The market checked out of City Lodge in recent weeks. The share price is down 19% year to date, placing it in the same category as the retail stocks on the JSE that have suffered a similar fate.
If there’s a South African consumer anywhere in a company's value chain, you can assume it has had a terrible start to the year.
The 52-week range tells a story of volatility, which is to be expected when looking at a JSE mid-cap that has had a particularly violent experience over the past five years thanks to the pandemic and changes in how people have been travelling and working. The 52-week high of 525c is now but a distant memory, with the stock now slightly above the 52-week low of 395c.
The share price has dropped several times in the aftermath of the pandemic. This level has historically been a trigger for range traders to jump in and ride it 25% higher before exiting. The risk is that the stock crashes right through the 52-week low, at which point all bets are off in terms of where the pain ends. This is why traders often wait for confirmation that a level will hold before taking a position. At the time of writing, there’s not enough evidence to suggest this will happen.
From a fundamental perspective, there are problems. The market is digesting the results for the six months to December 2024, and though average room rates were up 10% (after increasing 9% in the comparable period), revenue was up just 2%. This suggests that occupancy was a challenge, which raises the question of whether City Lodge’s rooms are too expensive. The average group occupancy fell from 61% to 57% — a material deterioration.
The narrative in the announcement is that occupancy challenges are being mitigated by “more effective yield management”, leading to the increase in room rates. Usually, price elasticity of demand results in lower occupancies when prices are higher. They are implying that things are the other way around — that demand is poor, hence they are forced to raise prices. This feels illogical, especially since we have other examples of stronger consumer discretionary spending in the latter half of 2024. Why would travel be so different from the uptick we saw in categories such as clothing and furniture?
Getting people into the hotels is the most important thing they need to do, as it also has a knock-on effect on the food and beverage offering that now contributes 20% of total revenue.
Food and beverage revenue grew by 6% during the interim period, an impressive outcome considering weak occupancies. This would’ve been even better if occupancies had gone in the right direction, or at least stabilised.
Getting people into the hotels is the most important thing they need to do
Another feather in management’s cap is that food and beverage costs were flat despite revenue growth, so gross profit margins improved from 59% to 61%. That’s about as good as a restaurant can hope for.
The core occupancy issue comes through in adjusted ebitdar margin (not a typo — that’s the industry standard), which fell from 31.8% to 31.2%. This excludes foreign currency gains and losses, providing the purest view of underlying performance. Adjusted headline earnings offer a similar view, down 2% (vs a 15% increase in headline earnings without adjustments). The impact on earnings was cushioned by a 2.3% reduction in the weighted average number of shares in issue.
There were some green shoots in January 2025 (a seasonally quiet month), with occupancy up 200 basis points year-on-year to 44%. They certainly need demand to improve, with plans to invest another R200m in refurbishments in the next six months. They tapped into R60m of borrowings during the interim period to fund the capex and it’s possible they will use more.
The interim results are fresh, so the market won’t be given another meaningful financial update for several months. In the meantime, sentiment looks rough. Investing in the footprint may well be the correct long-term decision, but if more debt is required to make it happen, then the impact of finance costs on full-year numbers could push City Lodge into lows not seen since 2021.
And if you ever needed proof of how stubborn dividends can be, City Lodge maintained the interim dividend at 6c a share despite borrowing money for refurbishments in a period of weak demand.
Why is this company even paying a cash dividend in the first place? Reinvestment in the hotels and share buybacks would be more useful.
