It’s difficult to imagine a sector more affected by the COVID-19 pandemic than travel and leisure. Overall, the tourism sector lost close to half a million jobs in 2020. Even after a strong rebound in tourist arrivals last year, numbers remain 44% lower than in 2019. Hotels, casinos and restaurants were shut, and even when economic activity returned, these were forced to operate under tough restrictions. The country’s large hotel groups temporarily ceased trading at certain properties in their portfolios, with some of these only reopening for business last year. After all, the National State of Disaster was lifted only in April 2022.

Things are almost back to normal, although international tourist arrivals and corporate travel is lagging in recovery. Visits to the V&A Waterfront, a useful bellwether of tourism activity, are at 86% of pre-pandemic levels. By comparison, domestic leisure tourism is booming and above last-normal levels.

Independent analyst Anthony Clark of Smalltalkdaily Research concurs, and says that ‘anecdotal feedback from operators in the industry suggests that this coming summer season in Cape Town is going be the best ever. Domestic travel has perhaps been curtailed because of the economy; business travel perhaps isn’t back to where it was because of people’s preponderance to use online meetings and companies cutting back on travel budgets. But the inbound tourism market is clearly making up for it’.

Hotel, casino and resort groups – arguably the hardest hit in the broader travel sector, aside from airlines – account for more than three-quarters of the total market value of this sector on the JSE. Together, the two listed gaming operators (Tsogo Sun and Sun International, with market values of R12.5 billion and R8.7 billion respectively) own all the major metropolitan casinos and large resorts in the country, with the sole exception of Emperors Palace, owned by Peermont. Peermont also owns a number of smaller properties, including a handful in Botswana.

Tsogo Sun, which counts listed black empowerment investment holding company HCI as its major shareholder, owns Gauteng’s Montecasino, Gold Reef City and Silverstar, as well as KwaZulu-Natal Suncoast and Golden Horse properties. In the last financial year, the three Gauteng operations comprised 56% of the group’s total revenue and profit (Ebitda) from casinos. The two in KwaZulu-Natal accounted for around a quarter. Tsogo says that strong profits were still achieved in the year to March, despite ‘a shortfall of income in casinos that is evident post the pandemic’.

With no new licences to be granted by government, Tsogo (like rivals) has shifted into the bingo, limited-payout machines and online betting markets. It also owns and operates all the hotels at its casino precincts. Previously, the group owned hotel group Southern Sun. It unbundled this (with the exception of hotels at its casino properties) to shareholders in 2019.

Today, Southern Sun operates more than 90 hotels and resorts, with 80 of these in SA. The rest of its properties are in Mozambique, Zambia, Tanzania, the Seychelles and the UAE. The bulk of its hotels operate under the Southern Sun, SunSquare, Garden Court and StayEasy brands. Its luxury portfolio includes the Beverly Hills in Umhlanga, Sandton Towers and Arabella, near Hermanus. ‘Trading levels continued to recover, particularly in the second half of the financial year, as local and international travel patterns normalised and demand for conferencing and events increased,’ it says. ‘All regions performed well and exceeded pre-COVID-19 levels except the Sandton node.’

Southern Sun was founded in 1969 by legendary hotelier and developer Sol Kerzner, in partnership with South African Breweries. In 1983, this business – 35 properties strong – was split into two. Sun International was established to house all the hotel properties in so-called ‘independent’ homelands. In 1991, Southern Sun was delisted from the JSE to become a subsidiary of SAB. In 1995, Tsogo Sun was formed as a consortium between Southern Sun and various empowerment partners to bid for casino licences. In the early 2000s, HCI became the largest shareholder in the group. It merged with rival Gold Reef Resorts and reverse-listed on the JSE in 2011 as Tsogo Sun. SABMiller disposed of its holding in 2014. In 2019, the group split into the current casino and hotel operations. Kerzner’s investment vehicle Kersaf and Sun International South Africa merged in 2004 to form the company that still exists today.

Sun International owns and operates the iconic Sun City resort, along with Carnival City, Time Square in Pretoria, GrandWest in Cape Town, Sibaya in Durban and Boardwalk in Gqeberha. Its urban casino properties generated 60% of the group’s income last year, with hotels and resorts comprising 23%. Of the urban casino portion, GrandWest, where it enjoys contentious exclusivity in the Cape metro, accounts for almost a third of the revenue. Time Square, which opened five years ago and is its newest property, is second biggest, with Sibaya also sizeable. It is also pushing hard into new markets with Sun Slots (limited-payout machines) and SunBet. Together, these already account for 16% of group income and 12% of Ebitda.

