Into Africa Via Hotels
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As far as emerging markets go, Africa has been a distant also ran to China. However, the hoteliers are quickly building their businesses on the continent. It might be worth following Starwood (NYSE: HOT), Marriott (NYSE: MAR), and Hyatt (NYSE: H) into this uncharted region.
According to Bloomberg, a rising middle class, increasing travel, and foreign business development, particularly from China, are combining to drive "the fastest pace of hotel development in the world" in Africa. The continent is growing up fast and is basically the leading edge of emerging markets. For those seeking a way in without taking on direct exposure, the hotel companies are a good way to play.
A Star Rebounds
Bloomberg notes that “revenue per available room in Africa and the Middle East is the highest of any region worldwide” for Starwood. The company is scheduled to open a hotel in Cairo in 2015, and “plans to increase its number of properties in Africa to 50 by 2016 from 38 today.”
Starwood's top line fell from 2007 to 2009 as the recession took its toll on performance. However, since bottoming out in 2009, the top line has been growing and it's now above where it was prior to the recession. Share net of about $2.85 last year is above the near $2.60 earned in 2007. Clearly the company has gotten back on track.
The dividend, too, has been on the mend, going from $0.20 a year at the end of the recession to $1.25 last year. The shares, meanwhile, are up almost 600% since bottoming out in early 2009. The price to earnings ratio is around 27, high but not out of line with peers.
That said, the company's focus on higher-end properties may justify the premium for growth minded investors. That's particularly true since wealthy individuals have fared better coming out of the recent recession than other socioeconomic classes.
A Focus on Management
According to Bloomberg, “Marriott has increased the number of hotel rooms it plans on the continent by 55 percent from last year.” For example, the company agreed last year to build a luxury hotel in Lagos and signed management agreements to manage two hotels yet to be built in Ethiopia.
Marriott's top line took a steep drop in 2009, but fell less than 1% between 2007 and 2008. However, the company's top-line recovery hasn't been as consistent as Starwood's, with sales falling between 2011 and 2012. That said, a near doubling of the company's profit margin led share net to rise from $0.55 to over $1.70 last year.
Like Starwood, Marriott's dividend has been increasing since falling below a dime a share in 2009. The dividend was $0.49 a share last year. The company's PE is around 21, less than 10% above its trailing five year average. The stock is up about 250% since its recession low and the shares yield about 1.7%.
The company owns relatively few hotels, opting instead to use an asset light management approach. Its brands span across multiple price points, that's likely been a drag on the top line coming out of the recession. Managing and not owning, however, has been a boon to margins. And that asset-light approach probably makes it the safest way to invest in hotels in Africa.
According to Bloomberg, Hyatt “plans to open hotels in cities such as Lagos; Nairobi; Addis Ababa, Ethiopia; Accra, Ghana; and Cape Town, to capitalize on Hyatt’s customer base in China.” It's being careful to select opportunities that fit well with its brand and global reach. At this point, the company has six hotels in Africa with two under development.
Hyatt's sales grew between 2007 and 2008 (pro-forma numbers), fell in 2009, and have been heading steadily higher since. The company's bottom line, however, hasn't been doing quite as well. Earnings per share of around $0.50 are about a quarter of their 2007 pro-forma level, largely because the company's profit margin has fallen from about 10% to 4%.
That's a big problem, however the market appears to be giving the company the benefit of the doubt: Its PE is around 47 and the shares are up about 65% since their late 2009 IPO. The company's focus is on the high end, but its results have been less than inspiring of late. Investors are probably better off avoiding the company for now.
Not Exactly Uncharted Waters
Africa is a continent made up of over 50 countries. Some are very desirable and others are landlocked or war-torn. Still, as these nations mature there are opportunities to grow along with them. These three hotels are trying to get in early. Of the trio, Marriott's focus on managing properties is likely the least risky approach. It's probably the best option. Starwood's high end focus has served it well, and should continue to do so for more growth minded investors willing to pay a premium for a company that caters to the top-tier. High-end focused Hyatt, on the other hand, has some work to do and is probably best avoided for now.
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