BUSINESS REVIEW

Chairman and chief executive's review

CHAIRMAN AND CHIEF EXECUTIVE’S REVIEW

B T NGCUKA
Chairman

A C WIDEGGER
Chief executive officer

 

Being able to adapt to various changes is one of the hallmarks of a dynamic, responsive and sustainable organisation.

 

Dear stakeholder

The past financial year was certainly one of major change for our group, adding credence to the term that in the fast-moving 21st century "the only constant is change".

Being able to adapt to various changes is one of the hallmarks of a dynamic, responsive and sustainable organisation, so we are justifiably proud of our ability to embrace change in all of its guises, whether they be internally or externally focused.

The biggest change that occurred in our group during the year was the stepping down of our longstanding chief executive, Clifford Ross, due to ill health at the end of June. At the helm since 2003, when he took over the chief executive role from group founder Hans Enderle, he was also one of our group's longest serving employees, having started his illustrious City Lodge career in 1987, two years after the group was established.

Clifford played a huge role in guiding our group through growing and maintaining its strong profile in South Africa and expanding its footprint in targeted parts of east Africa and southern Africa. Like Hans Enderle before him, he has left an enduring legacy on which our group can build a very bright future. Our group is sincerely grateful to him for all his commitment and dedication spanning more than three decades and wish him all the very best in his future endeavours.

With effect from 1 July, Andrew Widegger, previously financial director, took over from Clifford in the newly titled role of chief executive officer under a revamped operational structure. This provides our group with significant continuity as Andrew has been a City Lodger since 1993 and was financial director from 1994. During this time, he worked very closely with both Hans and Clifford at a strategic level, and is thus well equipped for his new role.

Our previous divisional director: financial, Alastair Dooley, took over Andrew's previous role in the newly titled position of chief financial officer. Alastair has been with the group since 2009, providing additional continuity in two of the executive director positions.

An exciting part of the new executive team was the promotion of Lindiwe Siddo, who joined the group in 2015 as a divisional director: operations, to the newly created position of chief operating officer. She has also joined the board of directors.

Further streamlining of our operations has also seen the appointment of two new general managers: operations – one to oversee our east African operations and one to focus on our South African operations. This helps to sharpen our emphasis on running our integrated operations as efficiently and as effectively as possible.

Our executive team is working together to galvanise a fresh vision for our group and a strategy is being developed to deliver on this on a sustainable basis. As part of our highly successful and longstanding commitment to service excellence, we are devising an exciting new programme that will focus entirely on the experience which all our stakeholders have when dealing with us. An important component will be an enhanced reward and recognition programme for our employees.

There is genuine excitement about our future prospects and the important role our group can play in providing world-class accommodation and related services, and growing the economies of the countries in which we operate.

VALUE FOR ALL OUR STAKEHOLDERS

Growing our footprint in East Africa, Southern Africa and South Africa

The 171-room City Lodge Hotel at Two Rivers Mall in Nairobi, which opened its first 104 rooms in early 2018, opened its remaining 67 rooms in September.

The 147-room City Lodge Hotel Dar es Salaam is expected to open by the end of October and the 148-room City Lodge Hotel Maputo is scheduled to open before the end of 2018.

In South Africa, the expansion of the City Lodge Hotel at OR Tambo International Airport has been completed. The first 39 of 62 additional rooms – increasing capacity to 365 rooms – were opened in the last week of June and the remaining rooms were opened in September. Construction is under way on the development of the 154-room Town Lodge Umhlanga Ridge, with an estimated completion in August 2019, and final approvals are awaited for the development of the 90-room Road Lodge Polokwane.

Once all these hotels are fully operational, the group will offer 7 991 rooms at 63 hotels in six countries in east Africa, southern Africa and South Africa.

Financial Highlights

Average occupancies at the group's operations decreased by four percentage points to 59% in the year to 30 June 2018.

In South Africa, occupancies declined to 61% from 63% as trading conditions continued to be impacted by low business and consumer confidence. Expectations following new leadership in the ruling party have not yet translated into higher levels of economic activity. The anxiety caused due to a lack of clarity on the policy for land expropriation without compensation, further impacts investor confidence.

Occupancies were also impacted by the Day Zero water campaign in the drought-affected greater Cape Town area which caused some travellers to cancel or shorten their stays. In general, across the country, the length of business travel stays has been shortened, partly due to budgetary constraints.

Botswana occupancies were in line with the prior year, but Kenya occupancies were markedly weaker over the year due to the re-run of the country's elections and an overhang of hotel accommodation supply in Nairobi. There were, however, encouraging signs of recovery in the second half of the year.

The 151-room Town Lodge Windhoek opened towards the end of 2017. The first few months of trading have been slow, reflecting the economic recession in Namibia.

Group revenue for the year dropped by 1,0% to R1,5 billion. Against the backdrop of lower occupancies and increased levels of discounting in the industry, room rates reflected below inflation increases.

On a normalised basis, total operating costs increased by 3,8%, while the headline EBITDA margin decreased by 2,8% points to 37,8% resulting in headline EBITDA decreasing by 8,2% to R566,0 million. Depreciation and amortisation rose by 2,4%, interest income was R2,6 million lower and interest expense was R13,3 million lower as a result of borrowing costs being capitalised during construction activities.

