City Lodge results are pleasing enough

Yesterday we received results from one of our recommended stocks which is always an exciting occasion here at Vestact. This time it was City Lodge who managed to grow revenues by 11% while normalised operating profit increased by 13%. Normalised headline earnings rose by 17% to 442.8c. Occupancies for the current year increased by 3% to 59% which is very encouraging. Remember we said that a small occupancy increase will result in a bigger earnings increase because of the big capacity ramp up? Well that is what we are seeing here.


The stock trades at R80 and a historic valuation of just above 18. There are other ways to value this company though. Remember that they own most of their hotels. On an accounting basis property, plant and equipment is valued at R1.092 billion which is depreciated each year. However management normally give their own valuation which last time came in at R3.6bn. This time they value estimated replacement cost of R3.8bn, a nice premium over the current market cap of R3.4bn.


This makes sense, buildings are maintained, especially hotels so the depreciation is not as excessive. In fact property usually increases in value and judging by the listed property index which is up 30% so far this year, the sector has done well. If the company had financial trouble they could certainly sell some hotels and it also allows them to pay great dividends. Both of these are comforting for investors. Talking about that dividend, they are distributing 60% of those earnings to bring in 268c for the year. That is a current yield of 3.35% which is not bad.

The company is not without its challenges. Input costs are increasing and electricity is a big expense. The industry is also very competitive and the global economic downturn has had a negative impact on global business travel. Despite the challenges we remain positive on the stock. Here is management's outlook.


"The improving occupancy trend has continued into the first two months of the new financial year. Construction of the 106-room Town Lodge Gaborone in Botswana is progressing well and the hotel is on track for all rooms to be opened by early February 2013. The joint venture transaction in Kenya, which includes the acquisition of a 50% stake in the Fairview Hotel and the Country Lodge in Nairobi, is now unconditional and a positive contribution to earnings is anticipated in the 2013 financial year. There is continuing emphasis on investigating expansion opportunities in East and West Africa, as well as in the SADC region and the group is confident that these efforts will be rewarded in the years ahead."


This management is very innovative in the industry and the expansion into Africa is very compelling. There is huge demand for low cost hotels in the continent, apparently hotel prices north of our borders are extremely excessive. We continue to add at these levels.