Tourism Rebound: Investment Opportunities and Growth Prospects in South Africa’s Travel Sector

The festive season and December are around the corner, a period when travellers and tourists often make their way to holiday destinations. Investors may view this as a market opportunity, as money starts flowing into the tourism sector.

Last year, South Africa saw a 48.9% increase in international arrivals, reaching 8.5 million, with total foreign tourist spending of R95 billion, a 92% rise from 2022, surpassing 2019 levels. In December 2023, 3.5 million travelers were recorded, surpassing November’s 2.6 million and December 2022's 2.9 million.

From January to May 2024, 3.8 million international arrivals were recorded, and Q1 foreign spending reached R25.7 billion. The largest share of arrivals in 2023 came from the Africa Land Market (72%), followed by Europe (15.2%). Projections suggest 10.7 million arrivals by the end of 2024 and 15.1 million by 2030. Additionally, tourism's contribution to GDP recovered to 8.2% in 2023 and is expected to rise to 10.4% by 2030.

For investors, this growth trend could signal strong opportunities in travel, hospitality, and related sectors as tourism nears pre-pandemic levels. Rising tourist numbers and regional growth indicate increased demand for services and partnerships, potentially making the market ripe for investment.

Listed companies such as Sun International, City Lodge Hotels, and Southern Sun are among those that could potentially generate capital to create value for investors or return to shareholders as dividends.

Sun International Boosts Dividends Amid Strong Growth and Strategic Expansion

Sun International increased its dividend to shareholders after delivering strong trading results, driven by its diversified operating model, omnichannel portfolio, and disciplined strategy execution. Its shares are up more than 12% since the beginning of the year. The group achieved a 4.0% increase in adjusted EBITDA to R1.6 billion, with adjusted headline earnings up 8.7% to R524 million, and earnings per share rising 9.1% to 215 cents. Total income grew 5.0% to R6.0 billion, with gaming income—77.4% of the total—rising 3.4%. Sunbet saw exceptional growth, up 71.8%, while hospitality income rose 12.3%. The group's debt decreased to R5.4 billion, and it repurchased shares worth R141 million. The board declared an interim dividend of 161 cents per share, totalling R416 million.

Sun International, through Sunbet, plans to grow its customer base and enter new online markets in Africa. With a strong balance sheet, it is well-positioned for growth through strategic planning and cost management. Government efforts to improve the economy and infrastructure should enhance the operating environment. The company remains focused on delivering stakeholder value through operational excellence.

City Lodge Reinstates Dividends Amid Revenue Growth and Sustainability Investments

City Lodge Hotels reinstated its cash dividends to shareholders in 2023. Although the stock is down 5% year to date, the company reported growth in occupancy and revenue in its recent financials, with no debt and revenue up 13% to R1.9 billion. Group occupancy reached 58%, two percentage points higher than in 2023. Food and beverage revenue grew by 22%, while total operating costs increased by 10%. Despite challenges from inflation, interest rates, and load shedding, the group achieved a profit after tax of R188.7 million, a 16% increase in diluted earnings per share to 33.2 cents, and adjusted headline earnings per share up 37%. The group is debt-free and continues to invest in sustainability initiatives, hotel refurbishments, and shareholder returns.

The group highlighted that the Government of National Unity and potential interest rate cuts are expected to boost South Africa's economy in 2025. The group has allocated R459.4 million for modernization, technology, and sustainability projects, while exploring new hotel opportunities. Though occupancy rates are currently soft, there is optimism that demand will improve as confidence returns.

Southern Sun Delivers Record Growth and Announces Maiden Dividend

Trading at its all-time high range, Southern Sun announced its maiden dividend this year following a record year, with 19% income growth, 32% EBITDA growth, and an 88% increase in adjusted headline earnings per share (HEPS) to 56.4 cents. Free cash flow of R970 million was used for share buybacks, expansion capital expenditures, and reducing net debt to R1.0 billion. This success stems from cost efficiencies maintained since the COVID-19 restructuring and the strong performance of its hotels in the Western Cape, particularly Cape Town, benefiting from robust tourism and business travel.

In a preliminary update, the group reported a slight rise in occupancy to 57.1% and a 1.7% increase in room rates for the first five months of the year. Despite modest revenue growth, lower debt costs are expected to boost earnings.

As of this writing, shares of City Lodge are trading at 13 times its earnings (Price to Earnings, or P/E, ratio), Southern Sun at 11 times, and Sun International at 6 times. Notably, lower P/E ratios often come with higher yields. Sun International has an annual dividend yield of 8%, City Lodge 3%, and Southern Sun has paid dividends only once so far.

Conclusion 

For shareholders in Sun International, City Lodge Hotels, and Southern Sun, there are positive signals of growth and shareholder returns. Sun International's strong results, dividend increase, and reduced debt highlight its solid financial health. City Lodge’s dividend reinstatement, revenue growth, and debt-free status position it well for the future. Southern Sun’s record year brought a maiden dividend, robust income growth, and share buybacks, fueled by tourism recovery. Collectively, these companies are showing improved earnings, strategic investments, and shareholder-focused actions, signalling confidence in their continued performance.

It will be important to monitor the recovery momentum as global travel demand continues to rebound. Key indicators to watch include rising tourist numbers and increased spending on travel experiences. Investors should also watch economic factors like inflation, as interest rates start to ease, along with geopolitical stability and potential disruptions such as pandemics or climate-related events, which could impact travel demand.

Last week, the South African Reserve Bank (SARB) kept the repo rate at 8.25% for the seventh consecutive meeting in July 2024, as expected. Two policymakers favoured a 25 basis point cut. 

In the intricate world of finance, money is the lifeblood that fuels economies, shapes markets, and drives innovation. Yet, how much do we truly understand the journey of money from its inception to its role in our daily lives?

The year 2024 is poised to become a landmark moment in history, with over 2 billion people worldwide preparing to cast their votes in elections spanning countries like the US, India, the European Union, Mexico, and South Africa, as highlighted by the World Economic Forum.