E CONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES.T HIS REPORT WAS SUPERVISED BYR OSÁRIOA NDRÉ WHO REVIEWED THE

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THIS REPORT WAS PREPARED BY “TERESA BRANDÃO”, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES.THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT Page 1/32

M

ASTERS IN

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QUITY

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ESEARCH

 Not adding capacity in South Africa. With economic growth almost stagnated at around 1.5%, and conservative perspectives for South Africa, the country presents little opportunities for the group to open new hotels.

 High expected growth outside South Africa.City Lodge desires to expand its brand across Africa, eventually having operations in 14 countries. With many expansion projects, growth outside South Africa should be a contributor to the success of the business.

 Occupancy rates due to pick up the trend registered in the past. In 2016, occupancy rates were lower due to the calendar effect, reaching 66%, nonetheless the increasing trend registered since 2011 should resume in the financial year of 2017.

 Macroeconomic risks. Political, health, or economic risks may affect the group’s occupancy rate, as well as the ability to raise prices. These risks may lead to an 18% decrease in the expected revenues per hotel.

 High capex during expansion phase. While Expansion Capex depends on the location of the new hotels, it may be as high as ZARm 471 per hotel. However, several risks may impede the opening of these hotels, leading to a possible investment without return.

Company description

City Lodge Hotel group is a hotel chain based in Johannesburg, South Africa. It offers services of accommodation, food, and beverages. Its main client base are corporate guests; however, tourism also plays a role in this business. Its security is listed in the Johannesburg Stock Exchange.

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A business in expansion

...but with some risks associated

Recommendation: BUY

Price Target FY17: R165

Price (as of 6-Jan-17) R144

Source: Bloomberg

52-week range (ZAR) R129-R176 Market Cap (ZARm) 6,254 Outstanding Shares (m) 44

Source: Bloomberg

(Values in ZAR) 2016 2017E 2018E Revenues 1493m 1629m 1866m EBITDA 621m 691m 793m NOPLAT 376m 411m 461m Net Profit 315m 374m 402m

EPS 7.6 8.6 9.2

P/E 18.1 19.1 18.2

Source: Group’s Report and analyst estimates

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“CITY LODGE HOTEL GROUP” COMPANY REPORT

PAGE 2/32

Executive Summary

City Lodge Hotel Group, with headquarters in Johannesburg, offers hotel accommodation, and services of food and beverages in many South African cities, as well as Nairobi, Kenya, and Gaborone, Botswana.

In the past, City Lodge has proved to be well managed and understanding of the African industry, with occupancy rates 5% above the industry’s average in South Africa. Additionally, the group has also been able to run high profit margins, around 21% in the past years, comparing with the industry’s average of 8%. New opportunities of expansion abroad are rising and the group intends to take advantage of these by opening 12 new hotels in the future. City Lodge has always been extremely cautious regarding its plans of expansion for the future. Nonetheless, projects in Africa are subject to certain risks, such as political or economic risks or even poorer access to certain materials, which may lead to delays of even the cancelling of certain projects. Additionally, African economies are more volatile, with GDP growth rate registering a volatility of 3%, comparing with developed economies which show a volatility of 2%. This may reflect itself in the occupancy rates or ability to raise prices. Consequently, evaluating City Lodge’s business requires a special attention to these risks.

City Lodge faces competition from many other brands, especially as it expands outside South Africa. However, as its customer base is mostly comprised of corporate guests and City Lodge offers a good deal for this type of stays, it distances itself from other major hotel chains which offer more touristic accommodation.

The target price was calculated through a Discounted Cash Flow model. Two scenarios were forecasted to reflect the unpredictability of cash flows. The valuation leads to a “BUY” recommendation, with a target price of ZAR 164 and an expected gain of 16%.

Company Overview

Company description

City Lodge Hotel Group is a hotel chain based in South Africa. It operates in the Consumer Services industry, in the Consumer Discretionary sector. Its services are mainly based in providing accommodation to tourists, which represent around 20% of guests, and corporate clients, comprising the remaining 80%. Revenues

South Africa continues to be the

main location

Expansion into many countries outside South

Africa is a major goal

Possible additional risks of developing a business

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PAGE 4/32 deriving from accommodation make for approximately 90% of the company’s total revenues. The remaining 10% derive from the service of food and beverages to clients. Besides these two, the group also has as key business projects hotel administration and customer relationship management. In 2016 it received an 86% customer satisfaction rating, a rating that has shown to be relatively constant among the biggest South African hotel chains. Regarding its staff, the group registered a turnover ratio of employees of 8.71% in 2016, mostly comprised by involuntary turnover. Throughout the years, the group has been able to develop a loyal customer base, having established a Loyalty Rewards system to incentivize previous guests to return. Moreover, there has always been a strong emphasis on the quality of accommodation, homely ambience, and friendly service, which allowed City Lodge to rank among the 200 largest hotel chains in the world.

In August 1985, through the vision of Hans Enderle and financial support from Mine Pension Funds, the first hotel opened to the public: City Lodge Hotel Bryanston, at the time called City Lodge Randbury. The group was later incorporated in July 1986.

In 1990, the second brand of the group was formed, Town Lodge, which has proved to be highly popular. In 1995, the group acquired 50% interest of the Courtyard Suite Hotel. Furthermore, in 1995 it also opened its first Road Lodge Hotel. In 2015, the group acquired the remaining 50% of interest from the joint venture.

In 2012 the group acquired 50% interest in the Fairview Hotel and Town Lodge, both located in Nairobi, Kenya. However, the revenues from these two hotels were only registered in the financial year of 2013, when it officially opened to the public. Also in 2013, the group opened its first owned hotel outside South Africa, the Town Lodge Gaborone Hotel in Botswana. In 2014 it acquired the remaining 50% of the Kenyan hotels, taking full ownership.

The group has grown significantly in the past years. With only 340 rooms in 1988, it grew to 7072 in the financial year of 2016, which ended on the 30th_{of June.} Nowadays the group has five distinct brands:

 Road Lodge, with 22 hotels and 2059 rooms: the most economic brand, with prices per room around ZAR 600;

 City Lodge with 17 hotels and 3002 rooms: this brand is located in the top layer of the market, with higher room rates, ranging between ZAR 1100 and ZAR 1700 per night;

Exhibit 1: City Lodge’s brands

Exhibit 2: City Lodge’s number of available

rooms

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PAGE 5/32  Town Lodge with 12 hotels and 1503 rooms: this is the mid-range brand, with room rates around ZAR 1000 in South Africa, and higher prices in Botswana and Kenya;

 Courtyard with 5 hotels and 381 rooms: this brand distinguishes itself from the others by offering more spacious accommodations, (studios, 1 bedroom apartments, or 2 bedroom apartments) which may reach ZAR 2800 per night;  Fairview with 1 hotel and 127 rooms: located in Nairobi with higher prices,

around KSh 15,000 per room.

