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The Finance Ghost: City Lodge dusts off the tourist welcome mat

The Finance Ghost: City Lodge dusts off the tourist welcome mat
The Finance Ghost
By The Finance Ghost
26 Feb 2023
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South Africa’s hospitality business is thrilled to see the back end of Covid and the subsequent return of tourists to restaurants and hotels across the country.

Tourism is back with a vengeance, which is fantastic news for South Africa’s economy and terrible news for menu prices and traffic in Cape Town. City Lodge couldn’t be happier, with its books comfortably back in the green.

City Lodge achieved headline earnings per share (Heps) of between 12.6c and 14.5c for the interim period. That’s a vast improvement on the loss-making comparable period that was marred by the pandemic. This range excludes the one-off settlement for business interruption insurance.

If earnings looked good again, why did the share price fall by more than 12.5% in the aftermath of this release?

The problem is that although City Lodge is profitable again, that Heps range was lighter than expected. With the interim period covering the six months to December, this is when City Lodge should have made a fortune.

Even if we recognise that the recovery in the non-summer months probably still has some way to go, the share price at the start of the week of nearly R5 looked rich compared with those earnings.

Using an annualised price/earnings multiple based on these earnings is fraught with danger. Still, it gives a quick and dirty guide for whether the share price still looks too high.

If we take the midpoint and annualise it, the price/earnings multiple is 15.9x even after this share price drop. And that’s … a lot.

The right kind of Mpact


In stark contrast to City Lodge, recycling and packaging group Mpact enjoyed a rally of nearly 9% over the past week.

For the year ended December, revenue from continuing operations was up 7%. This doesn’t tell the full story of the core operations, as the base period included a major distribution agreement that Mpact terminated. 

Without that impact, revenue would have been up by 15% and volumes by 6%. The difference between revenue growth and volume growth is explained by pricing increases, so Mpact has been a beneficiary of inflation.

Mpact’s volume growth was largely driven by its paper business, as the plastics business saw flat volumes year-on-year. Adding to the paper story, Mpact plans to invest R1.2-billion in its Mkhondo paper mill to better meet the growing demand from the export fruit sector.

Adcock Ingram: No bitter pills to swallow here


Another happy story on the market last week was Adcock Ingram, which rallied nearly 6% on the news of a much higher dividend. Despite relatively modest top-line growth, the dividend was up by a stunning 20%.

Adcock Ingram managed to overcome the gross margin pressures that are a reality in this market. The single exit price increase is regulated each year, with a particularly low increase of just 3.28% granted for the forthcoming year.

With substantial cost pressures in the manufacturing process, Adcock Ingram has warned shareholders that gross margins are almost certainly heading in the wrong direction.

Perhaps all that really matters is demand for Panado, as normalisation of demand in that product was largely responsible for a drop in volumes of 5.4% in consumer business.

Investors will keep an eye on the hospital segment, which saw turnover decline by 2.2%.

Although Adcock Ingram somehow managed to extract trading profit growth of 10% from that segment despite the dip in turnover, that’s clearly not sustainable.



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Aveng: Not flat


There was a time when Aveng was hugely popular among retail investors, not least of all because you could buy at 1c per share and sell at 2c per share, doubling your money each time.

A major share consolidation has stopped that madness.

The balance sheet has been the focus area for investors, which tells you how much trouble Aveng was in. The company is about to settle all its legacy debt with the proceeds from the Trident Steel disposal.

The world isn’t flat and neither is Aveng’s earnings growth, despite the company claiming otherwise. Earnings for the six months to December fell by 9.5% from R53-million to R47-million, with local business Moolmans as a pressure point in the group.

Someone needs to explain to Aveng what “flat” means.

If it glitters, it’s not AngloGold


In one of Warren Buffett’s famous quotes he talks about how “anyone watching from Mars would be scratching their head” while watching people digging gold up and then paying people to guard it, with almost no utility along the way.

I got tired of scratching my head, so I sold my gold positions earlier this year after a significant rally in the metal when the market hoped that the Fed was coming to the end of the hiking cycle. Recent economic data out of the US suggests otherwise, so gold has once again behaved in a way that bitcoin fans (annoyingly) love seeing.

The real losers here are the gold mining houses (and their shareholders). AngloGold fell more than 5% last week, although the release of results is only part of the reason here. Mining companies rise and fall in line with commodity price movements, with results usually not causing much of a stir.

Poor AngloGold did its best, increasing production by 11% in 2022. This helped to drive an increase in all-in sustaining costs per ounce of just 2%, which is a really solid outcome in an inflationary environment.

Sadly, the gold price just refuses to play ball, so adjusted earnings before interest, taxes, depreciation and amortisation were lower anyway.

As an inflation hedge, gold has failed miserably. As has so often been the case, the Oracle of Omaha was right about this one. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly DM168 newspaper, which is available countrywide for R25.

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