Normalised headline profit before tax decreased by 8,4% to R458,9 million while normalised headline earnings decreased by 8,6% to R331,1 million. Normalised diluted headline earnings per share were down by 8,8% to 760,6 cents.

The process of obtaining approval from the Kenya Revenue Authority for the Investment Deduction tax allowance on the development of City Lodge Hotel at Two Rivers Mall in Nairobi, has commenced. This will lead to a zero normal tax charge for the entire Kenyan operation, including Fairview and Town Lodge, until such time as the allowance is fully utilised. The application is based on a claim of 150% of the cost incurred, however, only a 100% claim was accounted for until it is finally approved. There is therefore a cash flow benefit due to the suspension of normal tax payments, until such time as the allowance is fully utilised.

In line with the group's established policy of paying out 60% of normalised headline earnings, adjusted for unrealised foreign exchange gains and losses, a final dividend of R2,01 was declared, bringing the total dividend for the year to R4,54, which is a decrease of 9,2% on the previous year.

On 6 July 2018, the Central Bank of Kenya ("CBK") announced that SBM Bank (Kenya) had commenced with the acquisition of certain assets and the assumption of certain liabilities of Chase Bank Kenya in receivership, in line with its announcement on 17 April 2018. It also announced that this process would be completed by 17 August 2018. The announcement did not, however, give an indication as to when the funds held in the bank would become available to depositors, although funds were made available later in the month. No further adjustments were made to the impairment previously recognised due to the lack of certainty around the timing thereof, which given recent developments will now be reconsidered in the new year.

Continuing to develop our people

As our group is so heavily dependent on its people for its ongoing development and success, it is extremely gratifying to note the ongoing achievements and progress guided by our human resources ("HR") department which is fully focused on developing individuals whose skills can benefit our group and the broader economy.

Some of our HR highlights in the 2018 financial year were the promotion of 28 staff members, including one general manager from our Accelerated Development and Deployment Programme, through internal development.

An impressive total of 15 631 training interventions were attended by staff, while 144 employees are working towards attaining their City and Guilds qualifications in various disciplines from skills programmes up to advanced diploma-level qualifications.

Maintaining and advancing our technology edge

Technology, in its various forms, continues to be a major enabling factor within our group, but also a very important interface for doing business and meeting the communications needs of our guests.

Our investment into technology platforms continued during the year with a significant focus on stabilising the existing environment and resources for our expansion beyond South Africa, while piloting a number of new platforms for future consideration.

These initiatives include:

  • Introduction of enhanced technology services for guests and staff
    • Our new hotels in Kenya and Namibia provided the ideal opportunity to adopt new technologies, providing our guests with a richer experience. These include larger in-room TVs hosted on an Internet Protocol ("IP") basis, allowing for broader channel selection, optimal picture quality and advanced interactive TVs. Responses from our guests have been extremely positive and we will continue to invest in this service during refurbishments of our existing hotels and the development of new ones. Legacy telephone systems are also being replaced by IP telephony.
  • Extension of our guest WiFi and fibre contract
    • This is based on positive responses from our guests over the past three years providing the platform from which to embrace further technologies, such as WiFi calling, TV casting and streaming capabilities, which we continue to investigate.
  • Introduction of a mobility platform for our guests
    • We continue to look into further enhancing the guest experience by enabling guests to make greater use of their mobile devices to interact with us.

Since launching our "Lodgix" Property Management System and "Rewards" loyalty system over the past few years, we have also been able to develop our own enhanced analytics capability. A new Business Intelligence tool has been introduced and is being enhanced to improve decision-making and proactive management in various aspects of our business.

Sales and marketing prove their worth

As a growing group in a competitive environment, sales and marketing activities continue to be important support drivers for our business.

It is gratifying to note that social media interaction with our guests is increasing and that we are attracting more followers on our chosen platforms. Online booking channels are also increasing in importance across our brands.

Brand tracking has become an important tool for us to be able to assess our strengths and weaknesses and where gaps may need to be filled in our product and service delivery strategies. Our innovative Bid2Stay online auction facility has been refreshed, making it more attractive to potential users.

In our sales department, we have moved to more full-time personnel, complemented by some part-time positions. From a marketing point of view, we have implemented some carefully targeted radio and outdoor advertising campaigns (some of which are included in this report) to increase awareness of our brands and the features and benefits they offer to guests.

Outlook

Our 34th year of operations started with a continuation of the soft trend experienced in the 2018 financial year. Within South Africa, it is unlikely that there will be a meaningful change in consumer and business sentiment and confidence until after the country has held its general election, which is likely to take place in the second quarter of 2019. The outlook for our hotels located outside of South Africa has shown encouraging signs of improvement and the group will benefit from the opening of our new hotels in Kenya, Tanzania and Mozambique.

Thanks

Our thanks once again go to each and every one of the special stakeholders who have helped us to continue achieving our aim of providing quality accommodation and services for business and leisure travellers from South Africa, elsewhere in Africa and around the world. These of course include those two very important sets of people – our staff and our guests – as well as our board, our suppliers, our shareholders and the communities in which we operate.

City Lodge