Hotels in South Africa are located throughout the country with higher incidence in the cities, especially Johannesburg, the economic capital of the country. However, it also has hotels in the coastal areas, which are thus more dependent on tourism than business travel.

Along with the rest of the industry, City Lodge Hotel Group increased substantially its room capacity in South Africa for the 2010 World Cup. This large increase was considered superficial since it did not reflect a sustainable growth in the industry in the long-term. Such measures to increase capacity were reflected mainly in a sharp drop in occupancy rates after the World Cup throughout the whole industry. Business travel has recovered slowly in the past years, however, the group, as well as the whole industry, is still working towards getting occupancy rates to levels prior 2010.

Since 2011, occupancy rates have been increasing modestly, only registering a slight decrease in 2016, which was mainly due to the calendar effect which did not have as many public holidays during weekdays. Nonetheless, revenue has been increasing quite significantly, which reflects growths in nightly room rates. In 2016 City Lodge opened two other hotels in South Africa, Road Lodge Pietermaritzburg, and City Lodge Hotel Newtown, leading to a total number of rooms of 7072.

Since 2013 the revenues from the three hotels outside South Africa have grown quite significantly. Even though hotels in Kenya suffered from rising political problems and from the outbreak of Ebola, the good performance of the hotel in Botswana made up for that decrease. Nonetheless, the trend registered in Kenya seems to have taken a turn in 2016, when such effects were not as evident.

Exhibit 4: 2016 revenues per brand

Source: Bloomberg

Exhibit 3: 2016 rooms per brand

Source: Bloomberg

Exhibit 5: City Lodge’s occupancy rates

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PAGE 6/32

Share price performance and shareholder structure

City Lodge Hotel Group (CLH) became successfully listed in the Johannesburg Stock Exchange on the 18th_{of November 1992, and it has ever since been a} member of the JALSH index, which currently has 162 members. When it first became listed, the stock had a price of ZAR 208.66 cents. Over a 10-year period, City Lodge share price registered a compounded annual growth of 12.11%. Comparing with the respective indexes, the JSE ranked ahead with a growth of 18.26%, while the JALSH ranked behind with a compounded growth of 7.85%. Regarding yearly changes, City Lodge’s share price in 2012 and 2013 saw very positive increases, 39.45% and 36.94% respectively, ranking ahead of both the JSE and the JALSH Index, which may be justified by the group’s specific characteristics, such as the information that the company would be expanding its operations abroad. On the other hand, in the year of 2011, the year immediately after the World Cup, the security registered a modest fall of 1.86% in its price. This decrease was also registered in the JSE and JALSH, reflecting a systematic component that affected the whole economy.

Over the same 10-year period City Lodge registered a very positive increase in its stock price comparing with its South African peers. This difference is mainly evident in the period following the beginning of City Lodge’s expansion outside South Africa. During the same period, the group’s share price in US Dollars registered a similar trend to its international peers. Moreover, the decrease in City Lodge’s price in 2009 was much sharper in USD than in ZAR.

Throughout this period, City Lodge’s evolution ranked ahead of the JALSH index, but behind the JSE exchange. Thus, this trend registered by City Lodge may not be entirely explained by the good performance of the whole economy.

Exhibit 7: Share price evolution in ZAR

Source: Bloomberg

Exhibit 8: Share price evolution in USD

Source: Bloomberg

Exhibit 6: Share price evolution in ZAR

Source: Bloomberg

Exhibit 9: Important events in City Lodge’s recent history

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PAGE 7/32 Furthermore, such as positive trend was not registered among the biggest players in this industry. Hence, part of this performance might be explained by the group’s specific characteristics and performance over the years.

In 1995, with the 10th anniversary of City Lodge, the Employees Share Trust was created to enable employees to become shareholders of the company. In 2008 the group was also able to successfully introduce BEE (Black Economic Empowerment) shareholders to its share base. BEE shares are a South African measure to incentivize black shareholders to take a more active part in the South African economy. The group currently has a total black ownership of 26.26%. As of December 2016, the group has 10 048 shareholders, and 43 505 000 shares outstanding, of which 25 300 000 free float. Furthermore, each ordinary share is entitled to one voting right.

The shareholder base is comprised of both public and non-public shareholders. The latter includes both directors and other employees. However, the distribution of shares across shareholders is not smooth, as 80.43% of shareholders with the least shares hold 3.28% of capital. On the other hand, 0.09% of shareholders with the most shares hold 43.09% of capital.

There are 16 beneficial shareholders that hold more than 1% of shares, accounting for 51.48% of total shares. However, the management responsibility of the group belongs to the investment management shareholders.

The group has an established policy of distributing 60% of its normalized earnings to shareholders, which in the financial year of 2016 led to a dividend per share of ZAR 5.17.

City Lodge also has outstanding preferred shares which are classified as a liability and are redeemable at a specific date or at the option of the shareholder. Dividends in this case are assumed interest expense in profit or loss as accrued.

The Sector

South Africa

Macroeconomic scenario

Even though South Africa is still classified as an emerging market, it is considered among all African economies the most developed one. Therefore, it sets itself apart from the other economies, which still have a longer pathway of development ahead.

BEE was developed in South Africa with the main

objective of righting the wrongs of the past, with a

special emphasis in the Apartheid.

Exhibit 11: City

Lodge’s shareholders

by geography

Source: City Lodge’s annual report

CLH BEE SPVs 14,7%

Aberdeen 9,6%

Enderle H R 8,8%

Melvin Douglas Inv. Man. 5,6%

PIC 5,6%

Abax Inv. 4,3%

Prudential Inv. Man 4,2% Fidelity Int. Ltd. 4,1% JP Morgan Asset Man. 3,8%

Total 60,8%

Inv. Man. holding more than 3% Exhibit 10: Capital held by Investment

Managers

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PAGE 8/32 South Africa’s economic growth has not displayed a smooth pattern over the last few years. During the decades of the 1980s and 1990s, South Africa, as well as the rest of Sub-Saharan Africa suffered severe slowdowns in their economies. After the oil boom of the 1970s, the collapse of commodity prices in the subsequent two decades significantly affected these economies, which translated itself in a decrease of output. After 1994, the South African economy experienced an impressive growth. Along with the rest of the region, which also experienced such growth, South Africa’s growth is also explained by the political stability achieved that year, with the first multi-racial elections being held, and consequently the end of Apartheid.

The most recent slowdown was registered in 2009, which was also registered in the rest of the world. This decrease in output was mainly explained by the financial crisis which affected not only the most developed economies, but also other economies such as South Africa. This fact evidences the idea that over the past decades, South Africa has been distancing itself from the least developed nations, such as the rest of Sub-Saharan Africa, and becoming more affected by developed economies’ issues.

