[TOP STORY] The hospitality sector has moved out of survival into strong recovery

SIMON BROWN: I’m chatting now with Zizile Lephalala, sector head for healthcare, construction and hospitality at Absa Corporate and Investment Banking. Zizile, I appreciate the early morning time. The hospitality sector, it’s fair to say, really has moved out of survival mode in the pandemic and truthfully is back into a very strong recovery.

ZIZILE LEPHALALA: Absolutely. Simon. Good morning. Thank you for having me this morning. It’s been a very positive 2022 in the hospitality sector. What we’ve observed, really, as we’ve mentioned, is the sector is no longer in survival mode, which it experienced during the last two years of Covid. But we are in fact now in a stronger anticipated recovery. So what you notice really is the performance turning from losses into profit, and the operators mainly being able to service their long-term debt obligations that they were not able to do during the height of Covid.

SIMON BROWN: Yes. And in many cases coming out almost, I want to say, stronger. The leisure activity is getting back to pre-pandemic [period]. For example, Sun International is paying its first dividend in six years. It stopped paying long before the pandemic, and [has been] coming out, I want to say, almost guns blazing as a better-looking and stronger-positioned business.

ZIZILE LEPHALALA: Absolutely, Simon. What the pandemic really offered the operators in the sector is an opportunity to re-look at their core structures and also focus on reducing their debts by strengthening their balance sheets. So what we are seeing with Sun International is exactly that. They’re able to dispose of non-core assets and use those proceeds to reduce their cash and also re-look at their core structuring to be able to operate in a more efficient way and thereby be able to pay their first dividend in six years.

SIMON BROWN: Hotels themselves are lagging. There are a couple of hotel operators on the JSE. You make the point that they’re at about 70% of pre-Covid levels but should recover. I remember from the City Lodge update late last year, their sort of November month was probably back at [their] pre-pandemic situation.

ZIZILE LEPHALALA: Yes. So what we’re seeing with hotels, especially the players that are pure hotels and do not have any diversification in their revenue streams, is that their recovery is lagging those that have diversified streams into the likes of gaming, such as Sun International. So what we are expecting is the recovery to come either this year, 2023, or in 2024. That’s because they are impacted by international travel inbound into South Africa. And we are expecting to see the full [quota of] international travellers back into SA by 2024.

And so, as you mentioned, City Lodge has also disposed of non-core East African assets and they are doing much more strongly, I think, focusing on the leisure offering as well as food and beverage, which previously was not really their strength. And so what we are seeing is that RBE ……3:24 is lagging. It is strong and I expect that [it] had a strong December in terms of the hotel operators, given that this is the first December that was not overshadowed by Covid variants or restrictions on international travel.

SIMON BROWN: You mentioned international, and we do get a quota of international [visitors]. What about the African continental free-trade area? Is that something that could potentially [see] our tourism sector, our leisure sector – and I’m thinking it might be business people coming into South Africa and staying in our hotels – going to benefit us as it rolls through?

ZIZILE LEPHALALA: Yes. we believe that it will benefit us. As we know today, intra-African travel makes up the largest component of inbound travel into South Africa. This is mainly from the low-income countries such as Lesotho, Zimbabwe and Mozambique, and of course we can’t compare [them] in terms of what they bring into the country with the likes of the US and Europe, which are secondary in terms of inbound.

And so with the African continental free-trade area, whose main mandate really is to eliminate trade barriers and also intra-Africa trade, we are expecting to see higher foreign direct investment into the continent according to the World Bank. This will ultimately also increase economic activity in Africa and increase household income which potentially could be spent on a hospitality sector. This is both from a leisure perspective and, I think as you mentioned quite correctly, from a business leisure [perspective] as well.

SIMON BROWN: A quick last question. Digital nomads – something which predates the pandemic, but obviously is now post-pandemic with the work from home gaining traction – is that something that that we are catering for as a country? I’m thinking frankly it could be international and foreign, but also maybe even local travellers. You may want to go and spend a winter in in in Durban rather than in a cold Joburg.

ZIZILE LEPHALALA: Yes. As you said, it does predate the pandemic, but the pandemic actually heightened the [likelihood]. So what we’ve seen with employers adopting the hybrid working model is that there’ve been a lot more digital nomads, which has strongly supported the domestic tourism sector in South Africa, especially during the restrictions that we had from international travellers. So what we are seeing is that that trend, we believe, is going to continue and that the operators have adapted and ensure that they have dedicated workspaces on their properties to take advantage of this trend.

And other things that they have done is to ensure that there are stronger connections, such as Wi-Fi, to ensure that digital nomads are able to work away from the office without any disruption.

SIMON BROWN: Thanks very much. We’ll leave it there. Zizile Lephalala is from Absa CIB. I appreciate the early morning time.