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Does some value lurk in SA’s leisure stocks?

City Lodge ‘trades 80% less than the value of its assets, and that’s what makes this one so interesting to me. I don’t think it’s going to go bankrupt’: Chantal Marx, head of research, FNB Wealth and Investments.

SIMON BROWN: I’m chatting now with Chantal Marx, head of research, FNB Wealth and Investments. Chantal, good morning. I appreciate your early morning time. The leisure stocks, we’ve got a couple, we’ve got Tsogo Sun Gaming, Tsogo Sun Hotels, we’ve got City Lodge, and so on. They’ve certainly been on a bit of a tear, particularly the two hotel stocks. Your take on the hotels? Are we getting ahead of ourselves? Is there perhaps some value lurking in those companies?

CHANTAL MARX: It’s been a very interesting ride. As I looked this morning, just as of Friday we had City Lodge up 88% since its lows. Tsogo Sun gaming up 277%, Simon. Sun International up 102% and Tsogo Sun up 31%. But, if you look at how far they still are away from their highs there could still be an argument to make for these companies. The problem just is, have we seen a permanent destruction of capacity in these areas? How long – if it’s not permanent – is it going to take for gaming and leisure activities and travel to resume to some sort of normality? And, very importantly, what is the opportunity cost of investing in these things now and staying invested in them now because I think, given the recoveries, they could go sideways for a while.

SIMON BROWN: Yes. They absolutely could. And of course, a third wave, a fourth wave, and so the list goes on. City Lodge in particular – I remember you and I were on TV a little over a year ago – and you did not like it back then. That was at R60, R70/share. Of course, now it’s a whole different story. I looked at their (interim) results which came out a few weeks ago and they have almost no occupancy, they’ve run out of money, they are loss-making. I wonder if there isn’t a risk of even perhaps a rights issue; or am I my being a little overdramatic here?

Read: Despite cash constraints City Lodge opens new Waterfall City hotel

CHANTAL MARX: We had the rights issue come through last year, but that was basically to cover the BEE deal that was underwater. But if we’re going to have the current status quo persisting, then I wouldn’t be surprised if they decide to come to the market again, particularly after a nice recovery, or the recovery that they’ve seen in the share price. But I think that they would also not want to necessarily raise capital at these levels. After the rights issue last year they de-leveraged quite a bit. So they do have the capacity to take on some debt, although it probably will be a little bit more expensive than it was two or three years ago. 

Very interestingly for City Lodge, though, I had a look at PEs for these companies and PBs, price-to-book, this company trades at a point to price to book, which means it trades 80% less than the value of its assets, and that’s what makes this one so interesting to me. I don’t think it’s going to go bankrupt. I think that the chance of a rights offer is there, but I don’t think it’s too urgent. And this price-to-book number just looks very interesting to me.

I mean, even if you’re going to value it as a property company because they own all their properties themselves, an 80% discount to NAV is way lower than the rest of the property sector. Of course, their occupancies are very low, but you could argue that there’s a case to be made. 

SIMON BROWN: Yes, because that’s at the City Lodge book. I remember looking at it a few years ago – its property and some of those properties are in really solid places. 

Chantal Marx, head of research, FNB Wealth and Investments. I appreciate your early morning time. 

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