In the year of 2015, the economy registered a slight slowdown, mainly due to drought and electricity constraints. The decreasing prices of commodities have also played a role in this deceleration, which is expected to continue in the future, with the GDP growth rate expected to come to a standstill. A possible rating downgrade was being discussed over the last months. And even though such a downgrade did not take place, Fitch changed the outlook on its assessment of South Africa’s future, moving it closer to a possible junk credit rating.

South Africa is facing difficult times, with very little growth and high inflation rates. This inflation was mostly driven by rising food prices, explained by the drought and currency depreciation. Therefore, monetary policy is expected to be ready to adjust money supply to guarantee that inflation expectations do not come ahead of those projected by the Reserve Bank. Labor productivity has been declining since 2011, evidencing the need for structural reforms to increase productivity and employment. Public debt has been growing steadily in recent years, with interest payments also increasing quickly, leading to the need for fiscal consolidation policies.

Adding to these factors, the political risk faced by this economy is another contribution to the expected stagnation of the South African economy. However, after the charges for corruption, fraud, and illegal spying by the National Prosecuting Authority (NPA) against Finance Minister, Pravin Gordhan were dropped, investors and businesses’ confidence in the South African economy

Exhibit 12: GDP real growth rate

Source: World Bank Note: South Africa’s GDP is

expressed in ZAR;

aggregates’ GDP is expressed

in USD

Exhibit 14: Inflation

Source: World Bank

Exhibit 13: South

Africa’s expected real

GDP growth

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PAGE 9/32 boosted. Although the widely-respected politician is known for the rigorous criteria he imposes on public spending, his task should be harder this year with the slowest GDP growth since 2009. South Africa still ranks as one of the least corrupt countries in Africa. Nonetheless, worldwide it displays a 44 level of corruption (from a scale of 100 – very clean, to 0 – highly corrupt), and ranks as the 61st_{most corrupt country out of 168.}

Hospitality industry in South Africa

The revenue from hotel room accommodation in South Africa increased 8.1% in the financial year ending on the 31st_{of December 2015 to ZARbn 14.2, a trend} that was also registered in the beginning of 2016. This reflects an increase in occupancy rates, but also in the average room rate per nightly stay.

A decrease of 6.8% in the number of international visitors was registered in 2015, comparing with the previous year. This decrease is mostly attributable to the strict Visa regulations imposed by authorities. For certain countries, applying for a Visa meant that travelers would have to do it in person. Furthermore, children under 18 would have to provide a certified full-length birth certificate, and in the case of travelling with only one parent, a written authorization by the other parent would also be required. These measures had a stronger impact in countries where there were fewer centers for Visa applications. This led to a 46% decrease on the number visitors from China, while visitors from India decreased 23.5%. However, it was not only from China and India that the number of visitors decreased: a large reduction from South American visitors was also registered due to the weakening of the Brazilian economy; Asia-Pacific and African regions also registered a decrease, as well as Europe and North America. The only exceptions, where an increase was registered, were in visitors coming in from the Middle East and North Africa.

However, towards the end of 2015 the requirements for a Visa application experienced some relaxations, with future amendments under consideration. Nowadays, those with a valid Visa to enter the United States or United Kingdom are also granted a Visa to visit South Africa. Tourist agencies can also provide Visas for their travelling groups. Consequently, the number of foreign visitors entering the country has started to slowly rise again. Furthermore, these Visa relaxations will have a special impact in business travelers. The Department of Home Affairs is implementing measures to reward and ease the application for a Visa for frequent travelers, such as business men and academics.

Apprehensions about a possible Ebola outbreak have also played a role in the decrease of foreign visitors, however South Africa is not a major center for the disease.

“The Ebola outbreak of 2014 killed five times more people

than all other recorded outbreaks combined.” BBC News – January 14, 2016

Exhibit 16: Foreign overnight visitors from top-10 countries outside

Africa in 2015 (in thousands)

Source: Hospitality outlook: 2016-2020 - PwC

Exhibit 15: Number of South

Africa’s visitors by origin

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PAGE 10/32 With the recognition of the importance of the hospitality sector in the whole country’s economy, the President has announced further investments to boost tourism in the country, which currently indirectly contributes to 9% of South Africa’s GDP. However, poor economic and financial expectations for the future may compromise the growth rate of incoming corporate visitors.

Moreover, poor global economic prospects may also influence the number of domestic travelers in South Africa. Nonetheless, the depreciation trend displayed by the South African Rand in respect to stronger currencies, such as the US Dollar, incentivizes foreign tourists to enter the country. As most incoming travelers come from foreign countries, in the short-term the currency effect will overshadow the effect of poor economic prospects, leading to higher increases in incoming travelers in the short-term, with a forecasted 4.6% increase in travelers in 2017. However, in the long-term the total number of travelers in South Africa is expected to increase at a more moderate rate.

Between 2009 and 2011, the whole industry added capacity, with an increase of 12.7% in rooms offered. This growth in the supply of rooms led to a reduction in the occupancy rates registered in the whole country, from 55.6% in 2009 to 53.0% in 2011. Since then, the number of rooms has been increasing at an average yearly rate of 1%, while occupancy rates have also been increasing slightly reaching 59.6% in 2015. Despite some hotels, especially those belonging to large international chains, being projected to open in the future, occupancy rates are expected to increase at a faster pace. Hence, with the increasing demand for tourism and supply, an overall occupancy rate of 61.2% in 2016 and 61.9% in 2017 is anticipated.

As for nightly rates, these are expected to increase slightly ahead of inflation for the whole industry. This leads to a forecasted increase in total revenues of 11.9% in 2016 and 7.0% in 2017.

3-star hotels offered 36% of the total accommodation in South Africa, and 32% of the total revenues in 2015. With an average room rate of ZAR 900 in 2015, 5.3% higher than 2014, 3-star hotels registered an increase of 1% in both occupancy rates and capacity. This led to an increase in total revenues of 7.4% in 2015. These trends are expected to continue in the future leading to a forecasted increase 7.6% in total revenues in 2016.

4-star hotels did not register any increase in capacity or occupancy rates (62.5%) both in 2014 and 2015, therefore revenue growth was solely explained by increases in room rates. However, both room availability and occupancy rates are expected to rise in the future. Room rates should maintain the previous trend. These prospects lead to an increase of 13.3% in revenues in 2016.

Exhibit 17: Total room revenue (ZARbn) and occupancy rates in South

Africa

Exhibit 18: Revenue by category of hotel in South

Africa in 2015

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PAGE 11/32 5-star hotels registered the highest occupancy rates, reaching 79.5% in 2015. As for room rates, these registered a growth of 7.7%, slightly above that of the whole industry. In 2016, occupancy rates are expected to reach 85%, while room rate increases should reach 20.9%. The main driver of these increases is the low supply of 5-star hotels. Occupancy rates dropped in 2010 due to the added 52% capacity in the previous year. Since that year no new hotels have been opened, which led demand to slowly catch up with supply. This leads to an expected growth of 34.3% in revenues in 2016.

