Companies that benefit from the December tourist boom

South African hotel chains and US-based hospitality companies are well-positioned to benefit from record tourist numbers throughout the festive season. 

The benefit to these companies will also not be a one-off, with the global tourism sector expected to grow by 8% a year over the next decade.

Allan Gray portfolio manager Varshan Maharaj recently explained how investors can increase their exposure to the companies that will benefit from this trend. 

Maharaj said that in the festive season’s run-up, many expect record tourist numbers at popular holiday destinations like Cape Town and Durban.  

The resurgence in the tourism industry post-pandemic is also reflected in international arrivals, which grew by 50% last year. 

Maharaj explained that this bodes well for the hospitality sector, which is currently undervalued and offers long-term growth for investors.

Maharaj said that as guest numbers improve following the decimation of the tourism sector during COVID-19, now is a good time for investors to reconsider the hospitality sector. 

“The key determinants of investment success are the price you pay and the value you get from earnings growth,” he said. 

“The hospitality sector currently offers attractive opportunities at both ends of the spectrum.”

Maharaj said the local hotel chains Southern Sun and City Lodge are particularly well-positioned to benefit from increased tourism. 

“Both these businesses own and manage hotels. Their profit is driven by the number of hotel rooms, occupancy of these rooms and average room rates (ARRs).”

Southern Sun’s ARR for this year is R1,388, which translates to $74. Hotels in comparable nations enjoy much higher ARRs of $120 to $150.” 

Because South Africa’s lower ARRs are due to relative oversupply, he believes profits will likely grow as occupancies rise. 

However, there is a potential risk, with increasing occupancy rates and ARRs relying on economic growth, which may take a few years to materialise. 

“Hotels are cyclical, but our assessment is that there are still some good years ahead,” he said. 

These companies have managed to drive a recovery in their earnings, but their share prices remain under pressure – presenting an attractive opportunity for investors. 

Looking offshore, Maharaj believes there are other appealing investment opportunities in hospitality, chief among which are Marriott and Hilton. 

“Most of their hotels are owned by third parties, with Marriott and Hilton selling their brands, systems, and hotel management expertise to hotel owners in exchange for a fee linked to the revenue and profits of the hotels.”

What Marriott and Hilton excel at is connecting loyal guests with hotel owners.

 “They have earned guests’ trust by giving them what they want, competitive prices and consistent experience, as well as satisfying hotel owners with higher returns,” he said.

Although their price-to-earnings ratio is relatively high, both these icons in luxury travel offer investors attractive returns given the success of their asset-light business model. 

“Marriott achieves consistent earnings growth, focusing on returning capital to shareholders through dividends and share buybacks, while Hilton is known for its high free cash flow conversion, which supports shareholder returns and reinvestment in growth.”

Another attractive offshore investment opportunity is Booking.com, the world’s largest online travel agent by revenue. It offers 29 million accommodation room listings and is dominant in Europe. 

Despite not being at the upper end of the market like Marriott and Hilton, Booking.com offers a wide choice of independent hotels, good user experience and low prices.

He said the company has captured a larger share of its customers’ travel spend by cross-selling flights, tours, meals and other experiences. 

Currently, South African hotel owners are trading at less than half of their replacement cost, and the American brand owners and online travel agents are trading at reasonable multiples while rapidly growing earnings, Maharaj said. 

Given the size of the global market, well-known players in the hospitality industry are likely to continue to grow in the years to come.