In the eye of the storm: SA hotels, casinos and restaurants
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A N A LY S I S
In the eye of the storm:
iStock-1169552292
SA hotels, casinos and
restaurants
Kaitlin Byrne
PORTFOLIO MANAGER
i KEY TAKE-AWAYS
In the Coronavirus pandemic, the and managing room portfolios,
share prices of hotels, casinos and restaurants have been negotiating
restaurants have been among the hard with landlords, and casinos
worst punished, with some hotel appear to be managing their debt
counters losing around 70% of their levels responsibly with funders.
value at their worst levels in March.
Prudential doesn’t believe all these
Based on our analysis, the sell-off been
companies will be permanently
overdone based on the fundamentals
damaged by the pandemic, although
Prudential Investment Managers ©
and future prospects for the leisure
their survival may well depend on
sector.
external factors such as the ability and
Among other remedial actions, hotels willingness of debt and equity funders
have been aggressively cutting costs to continue to support companies,
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A N A LY S I S IN THE EYE OF THE STORM
and how long the economy takes three were already facing risks of
to re-open fully and pick up again. their own, but a complete shutdown
for months was certainly not on the
S ince the outbreak of the Coronavirus cards for any one of these sectors at
pandemic and economic shutdown the beginning of 2020.
in South Africa in March 2020, three The accompanying graph shows how
sectors in particular have found companies like City Lodge, Tsogo Sun
themselves in the eye of the storm: Gaming, Sun International and Spur
hotels, casinos and restaurants. The have seen their share prices fall much
share prices of the companies in further than the overall market (as
these sectors have certainly felt the measured by the Capped SWIX) during
pain, underperforming the FTSE/JSE the downturn and have struggled to
Capped SWIX Index significantly. All recover to the same extent as the rest of
Leisure sector share prices hit hard
Based to 100
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SOURCE: Refinitiv Datastream/ Prudential Investment Managers
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A N A LY S I S IN THE EYE OF THE STORM
the market. Tsogo Sun and City Lodge severe drought in 2018, which took
have been particularly hard-hit, losing its toll not only on international
around 70% of their value at their tourism, but interprovincial travel as
worst levels from the start of the year. well. 2020 was meant to be the year
Spur was somewhat more resilient, where Western Cape hotels finally
with a decline of around 30%. This recovered from one of their toughest
dire performance is understandable trading years and started to return to
if we consider some of the drivers more normal occupancy levels, while
behind it, but has the sell-off been also hopefully regaining the ability
overdone based on the fundamentals to price their rooms above inflation.
and future prospects for the leisure City Lodge compounded its struggles
sector? in South Africa by completing a multi-
year expansion into the rest of Africa
Hotels: Aggressively cutting costs
where they have invested over R1bn.
and managing room portfolios
They are more likely to see losses than
The listed hotel space in South Africa
profits from this expansion in the next
has three companies with pure hotel
few years.
exposure - City Lodge, Tsogo Hotels and
Hospitality Property Fund - although Upon the announcement of the
most of the value in Tsogo Hotels is complete Level 5 lockdown in mid-
attributable to its 59% holding in March, all the hotel companies
Hospitality Property Fund. Before prepared to close their entire portfolios
the shutdown in March, all the hotel and embarked drastic cost-cutting
companies had been struggling with measures to save cash. Focus was on
depressed occupancy levels, and as a put on employee costs, lease expenses
result, an inability to increase their room and cleaning and laundry, as well as
rates by more than inflation. Sandton debt service costs which can be a large
hotels had been hit with oversupply part of non-operational costs.
from new rooms added in the last
few years, combined with a weak While City Lodge didn’t have a high
local macroeconomic environment. amount of debt on their balance sheet
The Western Cape saw major declines at the outbreak of the pandemic, it was
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in occupancy levels as a result of the certainly higher than previous years
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hotels that are focused on international
due to the African expansion and the travellers remaining shut.
losses from the African hotels, which
had started to impact their results. To In March, City Lodge shut down
manage this, they have been able to all 62 of their hotels, then initially
get debt covenant waivers from their opened seven in order to provide
lenders for their debt repayments due accommodation for essential workers
in June and December 2020, as well as for some businesses, some for tourists
securing additional liquidity. However, not able to return home, and some
they have experienced additional for quarantine purposes. They are
troubles stemming from a R750m loan currently sitting with 21 hotels open,
guarantee to their BEE partners. As undoubtedly at reduced occupancy
City Lodge shares were held as security levels, and should continue to slowly
for this loan, trouble lay ahead as the open more as the economy starts to
share price of City Lodge tumbled. As re-open.
the share price fell, so the guarantee
to lenders kicked in. As a result, City In generally, the hotel groups have
Lodge have now announced a R1.2bn done a very good job reducing cash
rights issue to cover the bulk of their costs as much as possible while their
outstanding debt, as well as the BEE properties have been closed, and
loan guarantee. planning the reopening of their
portfolios in the most cost-efficient
Meanwhile, Tsogo Hotels have way. Funders have also been very
successfully agreed on delaying debt supportive so far, which is also the
repayments coming due in September advantage of having a portfolio of
2020, with lenders recognising that it hard assets (i.e, fixed property) which
was difficult for the group to make can be used as security for borrowings.
payments when their hotels were
not trading. More recently, now that Restaurants: Negotiating hard with
provincial travel is allowed for business landlords, opting for delivery-only
purposes, Tsogo Hotels are re-opening in the interim
key hotels in each of the main cities, The restaurant industry also came
but will more than likely be watching under significant pressure when the
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their cash burn rate very closely, with lockdown came into effect. In mid-
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March the restriction on the number negotiations with landlords, since
of people allowed into a restaurant having such a large store footprint
had already created severe pressure in the group gives them an element
for restaurant earnings. Although of bargaining power. They have also
one would think that some business given their franchisees relief in the
is better than no business, this is far form of their monthly franchise fees
from the case. As Spur later announced and marketing contributions.
to the market, the full lockdown
almost came as a relief to the company Spur are starting to slowly re-open
because operating with the same cost restaurants that are able to operate
base but fewer customers is more profitably under a delivery-only
damaging than operating with no method, such as those where the rental
customers at all, but with the ability negotiations have been favourable,
to significantly lower costs. despite earning a lower margin
compared to sit-down restaurants.