Johannesburg, Cape Town, and Durban are the most important cities in South Africa for the hospitality industry. Johannesburg is more dependent on business travel than tourism. Hence, it has not been as affected as other locations by the restrictions imposed on tourism in the past. Cape Town is more dependent on tourism, therefore it suffered more severely from the restrictions imposed by the government. However, as some of those restrictions are being mitigated and eased, the market in this city is rebounding to numbers of past years. Room rates in Cape Town grew in 2015, leading to an increase in overall revenues by 9%. The city of Durban captures both tourists and business travelers. In 2015, revenue grew by 14%.

Kenya

Macroeconomic scenario

In 2017, presidential and legislative elections will be held in Kenya, leading to possible political tensions. Furthermore, threats from the Al-Shabaad, the Somalia-based Islamic group, which has previously carried terrorist attacks in Kenya, pose an important risk for the security of the country. Corruption is still a major issue for the economic and political environment of the country, since Kenya ranks as the 29th_{most corrupt country in the world.}

Along with other countries in Africa, Kenya’s gross domestic product has shown an important improvement, growing 5.6% in 2015 compared to 2014, driven by sectors such as agriculture and construction. GDP growth rate is expected to increase modestly in the following years, keeping afterwards a relatively constant rate. In 2016 the Central Bank of Kenya lowered the benchmark interest rate to 10.5%, comparing to previous year’s 11.5%, due to the recent trends of lower inflation rates and stabilization of the local currency. Inflation rates in the country reached 6.6% in 2015, slowing down from 6.9% in 2014, a trend that it is expected to continue in the future, with prospects of 5% inflation around 2020.

Exhibit 19: South African cities by population

(millions) in 2015

Source: Business Tech

Exhibit 20: Kenya’s real expected GDP growth

rate

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PAGE 12/32 Even though a cautious outlook is kept regarding the upcoming 2017 elections, Kenya is expected to keep the strong economic growth in the future.

Hospitality industry in Kenya

Tourism in Kenya has suffered in the past due to the economic crisis in Europe and North America. However, internal factors, such as political instability and the outbreak of Ebola have also played an important role in shifting tourism to other areas. Therefore, measures to mitigate these factors and ultimately increase tourism in Kenya have helped bring the number of foreign arrivals up in the first trimester of 2016, comparing with the same period last year. And while domestic travelling was almost inexistent ten years ago, it has become more important with the increase in middle-class income.

In 2015, total room revenue in Kenyan hotels increased by 6.1%, negatively impacted by a slowdown in occupancy rates, and positively by a rise in room rates. Furthermore, this increase was highly benefitted by the significant growth of the whole economy, which led to an increase in domestic tourism and business travel. Additionally, the capital city, Nairobi, was one the locations that suffered the least from the economic and political crisis; hence, for the future Nairobi is also set to benefit immensely from the increase in business travel in the country.

With good prospects for the future of the Kenyan economy, revenues from stay unit nights are also expected to keep a steady growth in the following years. In the future, more hotels are expected to open in Kenya, with the country building capacity in an industry that is still developing.

Botswana

Macroeconomic scenario

In its 50 years of independence, Botswana has become a politically stable country, with good governance and effective management of natural resources, largely supported by the discovery of diamonds.

However, the country is still considered vulnerable due to its dependence on commodities. In 2015, a decline in the mining production led to a slowdown in GDP growth, a decrease of 3% compared to 2014. Mining production is expected to improve with a higher demand from developed countries in 2016. Therefore, Botswana’s GDP growth should pick up previous levels, with an expected growth of 3.6% in 2016. Inflation in 2015 reached 3%, one of the smallest in the region. In the future, this value should increase slightly, keeping nonetheless its ranking as one of the lowest in Africa.

Exhibit 21: Evolution of hotel revenues in Kenya

(USD)

Exhibit 22: Botswana’s expected real GDP

growth rate

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PAGE 13/32 Income inequality in Botswana ranks as one of the highest in the world. HIV/AIDS is still a major hurdle for the country, with a prevalence rate among adults of 22%, which contributes to negative education and health outcomes. Nonetheless, Botswana is considered to have one of the best political systems in Africa, where Presidents are elected democratically and with high respect for human rights.

Hospitality industry in Botswana

Tourism in Botswana has benefitted from a shift of tourists from Kenya. With the main attractions of safaris and hunting, Botswana has since the 1960s become a more popular destination. Nowadays, the tourism sector indirectly accounts for about 12% of the country’s GDP. Moreover, Botswana is one of the highest ranked African countries regarding transparency and lack of corruption. These factors have contributed to the development of the financial sector and a slow but steady increase in foreign direct investment inflows. Hence, the hospitality industry is expected to be positively affected by the incoming business travelers to the country.

Moreover, recent plans to diversify Gaborone, the capital and economic center of the country, are taking place, making it a more attractive place for investors. Hence, with the development of the city, business travel has become especially important for Gaborone, since tourism has a higher incidence in rural areas for attractions such as safaris.

Other countries

Macroeconomic scenario

Currently, City Lodge has hotels located in three different countries, however, in the future it intends to open eleven new hotels outside South Africa. Moreover, the countries where these new hotels are due to open are spread out across the entire continent and display very different risk profiles, with most of these countries ranking as some of the most corrupt nations worldwide.

With national elections coming up in 2017, Rwanda’s future seems almost

certain with a reelection of the current president. Even though Rwanda is expected to maintain a high economic growth in 2016, this should come slightly behind the growth registered in previous years. This fact is explained by external headwinds, such as the weaker demand for the country’s mineral exports, which also deteriorated significantly the current account deficit.

Namibia registered a slowdown in economic growth with the GDP growth rate declining form 6.4% in 2014 to 4.5% in 2015, explained mainly by the weak commodity prices. Nonetheless, strict monetary policy allowed for a decline in

Exhibit 23: Number of incoming tourists to Botswana (in millions)

Source: Index Mundi

Corruption Index

Botswana 63

Rwanda 54

Namibia 53

South Africa 44

Ghana 47

Zambia 38

Ethiopia 33

Ivory Coast 32 Mozambique 31

Tanzania 30

Nigeria 26

Kenya 25

Uganda 25

Angola 15

Exhibit 24: Corruption indexes (100=very clean;

0= extremely corrupt)

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PAGE 14/32 inflation rates. Economic growth is expected to increase to 5.8% in 2016, prompted by a strong political and macroeconomic environment, making Namibia one the most stable countries in this region, factors which may promote investment in the country.

