City Lodge (CLH) is a high-quality business and has been since inception in 1985, when it was formed by Swiss hotelier Hans Enderle. The recent half year interim results to December 2020 were as expected, not good. Covid-19 travel restrictions have acutely affected hotels around the world, and City Lodge is no different, seeing their occupancy rate fall from 58% to 17% for the period. This resulted in an before-tax loss for 2020 of R582.7m, down from a R306.9m profit in 2019. Likewise the recent periods revenue was down 25% from R1.5bn in 2019 to R1.1bn.
However, once a successful vaccine roll-out is underway and people begin to feel safe to travel again City Lodge is well positioned to benefit from the recovery in holiday and business travel, even if volumes never return to pre-pandemic levels due to the popularity of Zoom meetings. This is because City Lodge hotels tends to have a break-even occupancy rate of between 35-45%, far lower than the industry average of 60%. This will allow the hotel group to return to profitability sooner and from lower travel activity than competitors. Also important to note is that as occupancy increases so do the room rates, accelerating the groups profitability.
City Lodge is capable of achieving such low break-even occupancy rates due to not having to pay franchise fees, as it owns most of its properties, as well as lower than average staff ratios. Staff are trained to work across several areas with a typical City Lodge employee servicing four rooms compared to one person per room at a full-service hotel. “Our people don’t work in silos,” says group COO Lindiwe Sangweni-Siddo “They move within the business”.
Another factor that sets CLH up well for the recovery is their low gearing and the conclusion of their August 2020 rights offer. The hotel group issued R1.2bn new shares, while their existing market cap was R914m at the time. The rights issue allowed the company to grow working capital, pay down existing debts and settle debt related to a damaging BEE share scheme. The BEE transaction was intended to allow three black owned companies to own 15% of City Lodge, allowing the group to remain a level 4 B-BBEE contributor. In order to finance the share purchase, preference share funding was taken-up that the acquiring companies have now become unable to pay. Meaning that R750m of the right issue will go towards settling this debt as City Lodge stood surety. The remaining R426m will go towards paying down their actual debt of R660m, leaving City Lodge with low debt levels in 2021 and poised to benefit from a return to travel.
Pre-pandemic the share price fluctuated around R15, falling 64% with travel bans. Following the rights issue in 2020, the company’s share price fell a further 50% to lows of R2.34. Since then the share price has recovered to some extent as the current price is R4.07. After completing a discounted cash flow, we have the share price target set at R8.1, which provides potential for significant upside.
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