Why is City Lodge more expensive than Southern Sun?

Both Southern Sun and City Lodge are hotel operators with a predominantly South African footprint.

While Southern Sun’s rooms are skewed towards the higher-end, tourism-orientated market, City Lodge’s rooms are weighed towards the low-to-mid-end business and domestic travel market.

Read: KZN tourism gets a boost as arrivals surge 29%

That said, these two local hotel groups are reasonably comparable and, along with their respective results, we would expect their valuations to more or less track each other.

Hence, it is something of a surprise to see how City Lodge attracts a premium to its book value versus Southern Sun.

City Lodge (CLH) & Southern Sun (SSU) price/book ratio (x)

Source: Koyfin (10/09/2026)

Given that both hotel groups own about four-fifths (around 80%) of their hotels, it is really their asset-heavy balance sheets that they are trading with in the market.

Their profits will tend to be more cyclical and, due to operating and financial leverage, more volatile.

Thus, shifting our valuation focus from profit and loss to the balance sheet helps us to hopefully to remove some of this cyclical noise and consider the long-term, true valuation of these two asset-heavy hotel operators.

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On this basis, City Lodge is rated at a premium to Southern Sun’s valuation by around a third!

Why?

This could be justified if City Lodge was earning a superior return off its hotels, or if it was growing faster, or if the market expected one or both of these things to happen in the future. While there is no ratio to properly track the forward view, the former two do appear to be (slightly) true  – see chart below.

Could this be a case of trading down by a post-Covid, cash-strapped domestic traveller?

CLH and SSU return on assets, return on equity (ROE) and 12-month trailing sales growth

Source: Koyfin (10/09/2026)

A slightly higher return, with a slightly higher growth rate, combine to arrive at a slightly higher valuation, albeit that City Lodge’s R2.3 billion market cap is materially smaller than Southern Sun’s R13.3 billion market cap.

The latter point implies that City Lodge’s rating should attract a small-cap or size-based discount.

But how do these two stocks’ valuations compare to much larger globally listed hotel operators?

This is complicated by the fact that some hotel operators are predominantly asset-light lease operators, and some are asset-heavy hotel owners – and they all have different gearing levels. Oh, and then accounting rules and assumptions differ across regions …

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That said, if we try to compensate for all this by focusing on ROE and comparing that to a gearing-neutral free cash flow (FCF) to enterprise value (EV) ratio, and sticking a line of best fit (linear regression), a picture forms:

Global listed hotel operators scatterplot (ROE versus FCF yield)

Source: Koyfin (10/09/2026)

A single (more) clear observation from this comparison is that City Lodge’s relative valuation against its peers is in line with where it should be.

If anything, Southern Sun’s relative discount to what its valuation should be is more obvious!

This is a good example of the limitation of relative valuation.

What if the valuation you are comparing a stock to is itself inefficiently priced?

What if it is not that City Lodge is expensive but that Southern Sun still offers value?

* Keith McLachlan is CEO of Element Investment Managers.

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