In Ghana, fiscal consolidation and increases in crude oil production should contribute to a higher economic growth in 2016, comparing with a 4.0% GDP growth in 2015. Inflation in 2015 was extremely high reaching 17.2%, however after 2017, inflation is expected to normalize, reaching numbers close to 9%. With contested results after the presidential elections in August and high dependence on commodity prices, Zambia is set to face hard times. However,

future fiscal consolidation should allow GDP to grow nonetheless, after registering a growth of 3.2% in 2015.

Ethiopia’s economy registered a growth of 9.6% in 2015. However, the unforeseeable protests of 2016 along with the drought the country went through have put some pressure on the whole economy, whose expected growth for 2016 has deteriorated. Nevertheless, this growth is expected to slightly pick up in the years after.

Ivory Coast’s economy is growing fast, with a registered growth of 8.4% and an

inflation of 1.2% in 2015. It is becoming a stable country with strong institutions and less dependent on the production of cocoa as its economy diversifies, hence the outlook for the future is positive, with a forecasted GDP growth of 8.5% for 2016.

In Mozambique, the fourth President was democratically elected in 2015. However, Renamo, the former rebel group which became the opposition party, doubled its parliament seats. While the current Government has a higher influence in the southern part of the country, Renamo holds a higher influence in the north. Political and social tensions have been rising as a result of strong disagreements between the two parties, leading to a possible peace deterioration. Hence, despite the positive forecasts for the growth of the economy in the future, with 2016’s GDP expected to grow 6.0%, Mozambique still faces a significant downward risk.

Tanzania has become a stable economy within this region with a growth of 7% in 2015, explained by an increase in public consumption. Political stability has also been a major contributor to the good performance of this economy. Despite the high corruption index the country still displays, economic growth is expected to remain relatively constant in the future, with yearly growths around 7%. Inflation reached 5.6% in 2015 due to higher domestic food prices and a depreciation of the currency.

Exhibit 26: Expected real GDP growth rates

Source: International Monetary Fund

Exhibit 27: Expected real GDP growth rates

Source: International Monetary Fund

Exhibit 25: Expected real GDP growth rates

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PAGE 15/32 With future economic and political uncertainty, and security risks brought mainly by the radical group of Boko Haram, Nigeria, the largest African economy, may

experience one of the slowest growths in the region, with an expected growth of 2.3% in 2016. Moreover, declining oil prices have severely influenced growth in Nigeria, which is highly dependent on this commodity.

With elections taking place in the beginning of 2016, the incumbent President of

Uganda has now been in office since 1986. Even though these elections have brought some political stability to the country, these are still far from being completely democratic due to factors such as corruption or abuses of human rights. GDP growth is predicted to increase slightly to 5.3% in 2016 after a registered growth of 5.0% in 2015.

Angola is still one the most important economies in Africa, however as it is highly dependent on crude oil, the GDP growth rate is expected to decrease in 2016 to 2.5%. Moreover, a sharp depreciation of the local currency, the Kwanza, as well as loose monetary policies have led prices to rise sharply. Despite experiencing political stability since the end of the civil war, Angola still ranks 6th_{among 168} countries in terms of corruption, which may pose as a big challenge regarding the development of the whole country.

Hospitality industry

The hospitality industry is growing rapidly in Africa. Besides local businesses, international hotel chains are also expanding into Africa, where there are many opportunities to develop a profitable business. With the recent developments of the pipeline across the continent, the number of rooms available has been increasing over the past years.

Tourism has been growing rapidly in Africa with the number of foreign visitors entering the continent increasing each year. While in 1990 the total number of visitors was 6.7 million, this number grew exponentially the years after, reaching 33.8 million in 2012. In countries like Tanzania, this sector is one of the fastest growing, with tourism contributing indirectly to 14% of GDP in 2015. Hence, tourism became a contributor to the stimulation of the continent’s economy. Furthermore, with most of these economies growing at a fast pace and with many business opportunities, the number of foreign corporate visitors in Africa also has room to grow. Furthermore, while expanding outside South Africa, City Lodge has been prioritizing the expansion into the capital cities, or to the most important cities in the country. Hence, the group is in a strategic position to capture business travelers coming into these countries.

While tourism and economic development is growing in Africa, there are more risks associated with opening a business in this area. Many hotels are already “Africa is becoming the

new battleground for global domination among

hotel groups.” Financial Times – January

10, 2014

Exhibit 28: City Lodge’s plans for expansion in the

future

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PAGE 16/32 being able to shield themselves from outside risks, such as terrorist attacks, with extra security measures. However, besides the risk of opening a business in a more volatile country, the lack of transparency of the public institutions of the country may pose as a serious threat. That is, regulation to open a new hotel in some of these countries may not be as transparent as it is desired, leading to possible failed investments in hotels which were not allowed to open.

Moreover, differences in the hospitality industry across the continent are still evident. Countries like Nigeria, Tanzania or Zambia have already more matured markets. On the other hand, Angola and Ivory Coast still have a more underdeveloped hospitality market. However, with strong institutions and prioritizing the development of tourism, these are expected to grow substantially in the following years.

Competition

City Lodge’s competition is extremely diverse and its competitors vary according to the location of a specific hotel. The majority of its hotels are located in the biggest cities in South Africa, while outside South Africa these are located in the capital cities of each country. Therefore, many hotel chains may not be direct competitors to every City Lodge hotel. Furthermore, for some locations, specific hotels, which are not publicly traded, may be the biggest competitors for a certain City Lodge hotel. In Johannesburg, hotels such as the Monarch Hotel or the Residence Boutique rank among the most popular hotels for business travelers. While for Cape Town, the 2Inn1 Kensington or the MannaBay rank in the top for business travelers. However, as these hotels are not publicly traded it is hard to compare them with City Lodge. Hence, the competitors analyzed comprise hotel chains whose hotels compete with City Lodge in the majority of its locations.

Gooderson Leisure Group – This company offers accommodation to tourists and corporate travelers in South Africa. It also provides other services: weddings, catering, conference facilities and spa. This chain was established in 1957, and became listed in the JSE in 2006, and with ten hotels in South Africa, Gooderson Leisure Corporation has a current market capitalization of ZARm 75. In the financial year of 2016, which ended on February 29th_{2016, the revenue was} ZARm 150, 17% higher than the previous year, a rate that has been relatively constant in the past. This increase is mainly due to an 8.9% increase in room rates, since occupancy rates have been relatively low, registering a decrease in 2016, 36% comparing with 39% in 2015.

