Unpopular hospitality shares starting to show value for investors

While the South African hospitality industry continues to struggle through what has been a particularly grim few years, value based asset manager, RE:CM, says that opportunities in certain listed stocks in this sector are starting to appear for investors

According to Faure Heymans, analyst at RE:CM, the hotel industry’s cycle has been moving lower for the last couple of years. "Margins in the hotel industry have been under pressure since 2008. The expected bonanza in 2010 never materialized and resulted in a significant increase in available rooms. It is unbelievable that hotel rooms, with a multi-decade useful life, were being constructed for a six week event."

"The expectations created by the FIFA world cup led to a 9.5% increase hotel rooms in SA in 2009. Major metropolitan areas however, saw increases well above 10%. The increase in demand from visiting soccer fans was easily absorbed and by the end of 2010 the industry had excess supply and margins collapsed."

Heymans adds that occupancy rates are still currently under severe pressure. "Occupancy rates are at their lowest in more than a decade with some of our investee companies remarking that this is the worst slump they’ve seen in 50 years.”

He believes that some hospitality businesses are currently presenting good opportunities for investors looking to achieve long-term capital growth by investing in shares that are trading at low multiples. "It is interesting to see corporate money beginning to flow into hotels. Recent activity in the market includes Protea setting aside cash for buying distressed assets, Tsogo Sun buying 100% of Formula 1 at below replacement value and a number of smaller distressed asset acquisitions by investee companies.”

Although the hotel cycle has been a lengthy one in the past and a recovery may be some time off, history has shown that it will eventually turn. "As investors who are prepared to take uncomfortable positions with a longer time frame, we feel there is value in specific listed hotel stocks, some of which are trading as low as 50% below the replacement value of the net assets.”

He says the market is offering investors a group of operational hotels at less than half of what it would cost to reproduce them. "Unfortunately the fact that we are still building positions in these stocks, precludes us from further disclosure. As usual our plan involves finding assets which the market has priced below intrinsic value and our clients reaping the rewards when the cycle turns,” concludes Heymans.