SOUTH AFRICA: Hotel Groups Explore Beyond South Africa

With the visa and immigration rules continuing to hurt the travel and leisure sector, you would expect investors to pause or pull back. But a quick look at shares in City Lodge Hotel Group tells a different story.

The stock, amid what FNB Securities says is a depressed local economic environment”, and with “several challenges facing the international tourism industry”, is north-bound.

It has gained 22% since January, making it the sector’s second-best performer behind Wilderness Holdings. Wilderness, which operates 45 safari camps and lodges in Botswana, Namibia, South Africa, Zambia and Zimbabwe, climbed by almost a third on the JSE.

However, even in the wake of relaxation rules announced by tourism minister Derek Hanekom last week, industry players remain cautious, and it could take time for SA to reclaim its appeal.

“There is no doubt that the visa regulatory framework has been damaging to tourism in South Africa,” asserted Sun International CEO Graeme Stephens in an email to finweek. In addition, he said “the number of direct flights has been reduced”.

This echoes the view of new Federated Hospitality Association of South Africa (Fedhasa) CEO, Tshifhiwa Tshivhengwa, who this month told the association’s Western Cape members that the likes of Australia and Thailand were “eating our lunch because we’re scoring own goals”. He said that SA already had its fair share of problems, adding, “now another hurdle has ?been added”.

Compounding the impact of these regulations – which, hitherto, required visitors from most countries to apply for visas in person and all minors entering or leaving the country to possess unabridged birth certificates – is a 7% year-on-year slump in overnight trips in the domestic market, to 47m, recorded by Stats SA.

That blip can be ascribed to what Colin Anthony, general manager at research firm Intellidex, terms “anaemic economic growth” that’s forcing consumers to spend less.

The industry’s losers

•Cullinan Holdings, Tsogo Sun and Sun International

Unlike their luckier peers, Cullinan Holdings, whose brands include Thompsons, Pentravel and Hylton Ross, and Tsogo Sun, owner of Montecasino and Gold Reef City, are losing ground. Its results, with profits falling, are not inspiring.

The same goes for Sun International – renowned for grande dame Sun City, among other assets – which tanked 4% the same day it unveiled its bid for unlisted rival Peermont, owner of money-spinning Emperors Palace, for R9.4bn. That was in March.

The ensuing seven months of uncertainty over whether the deal will be approved by the competition authorities (it was, with strict conditions), dragged the listed firm’s market cap to R10.3bn with the stock crashing 30% to trade at R95 at the time of writing.

That is markedly lower than the almost R140 it commanded pre-Peermont news. At a reduced P/E of 15, the stock is cheap but punters are playing wait-and-see as Sun International continues its engagement with the Competition Commission. Among other factors, Sun International’s boss links the stock’s performance to problems in the sector.

Meanwhile, the group’s South America strategy is long-term but “not rewarding it Closer to home, the planned Peermont deal has spurred an “overhang of the potential equity raise”, Stephens adds.

“The potential acquisition of Peermont is extremely significant and has major connotations for the group – including the possibility of a R5bn equity raise,” he said. “It is also completely uncertain as to whether the deal will be approved, be declined or be consummated in a form other than a full acquisition.” The deal is set to expire on 31 March 2016.

Sun International initially planned to issue 10.5m shares in a rights offer for R120 each, which represented a negligible discount (given the plunge to current levels, that scenario is academic now) and take on a further R575m in debt facility.

Stephens is disappointed that the investment community does not seem to be pricing what he feels is the upside of the relocation of Morula Casino to Pretoria’s eastern suburb of Menlyn.