City Lodge needs us to “get back to life”


City Lodge needs us to “get back to life”


Published Date: 2021-09-13 | Source: INCE|Community | Author: The Finance Ghost

City Lodge needs us to “get back to life”

The hospitality industry has been the biggest loser of all during Covid. Tourism and travel shut down completely. To make it worse, people have realised that Zoom calls are more enjoyable than red-eye flights across the country for the sake of a couple of meetings.

In-person meetings will always exist for the sake of forming relationships and closing deals. Having said that, we know that hybrid working environments are here to stay. There will be some return to business travel, but it's a safe bet that there has been a structural shift in the way people operate.

That isn't great news for airlines and business hotel groups which previously relied on a world where video calls were for catching up with your uncle in Australia, not for doing business.

To survive the pandemic, City Lodge raised a whopping R1.2bn via a rights issue in August 2020. It was a 13:1 rights offer, which means the company issued 13 shares for every 1 share in issue before the rights offer.

In other words, shareholders who didn't follow their rights were diluted severely. It was a nightmare for shareholders, made worse by the need to unwind the B-BBEE deal at the worst possible time. The only winner was Standard Bank, which made a fortune on the rights offer and benefitted from its debt into the B-BBEE structure being covered by the proceeds.

A further balance sheet improvement will be achieved when the proceeds of the East Africa disposal land in the bank. City Lodge sold four hotels in East Africa and expects the deal to close by the end of the year.

With 2020 behind it, City Lodge needs to find a way to operate a sustainable business. The latest results for the year to June 2021 show just how difficult that will be.

Bearing in mind that the comparable year included a few months of hard lockdown, City Lodge's revenue is still down 56% vs. the prior year. The headline loss per share is 91 cents, an improvement from a loss of 128 cents last year (adjusted for the rights issue).

Obviously, no dividend has been declared.

To give an idea of the journey City Lodge has been on, the occupancy rate of of 55% in 2019 fell to 38% in 2020 and 19% in the 2021 financial year.

In August 2021, occupancies were 24%. Even the recent numbers are still way off the levels that City Lodge needs to operate profitably.

To try and mitigate the drop in revenue, City Lodge's cash operating costs have decreased 30% excluding foreign exchange losses. Interest expense is down R26.8m thanks to savings on the B-BBEE structure which was unwound using the proceeds of the rights issue.

Locally, City Lodge has opened a 168-room Courtyard Hotel in Waterfall City and "initial trading has been encouraging" - this is a helpful read-through for my position in Attacq, the REIT that is concentrated on the Waterfall area in Gauteng.

That's why I love the markets - a tidbit of information in a City Lodge announcement suddenly gives me useful information about my Attacq position!

In terms of City Lodge's prospects, this company is clearly part of the recovery trade. If you think travel might recover in the short-term, then City Lodge is interesting. The fact that the company uses the hashtag #GettingBackToLife in the SENS announcement shows you how critical the situation is.

Notably, the share price has already increased over 53% this year.


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