Episode Transcript
The Finance Ghost: Welcome to episode 282 of Magic Markets. It's going to be a good one this week, even though the weather is not so great down here. We'll be talking about the tourism sector.
Of course, it is summertime for you in Canada, Moe, so maybe it's slightly more appropriate for you. Although I did at least get to go to Franschhoek for Bastille Day this weekend. So, tourism is still an option in winter. Just a little bit easier in summer, isn't it?
Mohammed Nalla: Indeed, Ghost. I love doing these holiday shows, certainly when it's holiday season up here in North America. Yes, we've just gone into summer, and so it's a really nice time to look at what's happening in the hospitality sector.
Interestingly enough, down in South Africa you've got a couple of names in that hospitality sector. You've got some casinos; you've got some hotels.
But up in North America, you get the full - let's call it, the full dashboard when you're looking at hospitality. Because you cover hotels, you cover platform businesses like Airbnb, you cover casinos, you also have those big cruise lines, which we've covered in Magic Markets Premium as well.
And so what I want to do this week is I want to give everyone an overview of what the sector looks like, what the recent performance has done, and then also maybe just a little bit of what the sensitivities are to the various angles of this particular sector. That's what I want to cover this week.
Ghost, maybe if you can just give us a run through in terms of what you're going to be looking at, and then we can jump right in.
The Finance Ghost: Yeah. So, I'm going to touch on how the tourism sector is a much bigger portion of South Africa's GDP than you would think if you looked at the JSE, because our choices on the public markets here are rather thin.
There are some very good companies, but just not many of them. And then on that note, I'll be touching on a couple of the options there, City Lodge and Southern Sun specifically. So, looking forward to that. But Moe, I'll let you kick us off first.
Mohammed Nalla: That's fantastic, Ghost. And even before I jump into that, you mentioned how important tourism is to South Africa as a percentage of GDP - but another very important point you have to note, and maybe you'll touch on this, is just how important it is to overall employment, because certain sectors do just employ lots of people.
Hospitality certainly is one of those, not just in South Africa, but even if you look at it up in North America. And so that's an important point when contextualising the macro story.
Up in North America specifically, there are lots of angles to this hospitality sector. If you look at hotels (and there are a couple of big names there, you're going to recognise them), Hyatt was actually one of the stronger hotel names over the last quarter.
The reason I'm highlighting that specifically is it's going to show us something very interesting in terms of the nature and just how the overall consumer story in the US has behaved.
Then you've got the more mid-level; Marriott, Hilton. Those have held up well as well. But the read through right now is, given that performance you've seen from Hyatt recently, and even if you look at some of the other sectors as well, you're getting this bifurcation in terms of the US consumer.
The upper end of the market, the luxury market, the slightly more affluent traveller, that's done really well, that's held up. The more middle-market traveller, the lower-income traveller, that sector has actually struggled quite a bit.
Then if we move on to platforms like Airbnb, Expedia: those have certainly seen a little bit better recent momentum. Booking.com, another platform business, that was weaker, but that's also because they were really, really strong earlier on in the year. So, there's probably a little bit of base effects that come through there.
The other sector I want to touch on (and I know I'm going through this quite quickly, but if I tried to go into each of these names in a lot of detail, we'd be here for like a one- or two-hour show) - let's go into casinos. This is a sector that's really been quite, let's call it, visible in North America. I think it's maybe the same down in South Africa.
And the reason I say this is that the casino stocks up in North America, not just the hospitality segment, but online gaming has certainly become a very big thing as well. I literally know every time I'm watching something, if I'm watching the World Cup, if I'm watching anything on TV, predominantly I'm now seeing advertising for these casino groups.
And one of those that was actually a standout, not just in terms of visibility but in terms of performance, was MGM. So that certainly has stood out. But other names have been quite mixed, and some have actually struggled in that sector.
And so the read through for me in terms of casinos is that it's not just a simple trade. You're going to have to actually look for the quality that's coming through, as well as what some of those players are doing on the online platforms, because that is effectively the asset-light part of the model that comes through.
And then lastly, Ghost, in terms of just a sector view, cruise lines: that's really a tough sector. And the reason I say that is it's probably the most cyclical part of the hospitality industry. The reason for this is because you get a lot of impact coming through from fuel prices. And we know what's happened with oil prices.
And so, if you're looking at that, we've had a bit of a recovery come through in terms of the cruise names. Royal Caribbean and Carnival, again, both of those are stocks we have discussed in Magic Markets Premium.
