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City Lodge trading update

On Tuesday afternoon we got a trading update from our preferred property/hotel company City Lodge. This update is for the year ended 30 June with the full results release expected in the middle of August.


The update states that if you include the once off BEE deal from last year, earnings are anticipated to be 36%-40% higher than the corresponding period. If you do not include the once off transaction normalised headline earnings per share are expected to be between 14% to 18% higher compared to the previous year. Let's take at look at last year's numbers so we know what to expect.


Last year normalised headline earnings per share came in at 379c per share. Let's go with the middle of the range 16% which will give us earnings of around 440c. The stock trades at R81 putting it on an earnings valuation of 18.4. But remember 2 things. One, this company is not only valued by earnings. It has a massive property underpin which management value at R3.6bn, a slight premium to the current market cap of R3.5bn. And two, the company recently added 1380 rooms to its profile with a current total of 6440 rooms. When occupancy rates do increase we expect to see big growth in earnings.


The dividend also needs to be considered. Historically they have paid around a 1.7 times cover so expect around 260c a share or a yield of 3.2%. That is a good yield for a company with lots of capital growth potential.


From these numbers we can see that things are turning and occupancies are starting to increase. This earnings growth will be on the back of higher electricity and municipality costs which means occupancy's may have grown more than you think. It is a good sign for City Lodge and a good sign for the industry as a whole. The industry has struggled since the massive ramp up during the 2010 World Cup. An oversupply coupled with a recession has caused the whole the industry to experience big occupancy falls.


We continue to like the company. The share price has had a bumpy ride reaching as high as R89 a few weeks ago to as low as R74 in June. We will use this recent pullback as an opportunity to get into the stock.


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