The latest trading update by City Lodge is unsettling for a company considered a defensive stock within the hotel sector.
Not only has business been slow because of the slew of public holidays in April and the local government elections in May, but the hotel industry is generally experiencing one of its toughest periods (see Money & Investing July 8).
The trading update states that the middle-market hotel group’s financial results for the year ended June 30 will reveal a headline earnings per share fall of as much as 36%.
The share price is around R64 , having fallen by 12% in the past month and by 20% in the past six months. In comparison, The Don Group is now trading at 29c/share but has risen by 38,1% over the past six months from a lower base.
However, City Lodge still offers a return on equity of 43,9%. The Don Group’s is a negative 5,46%.
Coronation Fund Managers analyst Pallavi Ambekar says the City Lodge trading update was weaker than expected. “Corporate and government spending has been weak, contributing to the three- star segment’s (City Lodge’s primary market) lower than expected performance, which was still better than the five-star market.”
“There might have been a positive impact from the World Cup, but if the hotel groups don’t get higher occupancies their operational leverage will mean that earnings will continue to be weak,” she says.
“ City Lodge, along with Gold Reef and Sun International — gaming groups that also provide accommodation — still looks relatively expensive. I wouldn’t pick any of them right now ,” she adds.
The Don Group has a current negative p:e, having reported its second consecutive operational loss at the end of 2010.
Avior Research hotels and gaming analyst De Wet Schutte says City Lodge occupancies for the year will average out at around 60%. This is far better than The Don Group’s dwindling occupancies (to 27% at the end of December 2010), but below the 2008 peak of 82%.
“City Lodge is arguably a little more defensive than most hotel groups,” he says. “Others are battling a lot more than these guys. Profitability for City Lodge is still good and it’s a well-run business. For value to be realised, investors will have to take a more positive view of the sector. Negative sentiment is still weighing down on share valuations,” he says.
An analyst report by Imara SP Reid recommends City Lodge as a buy.
“We’ve noted in the past that ‘hotel properties’ on other stock exchanges are deemed one of the riskiest categories,” says the Imara report. “Still, City Lodge has gone through some expansions ahead of the World Cup that still have room to ramp up.
“In addition, many poorly considered wannabes that sprang up ahead of the World Cup ... are simply running their balance sheets down, as a precursor to having to be turned into blocks of flats.”
The report suggests that this year will be City Lodge’s low point.
Prescient Securities executive director Cheree Dyers also feels the hotel market has bottomed out. “The fundamentals for SA’s hotel market have been in disarray over the past year,” she says. “We attribute this mainly to the growth in capacity, the World Cup and a struggling consumer and corporate traveller.
“Over the short term it is a question of deep pockets and a business model that can sustain the tough trading conditions. City Lodge is well positioned to do so,” she says.

This article first appeard in Financial Mail, July 15 2011