Rougher seas ahead for SA tourism – and a top performing JSE stock “priced for perfection”

Cullinan has done very well over the past three years - but is now priced for perfection
Cullinan’s share price has done very well over the past three years – but is now priced for perfection and vulnerable

A clear play on the health of SA tourism,¬†Cullinan Holdings has been one of the best performing shares of the past year, ¬†up 74% to a market cap of R1.6bn. The company chose an unusual time – December 23rd – to release its financial results for the year to end September. That’s a pity because I would have liked to engage again with the CEO Michael Tollman, a member of the famous hospitality family. To its credit, though, the travel and tourism company published its 2013 annual report at the same time, providing plenty of additional information for investors. Best known for its Thompsons Tours, Pentravel, Ikapa and Springbok Atlas brands, Cullinan reported a 58% HEPS improvement and with the recently acquired tourism business of Imperial starting to kick in, the company is expectant. His CEO’s letter in the annual report has Tollman expressing confidence in ¬†being able “to achieve above average¬†growth in 2014. We believe¬†the tourism¬†market to Southern Africa will expand further over the next five years,¬†both from Asia as well as from other markets.” Maybe. But before you rush out and buy the shares, have a read of independent investment actuary Rob Baker’s report which shows there clouds on the horizon. Cullinan shares, trading on 26 times last year’s earnings, are priced for perfection. They are vulnerable. ¬†– AH¬†

msc_operaBy Rob Baker*

If you build it they will come? Plans are advancing for the building of a new passenger cruise terminal in Cape Town’s V&A Waterfront…but will the passengers come? Cruise tourism in South Africa is reaching its peak this summer, and as things stand there will be a severe reduction in the supply of cruises in the 2014/2015 season.

In a blow to the South African tourism industry, MSC Cruises has decided to send only one ship to our shores in the summer of 2014/2015. This compares to the 2 cruise ships plying our shores this season (2013/2014) and last season (2012/2013). Even in the 2011/2012 and 2010/2011 cruise seasons there were 2 ships – the MSC Sinfonia and the MSC Melody (although the Melody is slightly smaller than the MSC Sinfonia and MSC Opera. The ships sailing South Africa’s shores this season (the same for last season) are the¬†MSC Opera¬†and the similarly sized MSC Sinfonia cruise ship. The Sinfonia has 777 cabins. Apparently the MSC Opera is going to the dry dock to be lengthened by 24m and some 200 cabins added on (yeah, apparently they can do this kind of thing!), but this only happens on the 2nd may 2015, so not in time for the new season.

The Opera will do 38 cruises in the 2014/2015 season. Assuming 2 spending adults per cabin, 90% full on average, and that the Sinfonia would do only 30 cruises, this means that there’s some 53,000 fewer passengers cruising in 2014/2015 off South Africa’s shores. It’s mostly local South Africans that go on these cruises. Sectors which are going to lose out are :

  • Airlines¬†: Although there are a fair number of Durbanites and Capetonians cruising, there are more Gauteng passengers than from Durban and Cape Town, and they would have to book return flights (typically to Cape Town or Durban). Even the Durban and Cape Town passengers would need to make flight bookings for the Cape Town to Durban/Durban to Cape Town and repositioning cruises to Europe.
  • Hotels¬†: Often cruise passengers will spend a night or more in a hotel in Cape Town or Durban before or after their cruise.
  • Other passenger spending¬†: Whilst in Cape Town and Durban the passengers spend money at tourist attractions and restaurants in the cities. Some of the cruises have stops in Mossel Bay, Port Elizabeth, Namibia, Mozambique, Mauritius, Reunion and Madagascar; and the spots they visit during these stops will suffer a small decline.
  • Harbour industry¬†: I’m not sure how the fees to the harbours work, but it will no doubt result in a decrease in the fees to the ports and related industries (e.g. food/drinks/fuel being delivered to ships)

Some of the people who don’t cruise will probably spend their money on other tourist-related activities (so there’ll be some tiny winners), and it’s not a complete loss. On the other hand, cruise prices are likely to be higher than they would otherwise be if there were 2 ships.

Whichever way it goes a new passenger cruise terminal at the V&A Waterfront will be much welcomed. Cape Town took a huge step backwards when overzealous authorities stopped allowing cruise ships to berth outside the Table Bay Hotel, and moved to tents at the windswept Eastern Mole portion of the Table Bay Harbour. The move to the sheds at E-Berth in 2012 represents a vast improvement over the Eastern Mole, but a shift to the Waterfront again is first prize.


Cruise tourism is only a small slice of the South African travel pie, but if MSC Cruises is seeing a declining market for cruises from South Africa, one has to wonder whether the issues are specific to the cruise market, or just to MSC Cruises.

  • Airline Industry¬†: Looking at the last 3 months available stats for OR Tambo International Airport, from August to October 2013, there were 2.5m passenger arrivals, compared to 2.4m in the same months in 2012 and 2.5m in 2011. It’s pretty flat, which is not bad considering that capacity was removed by both 1time and Velvet Sky going under.
  • Hotel Industry¬†: Tsogo Sun reported that the 6 months to 30 September 2013 saw overall industry occupancies at 59%, compared to 58% a year earlier (note that this is a different metric, to the total supply figures for cruises).

What may have happened in the cruise sector is that more supply was added in 2012/2013 and 2013/2014 than the South African market could absorb, and now it is being scaled back to a more sustainable level. Of course it is far easier for a cruise liner to change its supply of ships by moving them to the Mediterranean; than for a hotel group (its hotels are stuck where they are!) or even an airline (it has to abide by regulatory restrictions on where it can fly).


* Rob Baker, an investment actuary, runs Contact him on for details on his subscription service, available for community memebrs at R50 a month (usual cost R100 per month)

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