Things are supposed to be looking up for the hotels and leisure sector. All over the country, glittering hotels have been built as SA gears up to host the soccer World Cup. Instead the outlook for the sector seems decidedly gloomy.

Tourism has been hit hard by the global financial downturn. As a long-haul destination, SA's foreign tourism plummeted 9,1% from August to December last year. The recession hit not only the leisure market, but also corporate travel budgets. Xenophobic attacks last year didn't help either. They contributed to a decline of 3% in tourists during April last year and just as the market began to recover, the financial crisis began to unfold.

Though the soccer Confederations Cup and the Lions rugby tour may offset the decline somewhat, a recovery for the sector is only on the cards from 2010. But with occupancies falling, it's all-out war between the hotel groups. Five- and four-star hotels are discounting rates to compete with three-star players.

One company that is well positioned in this market is City Lodge. Though business travel is likely to be curtailed, the company continues to benefit from its competitive pricing strategy, attracting travellers keen to stay in more affordable accommodation. The group is also likely to be more resilient than the gaming counters, which have been affected as consumers are left with less disposable income. Though gaming stocks have historically been fairly well insulated against economic blips - people gamble even in tough times - this time around it hasn't proved to be the case.

City Lodge, however, has a strong pipeline of new hotels and with its low gearing levels and attractive dividend yield of 7,2%, it tops the lists of a number of analysts.

Gauteng is the strongest performing province, growing on average by 7% for the year to mid-March 2009. KwaZulu Natal also grew about 6% last year. However, the Western Cape market declined by 15% in the year to February 2009 and gaming revenues were also down in the Eastern Cape by 1,5% during the first two months of this year.

Sun International is exposed to the poorer performing Western and Eastern Cape markets, while Gold Reef has the largest combined market share in better performing Gauteng and KwaZulu Natal. Sun International also faces a double whammy in that it is exposed to the top end of the tourism market - a sector that is expected to drop off considerably.

Investors also weren't impressed by Sun International's U-turn on its progressive dividend policy last year. "This fuelled the perception of possible distress within the company, rather than management being prudent ahead of its huge capex programme," says BGM analyst Adrian Ince. "The dividend yield was a solid underpin in terms of our attraction to the counter."

The group's investment in Monticello in Chile has also faced challenges, including a slowdown in consumer spending in that country and further delays in the opening of the retail and hotel offering at the casino. It is also committed to significant capex, including R1,2bn earmarked for Nigeria to build and refurbish the three- and five-star Federal Palace hotels and the construction of a casino. All this at a time when the international outlook for tourism at best remains murky.