Spur operates a franchise model, The one advantage that should come
meaning they receive a set franchise fee from this crisis is that the restaurants
based on revenue from the franchisee that are able to survive should be the
who owns the restaurant. Spur have financially stronger restaurants that
over 600 restaurants which include the are more rational with pricing. This
popular brands Spur, Panarottis, Hussar should allow the remaining restaurants
Grill, John Dorys and Rocomamas. to regain some pricing power in what
The group is in a positive net-cash should be a less-competitive industry
position and therefore doesn’t face going forward, as we have seen the
the same level of financial pressure likes of Dominos and a number of
as hotels and casinos, but they do smaller restaurants close their doors.
face the risk that earnings would be
permanently lowered should several Casinos: Managing higher-than-
of their franchisees go bankrupt. usual debt levels after large
Therefore, it is in the group’s best expansions
interest to ensure that franchisee The casino industry is known for its
health is maintained, which is where multitude of risks, all of which are
Prudential Investment Managers ©
the real financial pressure is felt. They well known to industry operators, such
have been able to be very firm in rental as the potential for the government
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to impose gaming tax increases, VAT had completed their large capital
increases that can’t be passed on, and spending projects, and had planned
a smoking ban within the casinos. to focus the next few years on strong
However, no one ever anticipated a cash generation to pay down the debt
risk like a pandemic that would see associated with these expansions.
casinos, whose doors are barely ever
closed, facing months of no revenue However, the advent of the pandemic
with a large fixed cost base. meant this was no longer possible.
Both casino groups had to close all
Sun International and Tsogo Gaming their casinos, as well as their limited
(split from Tsogo Hotels in 2019) are pay-out machines (which are placed
South Africa’s large listed casino in bars and restaurants), and found
companies, with Peermont being themselves in a tight space in terms
the third (unlisted) casino company. of debt levels. Both Tsogo Gaming
This shut down came at a bad time and Sun International submitted
for both Sun International and Tsogo plans to funders on how they would
Gaming in terms of how much debt manage the crisis and cash levels, and
they carried on their balance sheets. most have been supportive thus far,
Tsogo Gaming had purposefully taken waiving covenants in the near term.
on more than their share of debt Sun International have announced
when they split from Tsogo Hotels, another rights issue to raise R1.2bn
given that the casino business is more more in capital, which will help them
cash-generative than hotels with their weather this period of very low cash
heavy capital spending; therefore they flows, and most likely keep debt
should have been able to repay the funders more comfortable.
debt over a reasonable time period.
Sun International still had a high Casinos are, by nature, very cash-
amount of debt on their balance generative businesses if they do not
sheet following their construction overspend on capital projects; however,
of Menlyn Casino in 2017 and 2018, they are geared to the economy to
where revenues turned out to be a degree. The recent announcement
significantly weaker than expected, that casinos would be allowed to
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resulting in a rights issue in 2018. Both open up again at 50% occupancy is
Tsogo Gaming and Sun International very positive, despite the reduced
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occupancy levels . The companies plan financial stress; and how long the
to manage costs carefully to ensure economy takes to pick up again. To
they are cash-positive, even at a lower date none of the companies have
occupancy level. encountered problems in either having
their debt terms eased or raising extra
Any permanent damage dependent capital through rights issues; investors
on external factors and creditors have still deemed it
At Prudential we are cautiously attractive to support them.
optimistic about the medium-term
future of these industries. We don’t Even now, three months after the
believe all these companies will be worst of the market crash, we still
permanently damaged by the impact see significant value in some of these
of the Coronavirus pandemic, but companies like Sun International on a
we acknowledge that they are most three- to five-year basis, even taking
certainly high-risk businesses given into account further capital or debt
the level of high operating leverage raisings. We are very cognisant of the
as well as the high financial leverage high level of risk involved in investing
prevalent in some of them. Their in these companies as well, and are
survival may well depend on several therefore cautious about the overall
external factors, such as: government’s size of the exposure to these three
decisions around the timing of the sectors, as well as to any one of these
full reopening of these sectors; the companies individually, in our client
ability and willingness of debt and portfolios.
equity funders to continue to support
companies during this period of high
Kaitlin joined Prudential in May 2015 as an Equity Analyst and was appointed Portfolio Manager
in early 2020. She is primarily responsible for covering South African and African stocks within
the Gaming and Leisure sector.Prior to joining Prudential, Kaitlin completed her articles at Ernst
& Young, where she was responsible for auditing companies in the Finance, Gaming and Leisure,
Real Estate and Manufacturing sectors. She currently has four years of industry experience. Kaitlin’s
Prudential Investment Managers ©
qualifications include B.Acc (Stellenbosch), CA (SA), and CFA.
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