But if you ask me, if I'm looking at this entire hospitality sector, my preference, certainly for the higher-quality names that are exposed to the upper LSM, the wealthier consumer, and then I would say cruises, that goes far down the list, simply because of what you have happening in the global geopolitical scenario.
Last point on that: uncertainty really hits this industry quite hard if you're looking at it from a macro level. You've just got to look at consumer confidence when there are geopolitical concerns. I mean, that popped up on a lot of these companies' recent announcements and earnings and so forth.
And that's because people don't actually need to be flying into a conflict zone in order for them to consider postponing their travelling. And they just need to postpone - they don't even have to cancel completely, they just need to postpone, and that starts to come through with quite a heavy impact in terms of company results.
The Finance Ghost: Yeah, exactly. It's a little bit like the show we did with the team from Aylett recently, actually, on alcohol stocks, where we talked a bit about how it's not about abstaining entirely, it's just someone cutting their consumption by one drink out of three or four. And then in percentage terms that becomes really interesting, and you get into a quality or quantity debate.
I guess it's a bit like that with tourism, Moe. If someone just delays a trip to respond to what's going on geopolitically, then suddenly all of the usual supply and demand trends just completely fall over, right?
We saw it with the Iran conflict and hotels in Dubai at completely insane prices. And of course, in retrospect, the right decision would have been, well, go on holiday in Dubai, you would have probably had a great time at a very low price. People don't think that way. They're not prepared to take the risk when things go crazy in the world.
Mohammed Nalla: Yeah, and that's really the point. It's why the sector is as cyclical as it appears. It really does filter through. And it's why when you're looking at some of the macro indicators, and I'll touch on that, because we do discuss macro quite a bit.
When you're looking at macro indicators, and if you want to map that to the hospitality sector specifically, you look at the normal stuff. You look at the labour market. You know what's happening with jobs. If people don't have jobs, they can't go on holiday. What's happening with real incomes? Are they increasing? Is inflation eating away at that?
That's the simple stuff.
But the two that I would say map very directly to a cyclical sector like this – the first would be consumer confidence. And that's exactly to the point you just mentioned. If consumers feel good and if they're confident, they're going to book holidays, but even if they're just a little bit nervous, those trips get postponed. You just need the change at the margin and that starts to hurt quite a bit.
The other one I would map very directly to a specific subsector would obviously be fuel and FX, simply because of that impact on cruises. But remember, it's not just cruises. I mentioned cruises. We haven't even touched on airlines, because airlines plug directly into this.
I wouldn't include it in hospitality, but it's part of that overall travel and experience bucket, if you want to call it that.
Right now, it's interesting that a lot of these stocks have done as well as they have over the course of the last quarter, but I don't think it's an easy, “Hey, you know what? We're out of the woods. Trump's actually got a ceasefire on or doesn't have a ceasefire on. Let's go and travel”. I think that uncertainty comes with a lot more of a premium or discount than it would under ordinary circumstances.
The Finance Ghost: So, Moe, should I maybe touch on a couple of the stocks that you can get your hands on, on the JSE in this space?
Mohammed Nalla: 100%. Tourism is a very important sector down there. I would see it as one of the highest-potential sectors in South Africa, along with agriculture, just for that point I mentioned earlier: the ability to absorb labour.
But again, it's close to home and it's a beautiful country. And so, I really want to hear what's happening with some of the hospitality names down there, specifically on something I haven't touched on in detail (but I think you'll have the opportunity to do so because you're going to cover a couple of stocks there) is, what's happening with occupancies?
When you're looking at hospitality, it's not just the overall trend: “Are consumers happy?”
It's what does that translate to in terms of that metric we call RevPAR, revenue per bed effectively.
Because South Africa is going to benefit not just from international travel, but what's happening with a domestic travel story as well. I’m very keen to hear your views.
The Finance Ghost: To set the scene, let me comment first on tourism as a percentage of South Africa's GDP, because the point I want to make here is that it is actually very underrepresented on the JSE.
So, if you go and ask Google for the answer, then you will find that tourism is around 4.9% of South Africa's GDP on a direct basis. Put in the indirect contributions and you're going to get closer to around 9%.
Other estimates suggest 1.8 million direct and indirect jobs. Stats SA reckons that 85% of total expenditure is domestic tourism and the other 15% is inbound. So, we do rely somewhat on international tourists to achieve these numbers, but it's lots of local travel as well.
Now, obviously these indirect numbers are a guess at best, like all statistics. But one thing is clear: tourism is a very big contributor to the South African economy, and it is a relatively modest part of the investable universe on the JSE.
