya (Nairobi), Ghana (Accra) and Nigeria (Lagos and Abuja) would all be on their near term horizon. Although the company hardly looks cheap at these levels, the price trades under the property replacement cost, the business is well run and has a history of very good dividend flow. We continue to be in accumulate mode.