Exhibit 29: Tourism direct contribution to GDP (%) in

2015

Source: Tourism Data for Africa

Exhibit 30: Previous financial year occupancy rates in Africa

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PAGE 17/32

Sun International Ltd – This chain operates in the gaming, hospitality, and

entertainment sector. It was created in 1967 in South Africa, and became listed in the JSE in 1984. Nowadays, Sun International is one of the largest tourism groups in South Africa, operating or having interest in 18 hotels, resorts, or casinos. It has since 2008 expanded to Latin America, where it currently holds operations in four countries. It also holds operations in other African countries. Currently, Sun International has a market capitalization around ZARbn 9. In the financial year ending June 30 2016, the group registered revenues of ZARbn 15, 9.1% higher than 2015. This increase is explained both by an increase in occupancy rates and in room rates.

Tsogo Sun – This group’s portfolio includes 93 hotels across Africa and

Middle-East, mostly concentrated in South Africa, with hotels ranging from luxury to more simplistic. The group also offers gaming, entertainment, and conference facilities. Tsogo Sun’s, listed in the JSE, has a current market capitalization of ZARbn 33. Occupancy rates for the group grew slightly to 62.5% in the financial year of 2016, which ended on the 31st_{of March. Room rates displayed the same} trend. However, the biggest parcel of the group’s revenues comes from the gaming industry, and only afterwards comes the hospitality industry. Tsogo Sun had a revenue of ZARbn 12 in 2016, up 8% from the previous year.

Marriott Hotels – This major North American hotel group has become a multinational enterprise present in around 110 countries, with a current market capitalization of USDbn 27. In Africa, the Marriott group is present through several brands, the most significant being Protea Hotels, for which it is a leading brand in the hospitality industry. Marriott is already the biggest hotel provider in Africa, being currently present in 10 countries, however this number is expected to increase to 16 by 2020. In the financial year of 2015, ending on the 31st_of December, Marriott registered a positive outlook in Africa. Occupancy rates in 2015 increased 2.7% from 2014, reaching 61.2%. However, room rates decreased 3.5% in 2015. The region of Africa and Middle-East contributed with USDm 37 for the profit of the whole group. Furthermore, certain brands of the company, such as Westin are present in South Africa with hotels that put a special emphasis in corporate guests. In Cape Town, Westin is the only brand with a direct connectivity to the convention center.

Hilton –This hotel chain was created in 1925, with the first hotel being opened in

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PAGE 18/32 entire EBITDA, however as a fast-growing group new hotels are expected to open in the continent in the future. Hilton registered an occupation rate of 66% in 2015 in Africa, which was the lowest for all the regions where the group operates. Room rates decreased 1.9% in 2015. Thus, even though this region is still being affected by political risk and low oil prices, revenues are increasing as a result of higher demand.

Accor –Created in France in 1967, Accor operates under 20 well-known brands, that offer hotels ranging from more luxurious to less sophisticated. Nowadays, it is present in 95 countries with 4100 hotels. Accor is quoted in the Euronext Paris, with a current market capitalization of EURbn 11. In Africa, it has 45 hotels, from Northern-Africa to Sub-Saharan. In the African and Middle-Eastern segment, EBITDA in 2015 was EURm 83. This value was 43% higher than in 2014, furthermore, EBITDA for the whole group grew only 6% in 2015.

InterContinental – With headquarters in London, UK, InterContinental ranks as

one of the biggest hotel chains worldwide, holding operations in more than 100 countries. Currently, it has 12 different brands, with different prices and types of accommodation. InterContinental is quoted in the London Stock Exchange, with a current market capitalization of GBPbn 7. Contributing 13% for the whole group, the AMEA region (Asia, Middle-East, and Africa) registered a revenue of USDm 242 in 2014. Furthermore, InterContinental’s presence in Africa’s major cities is already quite important, principally through the Holiday Inn brand.

City Lodge faces thus competition from local businesses as well as national and international hotel chains. While City Lodge may be a well-known chain in South Africa, having an advantage in local tourism and business travel, many international tourists or businesses look for more renowned international chains. However, the group collects most of its revenues from corporate clients, unlike most of its competitors. Therefore, its offer of more simplistic hotels, having nonetheless distinct economic brands, for an adjusted price, may be a significant advantage, since it fulfils the requisites many business men look for.

City Lodge’s

Performance

City Lodge’s revenue in past years has grown significantly. This can be explained mainly by increases in capacity and prices. Moreover, slow increases in occupancy rates in most years have also contributed to higher revenues. Despite having registered a negative growth in occupancy rates in 2016, the group’s revenue grew 15% nevertheless to ZARbn 1.5 (vs ZARbn 1.3 in 2015).

Exhibit 31: City Lodge’s past revenues

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PAGE 19/32 The current three hotels outside South Africa have been playing an ever more important role in the group’s performance. While in 2013, the combined revenue of these hotels amounted to ZARm 0.755, by 2016 the revenue has grown to ZARm 150.

The book value of City Lodge’s assets rose by 6.6% in 2016, with a total value of ZARbn 1.9 being registered this year. The book value of equity followed the same trend, with a total increase of 19.8% in 2016 to ZARm 872.

Valuation

Even though City Lodge Hotel Group has operations in different markets, the consolidated financial statements do not discriminate operations by country. Therefore, each monetary item in the statements is presented in South African Rands. Any gains or losses derived from movements in exchange rates is then registered in the appropriate lines of each statement. However, possible sudden movements in exchange rates may affect City Lodge’s revenues, with the exceptions of revenues generated in Namibia, since the Namibian Dollar is pegged at par with the South African Rand. Hence, even though revenues for each location were calculated in South African Rands, following the pattern of the group’s past statements, these had in account the expected future exchange rates, through a method of expected inflation by country each year.

Revenue drivers

Currently the group has 54 hotels in South Africa, 2 in Kenya and 1 in Botswana. In 2017, three new hotels are due to open, one in Kenya, one in Tanzania and one in Namibia. In 2018, another hotel will open in Mozambique. While these four hotels are certain to open, the group has prospects of opening eight other hotels in the medium term which do not have any formal confirmation yet. Hence, and having in account the added risk of developing a business in Africa, two scenarios were forecasted.

 Upside scenario

This business has three main revenue drivers: room capacity, occupancy rates and room rates.

Besides the four hotels due to open until 2018, the group is expected to open the other eight hotels by 2022. It is forecasted that from 2020 to 2022 the group opens the desired hotels; this represents an increase in annual capacity that matches the group’s previous expansions.

