City Lodge Holdings - Model Update
City Lodge Holdings is a South African-based hotel group with over 7500 rooms in 59 hotel properties across Botswana, Mozambique, Namibia, and South Africa. The group houses four hotel brands namely Courtyard Hotel (five hotels), City Lodge Hotel (19 hotels), Town Lodge (12 hotels) and Road Lodge (23 hotels). The brand offers budget-friendly accommodation through Road Lodge, upper midscale stays via Town Lodge and City Lodge Hotel, and upscale accommodation and conference services through the Courtyard Hotel.
The group owns 81% of its hotel properties and highlights its robust maintenance policy and regular refurbishment programme as keys to its success. It focusses it locations on strategic nodes, for example a Town Lodge or Road Lodge will be near an airport and Courtyard Hotels will be in high-end office and shopping districts.
Just under 51% of rooms are in Gauteng, followed by the Western Cape (12%) and KwaZulu Natal (KZN) (12%).
The global hospitality industry
The global hospitality industry showed steady growth up until the disruptive impact of Covid-19 lockdowns worldwide. Since economies started reopening from 2021 onwards, there has been strong recovery in the industry, but it will take some time to fully recover to pre-pandemic levels.
To get back to 2019 levels in the next five years, the hotel and resort industry will have to grow at a compounded annual growth rate of 7.5%. It is expected that the market could recover to 2019 levels sooner though and may exceed this level by 2028. The hospitality sector in its entirety is forecast to grow in excess of this level as international tourism rebounds and consumers have been seen to value “experiences” above physical goods in a post-pandemic world.
Hospitality in South Africa
The South African hospitality industry was severely impacted by both local and international events over the last few years. In 2020 through 2021 the Covid-19 pandemic lockdowns resulted in very low occupancies globally and locally. The KZN unrest in July 2021, and the Russia-Ukraine conflict and KZN flooding in 2022 added further strain. More recently, high inflation, loadshedding, a lack of capacity in local air travel and general macroeconomic pressure locally has had a pronounced impact on local and international travel.
Still, the recovery from lockdown lows has been steady and continues. There is still scope for further recovery, particularly in international and business travel with the former also expected to receive a boost from a weaker rand.
Latest results (1H23 ended 31 December 2022)
What we like about this company
What we don't like about this company
Outlook and Valuation
We expect revenue growth FY24 through FY26 to average 14.4% and margin expansion as the marginal cost of additional occupancies are low. We anticipate that debt will go up, but that gearing will come down because of improved profitability. We forecast HEPS growth to average 35% to 40% over the forecast horizon.
We calculate a 12-month target price of R5.57, yielding potential upside of 29.4%. Our fair value presently is R4.95 (or about 15.1% above current levels).
