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Tsogo Sun cautious on hotel sector recovery in 2020

But the hotel group’s CEO says there is enormous longer-term upside potential for tourism growth in SA.
Hospitality Property Fund's Southern Sun The Cullinan Hotel in Cape Town. Image: Supplied.

Despite government’s U-turn on unabridged birth certificates for foreign minors travelling to SA, the relaxation of visa rules and Cape Town’s drought being over, the boss of JSE-listed hospitality giant Tsogo Sun Hotels remains cautious about a robust recovery in the hotel accommodation sector next year.

Marcel von Aulock, CEO of Tsogo Sun’s recently unbundled hotels division and chairman of Hospitality Property Fund (HPF), says while there are positive signs, the biggest factor that will drive a sustainable recovery in the sector is stronger economic growth in the country.

Read: SA’s international tourist arrivals ‘not looking good’

He was speaking to Moneyweb this week, following a presentation to investors on Tsogo Sun Hotels Limited and HPF’s latest results for the half-year to September 30, which came out last week.

Marcel von Aulock, CEO of Tsogo Sun Hotels. Image: Supplied

Tsogo Sun Hotels is the country’s largest listed hotel group, with 113 hotels across the country. It also has a majority stake in JSE-listed HPF, which is SA’s only hotel-focused real estate investment trust (Reit). Together the groups own around 10 500 hotel rooms in the country.

Read: City Lodge shares fall more than 8% on negative trading update

The new separately-listed Tsogo Sun Hotels business also manages Tsogo Sun Gaming group’s casino-based hotels in the country and a few third-party owned hotels. Altogether it manages more than 14 400 hotel rooms in SA. In addition, Tsogo Sun Hotels has properties in Mozambique and Nigeria, as well as stakes in UK-based hotel groups.

“The SA hotels industry has been pretty stable; however, it is not growing at the rate that we would like it to grow,” says von Aulock.

“We are seeing pressure particularly at the bottom end of the market, but there are some green shoots…. Finally addressing the unabridged birth certificate and visa issues is a big move by government. It was ridiculous what they did in the first place, but the fact that they’ve finally addressed the issue properly is encouraging,” he adds.

Listen: New visa changes to ease SA entry

Von Aulock notes that Tsogo is seeing “some relatively good” forward bookings for the holiday season and believes corporate travel will be good for the first quarter of next year.

“We are cautiously optimistic for the short-term into next year as it still is a tough operating environment…. However, there is enormous longer-term upside potential for tourism and business tourism growth in the country,” he says.

Tsogo Sun Hotels reported headline earnings per share of 5.2 cents for the half-year, which marks the group’s first set of financial results following its unbundling from the bigger Tsogo Sun Gaming group in June.

The hotel group recorded R2.1 billion in income for the six months to September 2019, while operating profit came to R320 million. It noted that profit attributable to equity holders of the company came in at R54 million.

Read: New York direct flights a boon for Cape Town tourism

In line with its pre-listing statement in June, Tsogo Sun Hotels did not declare interim cash dividends for the period. The group plans to apply cash resources generated during its initial 15 months post the listing towards settling its offshore division’s dollar-denominated interest-bearing debt.

Von Aulock tells Moneyweb that this dollar debt stands at $85 million and relates to the group’s offshore hotel acquisitions in the UK as well as properties in Nigeria and Mozambique.

“When Tsogo Sun Hotels was part of the bigger Tsogo Sun Gaming group, this debt was manageable. However, with Tsogo Sun Hotels being a separately-listed group now, we are not comfortable with the level of debt. We told the market before the unbundling that we would withhold paying dividends for the first 15 months or so in order to pay off our dollar debt.”

Meanwhile, HPF saw its distributable earnings for the half-year to September decline by 9% to R215 million.

Read: Rising Cape Town dam levels to buoy agriculture and tourism

This was despite an uptick of almost 4% in hotel occupancies within its large Western Cape portfolio (55.7% for the half year), which showed a recovery following the drought. The group’s performance was hit by weaker Gauteng hotel occupancies for the period, which dropped to 59.1%, compared with 61.7% for its corresponding half year. Earnings were also affected by an R11-million settlement, related to a shareholder appraisal rights issue.

Tsogo Sun Hotels holds a majority 59.2% stake in HPF, which owns 54 hotels in SA including flagship properties such as Cape Town’s Southern Sun The Cullinan Hotel and the Westin Hotel, which is part of the Cape Town International Convention Centre complex.

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