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Apr 04, 2008:
The Don, the only black-owned and -managed hotel group in SA, is looking at a number of potential new destinations
"In most African cities, demand for hotel accommodation outweighs supply,” says The Don Group CEO Thabiso Tlelai, “and our offering is absent from most markets in Africa.” He says the Don, the only black-owned and -managed hotel group in SA, is looking at a number of potential new destinations.
With higher price yields and earnings in hard currency, Africa has been an attractive market for SA-based and international hotel groups. Hotel inventory in Africa is typically old and overused, and there is little competition.
Though there is risk — witness the impact of political turmoil on tourism in Zimbabwe and Kenya — the continent’s economic growth has positive spin-offs for business visitors as well as leisure travellers.
With an estimated 44m international travellers each year, African tourism has gained momentum over the past few years. Average annual growth since 2000 has been about 7%.
The Don has already been aggressively marketing to African visitors to SA, resulting in an important revenue stream. The tie-up with Big Brother Africa, broadcast across the continent from August to November last year, “gave our hotels good visibility,” says Tlelai. “A marked increase in cross-border reservations continued long after Big Brother Africa ended. If the African market is using us here, it means they like our product,” he says. “And if we take our product to them, they will still like it.”
Chris Gilmour, an analyst at Absa Asset Management, points out that Africa is a difficult place for business. Challenges include frequent power outages, a shortage of skilled staff and even transport to and from hotels. “But on the upside, hotel operators can charge almost what they want for basic accommodation, as there’s very little available,” he says.
Most successful hotel operators on the continent have invested little in hard assets and instead operate management contracts. “The Don would be well placed to exploit Africa, but they’d need to start small and probably with a joint venture partner,” says Gilmour.
Tlelai says the Don’s bigger rooms (from studios at about 55m² to three-bedroom apartments larger than 150m², compared with conventional hotels at an average of 33m²) have also positively affected length of stay in its hotels. The offering also appeals to tour groups.
Tlelai helped turn the Don around from near-bankruptcy in 2000 to a steadily growing niche hotel group today. However, he is tired of turnaround talk, which “implies restructuring and changes to strategy,” he says. “The group turned around eight years ago and has been on a growth path ever since.”
Last week the Don reported another six months of solid results. Revenue was up 13% to R34,5m and operating profit improved 25% from R6,4m to R8m.
Despite a tougher operating environment, the Don managed to offset increased costs with higher room tariffs. But how long will hotel groups be able to continue passing on increases to their customers without affecting occupancies? “Everyone in the sector is experiencing the same economic shocks,” says Tlelai. “We think we will be able to absorb them without too much impact on our bottom line.”
At 60c, the Don’s share price has increased steadily from 8c over the past three years. Its price:earnings ratio is also a more reasonable 28 (down from 128 last year). - Jacqui Pile
