The Finance Ghost: The lowdown on Growthpoint, City Lodge and Bell

17 Sep 2023

Growthpoint is struggling to get decent returns from its own portfolio, yet investors are ploughing into the healthcare and student accommodation assets it manages.

Distributable income going up is definitely better than it going down, so growth of 1.3% in Growthpoint’s dividend in FY23 could be worse. It needs to be a whole lot better, though, as you can crush that return just by opening a savings account at your bank.

It’s going to get worse before it gets better, with a sombre outlook for FY24 showing an expected drop of 10% to 15% in distributable income per share. Ouch. When you consider how hard growth is to come by in South Africa, that’s a lot to claw back.

The V&A Waterfront is a star performer, at least, with a 21.5% increase in Growthpoint’s share of distributable income. The rest of South Africa isn’t so great, with negative reversions on leases and challenges in renewals in general, causing a 4.4% decrease in funds from operations per share.

Growthpoint has been steadily reducing its local exposure, selling 29 properties totalling R1.5-billion in this period. R11.2-billion of local exposure has been sold since 2016. Only one property worth R18-million remains for sale at this stage.

The grass isn’t always greener on the other side, though, with the valuation of the Australian portfolio under pressure.

Yet, despite all this pain in property, Growthpoint Investment Partners is somehow managing to increase assets under management. Growthpoint is struggling to get decent returns from its own portfolio, yet investors are ploughing into the healthcare and student accommodation assets it manages. Assets under management grew 14.7% and management fees jumped from R67.2-million to R98-million. Go figure.

City Lodge: room for growth, but can it get pricing up?

As Covid-19 continues to slip further back in our collective memory (remember that time when we couldn’t leave our houses?), City Lodge Group’s occupancy rate has skyrocketed, climbing by 18 percentage points year on year to 56% for the year ending June 2023. It surpassed the 55% mark from FY19, before the pandemic hit the industry.

Don’t bother drawing a share price chart from 2019 in the hope that we will get back there, as City Lodge had to raise a great deal of equity capital and there are many more shares in issue. Still, an occupancy result like this should be propping up the share price, so why isn’t that happening?

The answer lies in average room rates. Although they rose by 12% compared with last year, they still lag behind pre-Covid levels, raising doubts about pricing power. It doesn’t help to fill the rooms if you’re not doing it at attractive rates.

The highlight is the food and beverage strategy, which is thriving. It now contributes 17% of total revenue, up from 15% last year.

This diversification proved invaluable, especially in a market dealing with load shedding and a need for people to find an oasis of electricity and coffee away from home. The gross profit margin on food and beverages improved from 55% to 58% year on year.

Ebitdar (the industry-standard metric, with that “r” included) increased by 83% year on year, with the margin rising from 27.5% to 32.4%.

A dividend of 8 cents per share has been declared, with the balance sheet in better shape.

But as strong as this all sounds, the investment case needs room rates to recover fully because of substantial cost pressures, including a 19% increase in property costs.

The new financial year is off to a decent start, with occupancy above 60%. We just don’t know what the average room rate is.

Bell Equipment: where did all the cash go?

You always have to be careful when a share price shoots straight up. Bell Equipment moved from R16.50 to more than R18.50 in two days. It’s now back at around R17.00. If there’s one thing I’ve learnt in the markets, it’s that sudden moves like to close the gap and consolidate somewhere in the middle.

After the excitement about the trading statements released by the company, perhaps the market got nervous about the cash flows.

There has been substantial investment in working capital. In fact, of cash generated from operations of R791-million in the six months to June, a whopping R757-million got caught up in working capital. That’s before paying interest or taxes, so there was a cash outflow of nearly R398-million.

Although the concept of a cash outflow in the interim period isn’t new, the quantum probably raised a few eyebrows.

There’s no interim dividend, so investors have to be patient for a final dividend. DM

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 Daily Maverick 168 newspaper, which is available countrywide for R29.

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City Lodge: room for growth, but can it get pricing up?

Bell Equipment: where did all the cash go?