Investers stay away from hospitality industry

Posted On Friday, 13 January 2012 02:00 Published by
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The hospitality industry is in such a troubled state that it’s no surprise that investors have stayed away from the sector.

By Zweli Mokgata


The hospitality industry is in such a troubled state that it’s no surprise that investors have stayed away from the sector.

In the period leading up to the 2010 soccer World Cup hotel developers embarked on a huge construction programme, expecting a tourism bonanza for a few years to come.

But the eurozone financial crisis, along with perceptions that SA is an expensive destination, has resulted in foreign tourism collapsing.

According to STR Global, which tracks movements in the worldwide hotel market, hotel occupancies in SA for the year to October 2011 were an average of 55,2%.

This was down from 56,7% in the same period of 2010. Average daily rates (ADRs) also fell from R971 to R839, a worrying indicator of the industry’s declining margins.

In this environment several properties were forced to shut down. The Grace, a landmark hotel Rosebank, was one of the casualties after its owners said it was no longer profitable. It was subsequently acquired by the Tsogo Sun Group.

Tsogo followed this up by increasing its stakes in the Suncoast Resort in Durban and the low-cost hotel group Hotel Formula 1.

Tsogo Sun CEO Marcel von Aulock has stated that the intention of the gaming giant is to gain access to all segments of the market in anticipation of a recovery in the economy.

Prescient Securities executive director Cheree Dyers says the continued pressures on corporate discretionary spending and disposable leisure income resulted in 2011 being one of the toughest years for the hospitality industry.

“The problem of oversupply of rooms is not expected to be resolved in the short term,” she says. “Consequently, we note with concern that the five- and four-star markets continue to decrease room rates in order to [increase occupancies]. The impact of this on leading hotel chains, especially in areas like Cape Town and Sandton, has been negative.

“It would appear that customers still have pricing power for now and while this is hurting the overall market, in our view the five-star and four-star players will not be able to sustain pricing levels,” she says.

Even in this environment certain operators have managed to maintain solid businesses and are better positioned to take advantage of a turnaround in the economy. But the question is when this will happen.

Occupancy levels in five- and four-star hotels, for instance, are below the break-even point.

Avior Research hotels, gaming & leisure analyst De Wet Schutte doesn’t expect a recovery of the sector in the near future.

“We expect to see a continuation of this trend in 2012,” he says. “The hospitality sector had a tough year on the JSE and we believe negative sentiment towards the sector played a role.

“However, investors can find value. We believe City Lodge Holdings and Tsogo Sun Holdings are both well positioned to benefit from improving hotel occupancy levels, though Tsogo is better positioned to benefit from cyclical growth in casino revenues,” he says.

Though the City Lodge and Tsogo share prices lost 13,1% and 11,6% respectively, Sun International was the worst performer with its share price down 17,9%.

Tsogo’s p:e of 16,4 is below the sector average of 18,61, while City Lodge is at 26,25. Sun International is more or less in line with the sector average with a p:e of 19. Dyers prefers operators in the three-star market such as City Lodge.

“Johannesburg should continue to be a growth centre for those groups with a strong presence in the city,” she says. “Companies with a strong balance sheet, well-managed cost base and strong, innovative management are likely to continue to outperform on a relative basis. In this regard we favour City Lodge.”

Source: Financial Mail

Publisher: I-Net Bridge
Source: I-Net Bridge

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