Now, there are obviously some look-through exposures, like, for example, the V&A Waterfront within Growthpoint, which benefits tremendously from local and especially international tourism. But that is not a clean view on tourism. You can't go and buy Growthpoint and then pat yourself on the back that you went and bought a “tourism asset” because you're getting everything else in the group as well.
I also want to mention Zeda in this category. That's Z-E-D-A, not Zeder, the agricultural company. Zeda is a mobility group, so you'll find some car rental stuff in there. Obviously, that is directly related to people needing to get around, and you're going to want to rent a car somewhere other than where you live. Hence, it becomes a tourism play.
But again, loads of other noise in there: fleet business, that kind of thing. So not a pure tourism play.
I know that you mentioned a little bit of the gaming assets and some of that, but I'm going to scope it out here because in South Africa, and I think it's the same internationally, the casinos are really struggling with online betting as a huge disruptive force.
So, it’s not really a direct link to tourism. I'm not sure too many people are travelling around these days to go to a casino specifically, so I'm going to leave those out for now. And we don't have any listed airlines either anymore.
So essentially, if you want to participate in tourism on the JSE, then you're going to have to get involved in the hotel groups. That's really your only option.
The first one I'll highlight, and this will give you some of the information around occupancy that you were looking for: City Lodge. So that share price is up 12% over 12 months, but it's down 15% year to date. Very much a victim of concerns in the market around how the Iran war has affected tourism, and that's even though City Lodge is more of a domestic play.
But obviously when petrol prices go through the roof, then domestic flights become way more expensive. Same with getting in the car and driving around as a family of three or four or even five. Chances are you just can't afford that holiday that you were hoping to take.
Now, we haven't seen numbers to confirm this yet because the last set of numbers we saw were for the six months to December 2025. Obviously quite outdated now.
Revenue was up 12%. Adjusted EBITDAR, that's with the R, which is the hotel industry standard, that was up 16%. Adjusted headline earnings per share was up 33.2% (and the adjustment there relates to Forex). So really good numbers from City Lodge in their last period.
But, when they released those numbers, they did indicate the January and February occupancy numbers were actually down year on year, or percentages at least. So that gave the market some jitters to think about alongside the Iran issue, which really only kicked off, obviously, from March.
To give a sense of their balance sheet, net debt: R170 million versus lease liabilities at R1.36 billion. Now that is just so interesting because actually their model is not primarily one of leases, it's to actually own their properties, as I understand it.
But you have a scenario where you've got the lease liabilities are based on what they are currently paying on leases, whereas a lot of why they would have debt would be capex and stuff on existing properties, which in turn are carried at historical cost.
So, if you look at their balance sheets, you get land and buildings coming in at R1.6 billion. Doesn't sound like much versus lease liabilities at all. But as I say, it's because actually these properties are being carried at very outdated numbers. This is obviously one of the arguments that people make in trying to support the valuation.
Share price currently at R4.40 when I looked earlier, versus a net asset value per share of R2.31. I don't think NAV is super useful here at all, as I say, because the book value is so outdated. I would look at the PE ratio: 13.4x. Dividend yield: 3.8%. Moe, you'll probably like that because you do like a divi.
I do actually have a small position in City Lodge, but I'm not adding to it currently because I just want to see what the occupancy did over the recent months. I suspect that they struggled, but we'll see. They were also in a net debt position as at the last financial period. So, there’s some reason for caution there.
And then I'll finish off my section by just talking about Southern Sun. Very different balance sheet to what you're seeing at City Lodge, and actually quite different underlying exposure as well. Southern Sun is way more about conferencing and international tourism, certainly than City Lodge.
At Southern Sun, the share price is up 3.3% over the past year. It's down 2% year to date, so very flat. Not a huge amount of activity here. Last set of numbers they released were for the year ended March 2026. So that's a very different period to City Lodge's six months to December. So just be careful with that.
Their income was up 9%, their occupancies were up 2.1 percentage points. Adjusted HEPS up 19%, dividend up 20%. All looks really good. Some very lumpy stuff in here as well, like the G20 summit in Gauteng. So that is something to just keep in mind.
And the balance sheet here is in really good shape, which is why I wanted to mention it. Net cash position of R86 million versus the net debt position of R266 million they were in a year prior, puts them in such a good position to actually do deals at potentially a difficult point in the cycle, which is when you want to be able to do deals.
