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Does travel and leisure offer phoenix-like opportunities?

‘If I was looking to go bargain-hunting in restaurants … surely the better entry is through the listed hospitality sector’, says Gary Booysen from Rand Swiss.

SIMON BROWN: I’m chatting with Gary Booysen, portfolio manager at Rand Swiss. Gary, I appreciate the early morning time. On Sunday evening President Ramaphosa put us back into Level 4, closing leisure. We heard Sun International has just closed all the resorts for only the second time ever. The first time was just a year ago. 

A fair bit of sell-off on the JSE yesterday. Should we be hunting around these stocks perhaps in light of the sell-off, in light of the fact that at some point we are going to be through the pandemic and back to some normal?

GARY BOOYSEN: I suppose that’s the assumption – that things return to normal and these companies make it through and you’re going to get a nice kick. If you’d done that after Level 1 lockdown recovered, and the initial sell-off, you’d have done very well. 

Yesterday, if you look at the travel and leisure index, that was down over 7%. You’d got Tsogo falling almost 10%, Tsogo on gaming. And Sun International down over 8%. Famous Brands with the restaurant business only down 4.7%. I think Distell was probably the best of the bunch because it obviously got that underpin from Heineken and was down only marginally.

While this was a big one-day shock after that Family Meeting, if you had been bargain-hunting at the beginning of the year, Tsogo Sun Hotels were up 84% for the year – even after the fall yesterday. If you look at the general travel and leisure index, it’s up 38% year to date. So it has been a case for bargain-hunting and maybe it’s time to kind of go and have a little hunt around again.

SIMON BROWN: I suppose that’s the sense. I was chatting with Nick yesterday – buy the dips. In that case, we were talking about the US and that has worked for a decade. It is a case. Often when it is the darkest that’s when you want to go out there and see what’s available. Some of these are decent companies. They’re having a very, very tough time, but they’re going to come back, normalcy will return and we can pick them up at prices that in a decade people aren’t going to believe.

GARY BOOYSEN: Hundred percent. How does the saying go? ‘Stocks are not often cheap and popular at the same time.’ You get a sense that a lot of the sell-off is very sentiment-driven. Of course, these companies are going to have very, very poor earnings. Of course, their vacancy rates have shot off the roof. Sun International’s closed for the next few weeks, and it’s all over their website at the moment. Of course, we’re going to get very, very bad numbers out of these companies for a little bit, but the question is: will they survive? If you look at a whole lot of different credit-rating audits it does look scary, but if they make it through I think you’re going to be well rewarded. 

There are a couple of things in these businesses that people potentially don’t appreciate when they’re going bargain-hunting; when you get what I’m considering a sentiment trip, a sell-off, a lot of these businesses are backed by very high-quality assets. They can sell off these assets and release a lot of cash. It’s probably not a great time to sell them now, but they’ve done rights issues recently, so a lot of their balance sheets are in such a position that they will make it through. 

At the same time, if you look at the negotiations with their creditors, their covenants have been extended. Okay, Sun International is supposed to start repaying debt, but I’m sure they are back at the table right now saying, “Guys – Level 3 lockdown”. On top of all of that, remember they’ve also got business interruption insurance, which is going to help mitigate the impact of this. At the same time, they’ve gone through this before. This is the third wave that we’re going through, and they’ve learned a lot from an operational point of view. 

Looking at Tsogo’s commentary, they can now be active and reactivate hotels incredibly quickly. On top of all of that, they’ve also laid off a lot of staff. It’s terrible to reduce staff, but at the same time when you’re right-sizing your staff contingent, you generally get rid of the people that you don’t want. You keep the good guys, and that puts your business in a much, much stronger position when things recover. 

So there are a lot of positives within these if you can get through what are going to be very, very shocking numbers. It takes a couple of reporting periods.

SIMON BROWN: I take your point around the assets. I mean, rebuilding Sun City – I suppose you could do it. It’s going to cost you a billion or something. Even many of the hotels, which are well located – they’ve kind of got the land grab. They’ve got the asset and those assets are neither easy to recreate nor cheap.

GARY BOOYSEN: Absolutely. I don’t want to be quoted on this one, but I think it’s between 50 and 60% of their replacement cost; to rebuild these things is twice the price of the asset currently. So for me, it does look like an opportunity. But of course, things are very uncertain. We don’t know what’s going to happen with the pandemic. We are at the Delta variant now; how many more variants are there? 

I suppose the other argument around hotels is this wasn’t a sector that was particularly robust going into the pandemic either. It is a sector that is quite ripe for disruption. You’ve got things like Airbnb coming in; that whole model is an aggressive competitor to them.

But I kind of get the sense that, when you’re going into a pandemic in a very difficult environment, do you back the small owners — moms’ restaurants and the Airbnb guys – or do you back someone that has access to the capital markets and deep pockets, and can ride this thing out? If things get too bad they can sell off non-core assets and focus on their most profitable properties. So for me, if I was looking to go bargain-hunting in restaurants, rather than trying to buy a restaurant directly, surely the better entry is through the listed hospitality sector.

SIMON BROWN: I agree. The risk is of a fourth wave, of course, but at some point this is all behind us. We’ll leave it there. Gary Boysen, portfolio manager at Rand Swiss, I appreciate the early morning.

Listen to Tuesday’s full MoneywebNOW podcast here.

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