Local curr/USD 2014 2015 South Africa 11,6 ZAR 15,5 ZAR

Botswana 9,5 BWP 11,2 BWP

Kenya 91 KES 102 KES

Tanzania 1 751,3 TZS 2 159,8 TZS

Namibia 11,6 NAD 15,5 NAD

Mozambique 34,0 MZN 47,8 MZN

Uganda 2 770,1 UGX 3 367,0 UGX

Rwanda 714,3 RWF 769,2 RWF

Zambia 6,4 ZMW 11,0 ZMW

Angola 103,1 AOA 135,1 AOA

Ethiopia 20,3 ETB 21,2 ETB

Ghana 3,2 GHS 3,8 GHS

Ivory Coast 542,0 XOF 610,1 XOF

Nigeria 182,5 NGN 199,3 NGN

Exhibit 32: Exchange rates’ evolution

Source: Bloomberg

Exhibit 33:Number of new

rooms expected each year

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PAGE 20/32 Occupancy rates are expected to resume the trend registered between 2011 and 2015: increasing slightly in the following years. However, having in account the current macroeconomic scenario and the fact that some competitors are adding capacity, occupancy rates should not reach the high levels registered in 2010. Outside South Africa, the new hotels should not experience high occupancy rates in the years following its openings. Thus, a more conservative forecast was made for non-South African hotels. Nonetheless, with the hospitality industry growing in the whole continent, occupancy rates are expected to increase in further years. The third revenue driver is increases in room rates and increases in the price of food and beverages. With a more conservative perspective regarding the global economy, room rate increases should not reach the high levels registered in previous years. These forecasts follow the group’s strategy of keeping price increases below those of competition to be able to keep or increase its current market share. 90% of the group’s revenues come from nightly stays, hence the remaining 10%, corresponding to food and beverages were, forecasted separately.

Even though not every guest spends money on food and beverages, services that are not included in nightly stays, a certain proportion of guests does. Therefore, an average revenue per room deriving from food and beverages was estimated. However, price increases in these products do not follow those of room rates. As these are not essential for a guest staying in the hotel, more moderate increases were assumed. Hence, these were forecasted to increase at the same rate as expected inflation in South Africa.

 Downside scenario

In this scenario revenue drivers are expected to behave differently. Projects in Africa often get delayed or even canceled, furthermore as a business that it is highly depend on corporate travelers, if the economy suffers a setback, the performance of the group may be strongly affected. Therefore, this scenario is more conservative and explores the possibility that the group’s plans fall short of what is projected. However, as the long-term is more uncertain, differences between the two forecasted scenarios are only registered after 2018.

Exhibit 34: Expected occupancy rates

Source: Analyst’s forecasts

Upside scenario 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CAGR Number of rooms 7072 7539 7687 7687 8059 8363 8735 8735 8735 N/A

Occupancy rates 66% 67% 67% 69% 68% 68% 69% 70% 70% N/A

Increase in nightly rates 12% 8% 8% 8% 8% 8% 8% 7% 7% N/A

Increase in f&b prices 12% 6% 6% 6% 6% 6% 6% 5% 5% N/A

Revenue South Africa R1 344 R1 464 R1 549 R1 687 R1 756 R1 833 R1 958 R2 036 R2 166 6,6%

Revenue non-South Africa R150 R165 R318 R402 R576 R659 R938 R1 093 R1 165 27,7%

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PAGE 21/32 The estimation of the first revenue driver, room capacity, is less optimistic. That is, it is expected that hotels which have not yet been confirmed by the group will not open in the future. City Lodge’s portfolio will thus be composed by 61 hotels.

The forecast of the second revenue driver, occupancy rates, will also be more conservative. Thus, for the South African hotels, occupancy rates should still increase in the short-term, as predicted by the group. However, if the economy starts to worsen, as assumed in this scenario, occupancy rates should decrease slightly. As for non-South African hotels, right after their opening lower occupancy rates are expected as well. Yet in the downside scenario these occupancy rates are not expected to rebound much more a after the hotels open.

The last revenue driver is the price of rooms, food, and beverages. This latter driver is set to be the one that will suffer the least from a poor economic environment. Moreover, prices of food and beverages are predicted to have the same growth as in the upside scenario. On the other hand, increases in room rates will be more moderate to face decreases in occupancy rates.

Costs

Since this business’s main revenue stream are services, the cost of goods sold is relatively low. Hence, the only costs of goods sold derive from food and beverages. Nonetheless, the group will have other important operating costs, such as electricity and water consumption. In the past years, City Lodge has become more environmentally friendly. It has placed in its rooms measures to help reduce the consumption of electricity and water. A decreasing trend in the consumption of these has been in fact verified in past years, however, with the rising prices, the overall cost has been slowly increasing. Thus, these costs are expected to rise slightly due to rising prices. Furthermore, operational costs also include the wages and salaries paid. One of the main advantages of expanding outside South Africa is the lower wages the group pays to its foreign employees, since average salaries in South Africa are higher than in most African countries. Hence, during the expansion years, operational costs as a proportion of total revenues will decrease slightly, translating the benefit of paying lower wages to a proportion of employees, a fact that is more evident in the upside scenario where the expansion abroad is more significant. In the long-term, profit margins are Downside scenario 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CAGR Number of rooms 7072 7539 7687 7687 7687 7687 7687 7687 7687 N/A

Occupancy rates 66% 67% 67% 67% 64% 64% 60% 60% 60% N/A

Increase in nightly rates 12% 8% 8% 5% 5% 5% 5% 5% 5% N/A

Increase in f&b prices 12% 6% 6% 6% 6% 6% 6% 6% 6% N/A

Revenue South Africa R1 344 R1 464 R1 549 R1 666 R1 674 R1 734 R1 721 R1 808 R1 899 6,6%

Revenue non-South Africa R150 R165 R318 R343 R346 R360 R359 R378 R399 27,7%

Total Revenue R1 493 R1 629 R1 866 R2 008 R2 020 R2 094 R2 080 R2 186 R2 299 10,4%

Exhibit 35: Expected occupancy rates

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PAGE 22/32 expected to be lower than in the upside scenario due to the higher taxes paid in most countries where City Lodge expects to expand.

Net Working Capital and CAPEX

Inventories are comprised by food, liquor, and beverages. Thus, inventories in the past have been a constant proportion of the revenues deriving from these products. As such, future inventories were calculated in the same way. A method of past days’ receivables and payables ratios was used to calculate accounts receivables and payables respectively.

With its current goal of expanding abroad, City Lodge intends to follow a strategy of choosing and buying strategic properties rather than leasing and managing. Consequently, the group has announced high investments in CAPEX, both for maintaining operations and to expand operations in 2017 and 2018. Future Capex for maintaining operations was calculated to compensate the expected depreciation each year. The calculation of expansion CAPEX comprises more uncertainty. Hence, to calculate future expansion CAPEX, past data disclosed by the company regarding the expected cost of developing two hotels, one in Nairobi, Kenya and one in Dar es Salam, Tanzania was used.