The interconnectedness – mostly prior – of the various casino and hotel groups on the JSE got a new twist in May when Tsogo Sun announced it had built up an approximate 10% stake in City Lodge. ‘It’s intriguing as to why Tsogo would have taken a 10% stake in a rival hotel given it’s already unbundled its own hotel operations,’ says Clark. ‘Could they see, potentially, an angle here for doing some form of a joint venture? Is it a takeover target or is HCI/Tsogo purely buying it for the eventual recovery in the domestic tourism and inbound tourism market to continue?’

The City Lodge group has traditionally focused on select-service properties, and it operates 59 hotels with more than 7 500 beds across four brands – Courtyard, City Lodge, Town Lodge and Road Lodge. Its occupancy rate last year was marginally higher than 2019’s, although average room rates are only 1% higher than pre-COVID-19. The group has overhauled its food and beverage offering and this now comprises about 17% of total group revenue. In June, it said that travel trends and the average room rates continue to rebound this year.

Two of the other companies in the sector were hit less hard than casinos, hotels and resorts. While there were occupancy restrictions and a night-time curfew, Famous Brands (with a market value of R5.8 billion) and Spur Corporation (R2.1 billion) were able to trade from Level 3 restrictions (and were able to sell food for offsite consumption during Level 4).

Famous Brands has a footprint of close to 3 000 outlets (including quick service restaurants and traditional restaurants), mainly operated by franchisees. Its brands include Steers, Wimpy, Fishaways, Debonairs Pizza, Mugg & Bean and Milky Lane. It has shifted into the casual dining space over the past decade and, in this (‘signature’) segment, owns brands including Lupa Osteria, Mythos, Paul, Salsa, Turn and Tender, Vovo Telo and Lexi’s. In the year ended February, Famous Brands reported a 14% increase in system-wide sales across its core leading brands (Steers, Debonairs and so on) and a 28% rise in sales in its signature brands portfolio.

By contrast, Spur Corporation has 642 restaurants, with nearly 90 of these in 14 markets outside of SA. It has fairly sizeable footprints in Namibia, Zambia and Mauritius. Beyond its namesake, Spur, it also holds the Panarottis, John Dory’s and RocoMamas brands. It has a smaller portfolio of speciality brands (the Hussar Grill, Casa Bella and Nikos). Like Famous Brands, most outlets are owned and operated by franchisees. In recent years, much of its growth has come from scaling the RocoMamas business, which it acquired early on in its development. Today, this has more than 100 outlets, including nearly 20 outside its home market. Between July and December, the overall portfolio of restaurants reported turnover of R4.4 billion. The group has largely recovered from the impact of the pandemic, with sales up 28.6%.

Both Spur and Famous Brands earn sales-based royalties from stores, joining fees (new stores) and manufacturing revenue (supplying their store networks as well as retail channels such as supermarkets with product). Both have launched very popular sauce and spice ranges, and they continue to grow this portion of their businesses as they’re manufacturing these goods for stores anyway (which means better margins).

Clark says that elevated levels of load shedding in recent months (at the end of 2022 and start of 2023) has worked in Spur’s favour. He says it offers a ‘sit-down destination, and families can go out with their kids during load shedding and have an affordable meal. All the stores have fairly good parking and they have entertainment options for children’. The company has highlighted this trend over the past 12 months. Looking ahead, according to Clark, as a much smaller business, Spur is able to ‘more easily scale from the current 650-odd stores to 800 or 1 000. That would translate into growth of above 30%. It would be much more difficult for Famous Brands to go from 2 500 to over 3 000’.

Frontier Transport, with a market cap of R1.5 billion, stands alone compared to the other listed companies in this sector. It too was spun out of HCI, and primarily operates the Golden Arrow and portions of the MyCiti bus services in Cape Town. It has a nascent travel and tour unit, and a small shuttle business. In the year to March 2023, it reported a 15% rise in revenue to R2.4 billion.

Clark says Frontier is pivoting away from diesel to electric over the next 10 to 15 years, which will fundamentally change the economics of the business. It replaces around 60 of its 900-bus fleet each year. It has trialled an electric bus and has plans to expand this fleet. ‘Given that most journeys [shifts] in the city on their buses tend to only be between 200 and 300 kilometres with constant stop-starts, electric buses are far more optimal,’ he says.

‘As long as they keep getting the government subsidies, which normally rise by around inflation every year, and they can mitigate costs and possibly bring the costs down by moving towards an electric vehicle and then putting in their own solar plants at their bus depots to charge the buses with their own infrastructure – and only use Eskom when they need to in the off-peak periods – there could be more than a 30% saving in running this overall fleet.’

By Tristan West
Image: Gallo/Getty Images