Simon's Stock Tips

Founder and director of investment website JustOneLap.com, Simon Brown, is finweek’s resident expert on the stock markets. In this column he provides insight into recent market developments.

- Simon Brown

CITY LODGE

Waiting for recovery in GDP

City Lodge* results for the year to endJune were much weaker than I expected. Revenue was up by 3%, but operating costs were up over 11%. This was coupled with lower occupancies, down from 59% to 55% (61% to 58% in South Africa), and really hurt this largely fixed-cost business. This is an example of how leverage can hurt – as opposed to helping. The net result is headline earnings per share (HEPS) off 19.5% and the dividend down 19.4%. When occupancies return, the leverage will work in a positive direction. But we don’t know when this will happen – I expected the local election in May to help at least keep occupancies stable. The commentary from management states that there are some “encouraging signs”. But, quite simply, what is needed is GDP growth and uninterrupted power from Eskom before things really kick off here. With the horror of a decline of 3.2% in first-quarter GDP unlikely to be repeated, City Lodge has probably bottomed in terms of occupancy. But it needs real GDP growth to improve markedly.

ABSA

Decent, but not thrilling