But those deals are not the easiest to come by. For example, they were going to acquire the share in the Sandton Consortium properties from Liberty Group, but then they got squeezed out by Pareto. So, lots of history there. Pareto and Liberty and everything else. And unfortunately, Southern Sun got squeezed out of the transaction.
So, they are sitting on this wonderful balance sheet and it's going to be very interesting to see what they do with it. Dividend yield almost 3%. So, you are being paid to wait around as an investor. PE only 11, so lower than City Lodge. And also, a really good management team at Southern Sun. We have a lot of very good management teams on the JSE. This is certainly one of them.
But this is a more complicated group than City Lodge because of the reliance on inbound international travel, big events, summits, that kind of stuff. And also, Southern Sun does have an international business, which is another level of complexity here.
So, is that complexity priced in? I guess that's the big question here. It's a good business. I'm not a shareholder at the moment, but it's something that is on my radar.
And I think those are two of the more interesting pure-play options on hospitality that you'll find on the JSE, Moe.
Mohammed Nalla: Yeah, Ghost, that's very interesting. I'm almost a little bit jealous because you got to really home in on the numbers there because you're looking at a much smaller industry, I guess, up here. I mean, it's just so diverse.
And maybe just to kind of balance this out, because I do want to look at some numbers. You've discussed performances, certainly over the last 12 months. Specifically, I want to highlight the massive dispersion that you've actually seen internationally.
Yes, like you say, sometimes it can be quite lumpy. You had the G20 summit down there. That's contributing to some of the lumpiness in the earnings. I'm going to exclude airlines simply because with airlines up here, similar to what you mentioned with the car rentals, you pick up a lot of business travel that comes through there as well.
And airlines over the last 12 months up in the US have been really stellar performers. So, I'm going to actually exclude those, because it does muddy the picture if you're just looking at hospitality.
Interestingly, when you mentioned car rentals, I went and had a look at Hertz, the name that came to the top of mind. It’s been an absolute dog over the course of the last 12 months. So very interesting to see some divergences there.
But when you're looking at the hotel groups up here, over the last 12 months, the standout performer in terms of the stocks that I mentioned earlier is Expedia, up around 45%.
Now, if we compare that to the performances you've had down there in South Africa, you can just see completely different playing field, right? 45%, that's the number one position.
But then those hotel groups that we mentioned. Marriott is up 30% over the course of the last year. If you have a look at Hyatt, which has really performed well in the last quarter, that's up around 25% then thereabouts. So, there are some really strong double-digit performances over the course of the last 12 months.
Those are just some of the strong names though, because if you look at some of the other names that were a lot weaker in the sector, Booking.com, another platform business, shows the complete opposite to Expedia. I think I mentioned Expedia as the top performer, right?
If you look at Booking.com though, that's actually traded a lot weaker and is actually the weakest performer in the subset I'm looking at. It's down around 24% over the last 12 months. So, you can't just say, “Hey, I'm buying platforms, I'm buying this mega theme”. There are underlying operational performances that you've got to be aware of.
And then to your point around casinos - up in North America, yes, it's the casino properties and so forth, but a lot of the big players here, specifically a player like MGM that has done really well, they've actually built out a very impressive online gambling platform, and that's really what they've been advertising.
When you see an MGM advert, it's not, “Hey, come to our casinos”. They're now advertising their online platforms. And so that's contributing to a lot of that upside, that bullishness that has come through in that sector specifically.
To wrap up on this, Ghost, I personally at this point in time don't have any exposure to the hospitality sector directly. It's just way too cyclical. There's a lot going on. But if I were to consider exposure, it would be in the asset-light names. I think you get a lot of operational leverage coming through there.
Heck, maybe even a player like MGM, if you don't have any qualms around that from a, “I don't want to invest in casinos,” kind of thing. That's really been a strong player and perhaps is one that we need to cover in Magic Markets Premium just to go and have a look at what some of the underlying drivers are in the business.
But unfortunately, that does go beyond the scope of what we can cover in the show this week. This is really a whirlwind tour from a macro perspective. I like some of the names that you've actually highlighted down in South Africa.
I think tourism is going to remain a very cyclical sector. So, bear in mind, where are we in the global economic cycle? There's a lot of sensitivity that's going to come through there. And that's probably the reason why I'm going to be a bit gun-shy, not looking to actually add exposure to the sector right now. If I were to do that, it would require a lot more homework.
But what do you think as our listeners, as our subscribers? That's where we've got to leave it this week. Let us know.
On social media, it’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X. Or go and find us on LinkedIn. Pop us a note on there. We hope you've enjoyed this. Until next week, same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