However, as the countries where City Lodge wants to open new hotels are extremely different, these costs may differ from hotel to hotel. The first measure to calculate the cost per new hotel regards the expected size of the hotel, in respect to number of rooms. Afterwards, to measure the average cost of the land in each country, renting prices for each location were used, that is, the price of rent per square meter in the largest city of each country. Even though, prices in major cities are higher, it is expected that new hotels will be located in these cities. Thus, for countries like Angola1_{or Nigeria, the cost of building new hotels} was estimated to be much higher than in countries like Namibia or Uganda.

1_{The cost of rent in Luanda, Angola is extremely high. Thus, the value of rent in Abuja, Nigeria (the second most}

expensive) was used to calculate Capex in Angola, since it was assumed the group will not engage in the Angolan hotel if the price of the land is that high.

Upside scenario 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

EBITDA margin 42% 42% 42% 43% 43% 43% 43% 43% 43%

EBIT margin 35% 35% 34% 35% 35% 34% 34% 33% 34%

Profit margin 21% 23% 22% 22% 22% 21% 20% 20% 21%

Downside scenario 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

EBITDA margin 42% 42% 42% 43% 42% 42% 42% 42% 42%

EBIT margin 35% 35% 34% 34% 33% 33% 33% 33% 34%

Profit margin 21% 23% 22% 21% 19% 20% 20% 21% 22%

Exhibit 36: Renting prices (USD per square meter per month) in the biggest city of

each country

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PAGE 23/32

Valuation

As an African business, which comprises more risk, City Lodge is expected to keep its debt relatively low. However, with future expansion, short-term debt should increase in the short and medium-term, eventually decreasing when the business stabilizes. Furthermore, in the long-term the proportion of debt to equity should decrease, eventually becoming residual. With the current payout ratio of 60%, eventually City Lodge will become a cash generating business. Thus, it is anticipated that this ratio will increase in the future. Furthermore, with less capital expenditures in the downside scenario, this cash will start accumulating sooner, hence an increase in the payout ratio in this case will be registered sooner than in the upside scenario.

Even though, GDP growth rate in South Africa is expected to slowdown in the future, the other less developed countries present higher prospects for GDP growth. Furthermore, the hospitality industry, both for corporate guests and tourists, is becoming one of the main contributors of the countries’ GDP, translating the importance and growth of this industry in Africa.

Thus, for the downside scenario, operational FCF are forecasted to grow at a rate of 4.4% per year. In the upside scenario, a yearly growth rate of 5.2% is expected.

WACC assumptions

The Weighted Average Cost of Capital was used to valuate City Lodge’s business. As the group’s financial structure includes both financial debt and equity, the cost of each was calculated separately.

Long-term and short-term interest-bearing loans compose City Lodge’s financial debt. The long-term debt includes two loans, loan A amounting to ZARm 250 and loan B amounting to ZARm 20, which once matured are forecasted to be rolled over; and BEE interest-bearing borrowings which should remain constant at ZARm 44, as it has happened in the past. Short-term debt is composed by a bank overdraft which is adjusted in the future according to the group’s financial needs. The cost of debt was calculated using the current 10-year South African

Treasury bond yield, the annualized default probability and assumed a recovery rate of 70%. This rate was assumed since City Lodge’s debt is not rated.

Exhibit 37: Book equity and net debt

Source: City Lodge’s annual reports

Operating Free Cash Flow 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Upside scenario -R12 R223 R153 -R59 -R31 R272 R801 R843

Downside scenario -R12 R223 R29 R496 R510 R505 R528 R551

Yield long-term 8,8% Annual default prob. 0,4% Recovery rate 70,0%

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PAGE 24/32 Nonetheless, as a business located in a high-risk country the levels of debt will be low to mitigate any event of default.2

The cost of equity was calculated through the Capital Asset Pricing Model, using the following inputs: risk-free rate, levered beta, and market risk premium. As the South African sovereign bond rates are a poor approximation of the risk-free rate, the US 10-year Treasury-Bond was used as an alternative for being considered the best approximation to a risk-free asset. Moreover, this rate was adjusted to the South African Rand through inflation differentials, spot and forward exchange rates between the South African Rand and US Dollar. This process yielded a risk-free rate of 6.5%.

The beta was found through a comparables method. Eleven comparable businesses, not only from South Africa but also from other African countries and developed countries, were used. A median of all the unlevered betas was used to calculate City Lodge’s levered beta each year.

City Lodge’s capital structure is characterized for having low levels of financial debt. Nonetheless, these values will change during the subsequent years, until net debt eventually becomes relatively constant while market capitalization increases. Consequently, in the long-term the debt percentage in City Lodge’s capital structure is expected to be close to 0%.

Even though City Lodge’s operations are in countries with higher alleged risks, no country risk premium was included in the discount rate. Even so, all perceived risks were comprised in the valuation. The risks with a systematic and undiversifiable nature are included in the levered beta; while the cash flows

reflect all diversifiable risks, as well as some systematic risks. Hence, to calculate

the market risk premium, it was only had in account the additional return investors receive from investing in the market instead of investing in a risk-free asset. An historical approach of S&P 500 returns was used. This index was used as an approximation to a world index, such as the MSCI World, whose correlation with the S&P 500 is almost 1, with the added advantage of having more observations. Using the returns of S&P 500 since 1990, as well as returns from the 10-year US Treasury Bond, a final annual market risk premium of 6.4% was achieved.

Even though the final WACC used each year depends on that year’s capital structure, with little variation the achieved WACC each year will be close 12.0%.

2_{After performing a sensitivity analysis to evaluate the impact the cost of debt has in the target price, it was determined}

that the effect of the cost of debt is extremely small in the final price target. With a cost of debt of 6% the target price will be ZAR 166, while with a cost of 12% the target price is ZAR 161.

Comparables Unlevered beta

City Lodge 0,58 Sun International 0,45 Tsogo Sun 0,75 Marriott 0,85 Hilton 1,03 Accor 0,98 Hyatt 1,00 InterContinental 0,75 Lux Island Resorts 0,73 New Mauritius 1,08 Host Hotels&Resorts 1,33 Redizor 0,87

Median 0,87

10Y T-Bond 2,4%

E CONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES.T HIS REPORT WAS SUPERVISED BYR OSÁRIOA NDRÉ WHO REVIEWED THE

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A business in expansion

...but with some risks associated

Table of Contents

Executive Summary ... 3

Company Overview ... 3

The Sector ... 7

Competition ... 16

City Lodge’s P

erformance ... 18

Valuation ... 19

Sensitivity Analysis ... 27

SOTP Analysis ... 28

Appendix ... 29

Executive Summary

Company Overview

Company description

Share price performance and shareholder structure

The Sector

South Africa

Macroeconomic scenario

Hospitality industry in South Africa

Kenya

Macroeconomic scenario

Hospitality industry in Kenya

Botswana

Macroeconomic scenario

Hospitality industry in Botswana

Other countries

Macroeconomic scenario

Hospitality industry

Competition

City Lodge’s

Performance

Valuation