City Lodge (CLH)
City Lodge owns and operates high-quality, affordable hotels targeted at the business and leisure traveller. Their offering includes hotels under four brands, namely City Lodge, Courtyard Hotels, Road Lodge and Town Lodge, offering ~7 600 rooms across South Africa, with smaller operations in the rest of Africa.
Occupancies for the three months ended 30 September 2023 stood at 62% compared to 54% in the prior year, with both corporate and leisure travel returning to pre-Covid trading levels. Occupancies for October were 63% and November at ~61%. Average room rates in South Africa were 9% higher y/y, after having increased 12% in FY23.
By our calculations, City Lodge is trading on a forward PE of 6.7 times, which still seems attractive against a very attractive medium-term earnings growth profile. The share price has not reaped the benefits of post-pandemic normalisation and we still believe that there is room for upside price potential. Management remains optimistic, and the outlook was positive ahead of the summer holidays and the new calendar year.
Calgro M3 (CGR)
Calgro M3 specialises in the development of integrated residential developments and the development and management of memorial parks. The company aims to assist the South African property industry to change and adapt traditional social structures, by improving the delivery of sustainable housing solutions and increasing the availability of quality burial sites.
Recent financial metrics for the company have been quite impressive. During 1H24, revenue was up ~14% while HEPS climbed ~38%, driven by a robust performance in the Residential Property business and supported by a continued focus on reducing costs, improving scale and maintaining margins. The balance sheet (underpinned by strong cash resources and conservative borrowing) is strong.
Calgro has been actively repurchasing shares over the last two years. Most recently, between 8 August and 4 December 2023, around 3.7 million shares (~3.02% of issued capital) were repurchased at an average price of R3.95 per share. This is a positive indicator of the company's perceived value compared to the expected growth trajectory.
We see Calgro's business model as a unique play in the South African housing space, upon which we are structurally positive going forward. The counter is currently trading on a 12-month historic PE of ~2.5 times, which is quite compelling.
Afrimat (AFT)
Afrimat was founded by a consortium led by current CEO, Andries van Heerden, in 2006 through the merger of Prima, which mainly supplied aggregates to the Cape construction and road building industries, and Lancaster, which was involved in quarrying and the supply of concrete blocks and bricks in northern KwaZulu-Natal and eastern Free State. The group fully listed on the JSE in November 2006. Since its inception the company has applied a diversification strategy that has ultimately seen it grow through acquisitions and evolve into a multi-commodity, mid-tier miner, which is also able to produce and supply construction materials and high-quality industrial minerals. Afrimat has a wide-ranging geographic footprint, with its end market being both local and international.
For the interim period ended 31 August 2023, Afrimat reported resilient results with the group benefitting from its diversified portfolio that acted as an efficient hedge against volatile operating conditions. The Bulk Commodities segment (~48% of revenue) was impacted by lower external sales, but more than benefitted from a significant improvement in domestic sales volumes and a weaker rand. Management expects improved volumes in this segment over the next six months as it ramps up anthracite production at the newly opened underground Nkomati shaft. A notable contribution to performance was Construction materials (~41% of revenue), which saw double-digit revenue growth and triple-digit operating profit growth amid well executed cost-saving initiatives, and increased volumes supported by robust demand for products in roads and building and infrastructure projects.
Afrimat is trading on a forward PE of 7.4 times and EV/EBITDA of 4 times which seems compelling given its expected growth trajectory and optionality related to the Lefarge acquisition. Medium term we see upside in the Construction Materials business as gross fixed capital formation locally remains depressed currently and the infrastructure backlog continues to grow. The diversification benefit of Industrial Minerals and Bulk Commodities may provide a buffer to earnings in the meantime.
KAL Group (KAL)
Kal Group, formerly Kaap Agri, was founded over a century ago and has evolved through the years to become an agriculture and lifestyle company specialising in the trade and retail of agriculture, fuel, and other related products. The company provides a diversified range of products and services to the agricultural sector as well as the general public. KAL Group has a large footprint across southern Africa with hundreds of operating points in South Africa and Namibia, with additional expansion plans in the pipeline.
The group's operating environment has been challenging, marked with negative impacts on farming and building materials sectors' spending capacity due to tighter economic conditions, weather-related challenges, and load-shedding. However, the financial performance has remained resilient. Top-line growth was particularly strong during FY23, bolstered by significantly higher transactions growth y/y, thanks largely to the recently acquired PEG business which has accelerated growth across retail and fuel as well as quick service restaurant (QSR) channels. The group's cash generation has also improved meaningfully over the past year, the balance sheet has strengthened and gearing improved.
Overall, we continue to like this company from a sectoral and strategic point of view, supported by its diverse operations. The current historic rating 6.3 times looks undemanding relative to the company's growth prospects.
African Rainbow Capital Investments (AIL)
African Rainbow Capital Investments holds stakes in several companies through the ARC Fund. Notable investments include Rain and TymeBank. ARC's mandate is to build a leading, black-controlled financial services and investment group by investing in attractive empowerment stakes across industries.
For FY23 (ended 30 June 2023), the overall portfolio has shown resilience despite constrained macros supported by its diverse nature, with several underlying companies achieving key strategic objectives and improving growth prospects during the period. The fund concluded several disposals at attractive IRRs. The company recently concluded a rights offer, with the proceeds to be invested into Rain and Thyme where we see good runway for growth.
African Rainbow Capital Investments is trading at a discount to NAV of 52% based on June 2023. We expect the discount to unwind to a more reasonable level given the quality of the underlying assets. We continue to like the company's investment strategy and believe it has the capability of extracting value from the existing portfolio and identifying quality investments in the future.
