Durban on track for one of its best high seasons, says Southern Sun

27 Nov 2022

The hospitality group is feeling good about the recent upward trend in leisure travel, with coastal properties performing particularly well. Inland properties, especially those in Gauteng, are lagging, with international and corporate travel budgets under inflationary pressure.

A burning truck on the N3 between Johannesburg and Durban is far more damaging to tourism than reports about sewage in the sea, said Southern Sun CEO Marcel von Aulock, brushing off concerns that the state of eThekwini’s beaches could be a turn-off for visitors to the coast.

And, judging by the number of events and conference bookings for the group’s properties in the city in October, Durban is on track for one of its best high seasons in years.

During a virtual presentation of the hospitality group’s interim results ending 30 September 2022, Southern Sun said it was encouraged by an uptick in room sales in South Africa, which are averaging at 83% of pre-Covid-19 levels, and by increasing occupancy, which has risen from 21.9% a year ago to 46% in the past six months.

Southern Sun has returned to profitability with adjusted headline earnings of R17-million and free cash flow of R191-million from continuing operations, showing an improvement across all regions and market segments, except in Nigeria.

All regions performed well relative to the previous period, given the impact of the Delta variant of Covid-19 and last year July’s rioting in KwaZulu-Natal.

Rugby tournaments and government events, including the African Travel Indaba and the Mining Indaba, made a significant contribution during the period, with the coastal region generating revenue and Ebitdar (earnings before interest, taxes, depreciation, amortisation and rent costs) of R844-million (R412-million in 2021) and R137-million (R23-million) respectively.

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International travel is still quite weak, even though it has improved somewhat, and the corporate market is yet to make a comeback. Southern Sun said this was because of the depressed local economy and businesses holding back on travel spend.

The corporate segment, in particular, has been the slowest to return to pre-Covid-19 levels, causing the inland region — specifically Gauteng — to lag behind other regions in terms of recovery.

Outlying hotels recovered as government activity increased in the lead-up to elections, while Rosebank continued to struggle with little recovery in corporate travel.

Despite this, government, groups and conferencing business in the inland region recorded revenue of R649-million (R251-million) and Ebitdar of R93-million (in 2021, incurring a loss of R17-million) for the six months ended 30 September 2022.

The group has net cash and cash equivalents of R510-million (R489-million) and since 31 March this year, reduced its debt by R315-million to R2.5-billion.

Von Aulock told media that although Ethekwini’s water woes were a concern and “clearly not helpful” to tourism, he was confident that the metro was committed to resolving the problem.

The water crisis was also unlikely to affect leisure travel because many visitors decide to head to the coast at the last minute.

“It’s a loyal market that just goes down to Durban,” he said. “I’m far more nervous about truck burnings and the lawlessness in the Midlands than I am about the status of municipal infrastructure.”

December in the Cape

Stays at Southern Sun’s Cape Town properties were snapped up during the recently completed SunBreaks campaign and have already exceeded 2019 levels, which the hospitality group attributes to the cost of flights and guests booking early to secure cheaper prices.

“We are actually seeing quite a good December uptake. There will still be a lot of in-month bookings that happen, but at the moment we are feeling good about it,” Von Aulock said.

In October 2022 — one of the busiest months for the group — Southern Sun achieved an occupancy of 46% (pre-Covid occupancy would have been at about 60%). Von Aulock said occupancy levels were unlikely to improve until international and corporate travel recovered.

He said although the group was pleased by the recent upward trend in trading and anticipated a return to normalised travel patterns, it would take time for the economy to recover, which required policy certainty from the government and solutions to the country’s ongoing energy crisis, which has had a significant impact on the group’s operating costs.

Rolling blackouts are costing Southern Sun millions. In the past six months, it spent R13-million on diesel in owned units, compared with R1-million spent on fuel in the previous comparative period.

With travel budgets reduced to save costs and customers preserving disposable income, higher transport costs are another travel deterrent.

Southern Sun said it would continue to guard cash flow and liquidity. South Africa’s rising food and fuel prices and increasing interest rates not only affect the group, but also its guests.

The lifting of the remaining Covid-19 restrictions in June 2022 was a consequential milestone, Southern Sun said, because it signalled its transition from survival to recovery.

However, 2021 was a “total disaster” for Southern Sun (formerly Tsogo). No interim cash dividend has been declared for the six months ended 30 September 2022 as the group wants to ensure it meets its obligations until trading normalises. Von Aulock did not see a significant return for shareholders until 2024.

Gaming exit

Southern Sun owns and leases hotels. It manages some hotels for third parties, such as timeshare resorts and gaming, which it hopes to exit by June 2023.

The group was known as Southern Sun before it rebranded to Tsogo Sun. It then split into two JSE-listed companies in September — Tsogo Sun Gaming (TSG) and Southern Sun, and is currently in a transitional period.

That separation agreement was entered into on 26 May 2022, giving TSG the right to terminate the various management and licensing agreements in respect of 15 hotels owned by TSG.

To date, management contracts over seven of the 15 hotels have been terminated, with TSG taking over Montecasino (Palazzo, Pivot and Piazza hotels), Gold Reef City (Gold Reef City Hotel and the Gold Reef City Theme Park Hotel) and Silverstar Precinct Hotels.

Suncoast Hotel, Suncoast Towers, Golden Horse Hotel, Blackrock Hotel (Garden Court Blackrock Newcastle), Garden Route Hotel (Garden Court Mossel Bay), the Caledon Hotel & Spa, Hemingways Hotel, the Ridge Hotel and the Ridge Park Hotel will be integrated in coming months.

Von Aulock said they had unbundled out-of-gaming in-perpetuity management contracts over the hotels because TSG wanted to run the properties, for which they had paid R400-million.

Southern Sun is also planning to offload the group’s entire 75.55% shareholding in Ikoyi Hotels Limited in Lagos, Nigeria, which, if approved, will help reduce the group’s US dollar-denominated debt. Because of the Ikoyi Hotels disposal, the $13-million (R231-million) Ikoyi debt has been reclassified to liabilities held for sale.

Von Aulock said that in the short term, the group remained optimistic that trading levels would continue to improve throughout the summer season.

In the medium term, and in the face of inflationary cost pressures, Southern Sun would continue to focus on maintaining the cost efficiencies that had been achieved through the restructuring that took place in response to the pandemic.

As cash generation improves, Southern Sun wanted to complete some refurbishment projects that had been placed on hold, particularly at flagship properties, but Von Aulock said the group had no intention of expanding its current footprint. BM/DM

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December in the Cape

Gaming exit