BROKERS’ NOTES: Buy Tsogo, sell City Lodge

Sven Forssman, head of equity sales at Kela Securities

BUY: Tsogo Sun Hotels

We like hotel stocks as tourism is accelerating and occupancies are increasing. The Westin Cape Town told us its occupancies are so high that it’s not allowing outside people in for breakfast, lunch or dinner. Among the listed players, we prefer Tsogo Sun Hotels over City Lodge Hotels in the short term. We think the group can improve its occupancy percentage from 40-plus to the mid-50s by the end of this year. Tsogo has power generators at all its hotels and has its own water storage capacity. We think the company’s NAV is about R12bn (about 790c a share against its current market price of 374c apiece). Management did good things during the pandemic, which we don’t think are priced in yet.

 SELL: City Lodge Hotels

City Lodge Hotels stopped bleeding cash in October last year, though January was bad and the sale of its East African hotels for R450m means it won’t have to come back to the market to raise money. It is using the R450m to reduce debt and refurbish its hotels. City Lodge has been trading above breakeven occupancy of 38% since October. Occupancies in the year to end-June are about 38% (which is disappointing) and the company thinks it can get to 55% in the next year. For every 1% move on occupancies, it makes about R15m in earnings before interest and tax.

But City Lodge only derives about 12%-13% of its business from foreigners, while Tsogo achieves more. Also, we think Tsogo will get to 55% occupancy sooner than City Lodge and its business is helped by the gaming division, which pushes more people through the doors.