Johnny looks back

Financial Mail - - MARKET WATCH - @mar­chasen­fuss

The lat­est an­nual re­port of Hosken Con­sol­i­dated In­vest­ments (HCI), cel­e­brat­ing 20 years since the com­pany’s for­ma­tion, is an en­ter­tain­ing read — es­pe­cially CEO Johnny Cope­lyn’s fas­ci­nat­ing and en­light­en­ing let­ter to share­hold­ers. I highly rec­om­mend it to in­vestors.

One poignant re­minder is that in HCI’S early years, the group’s in­vest­ment in a free-to-air tele­vi­sion broad­caster was, at one point, a rather daunt­ing prospect. Cope­lyn notes: “In tele­vi­sion, we bid for the first free TV li­cence and sur­vived two gru­elling years in which the com­pany lost a le­gendary R1m/day un­til fi­nally it turned and be­came prof­itable.”

HCI’S 5% stake in Vo­da­com had to be sold, and in­vest­ment hold­ing com­pany Rem­gro clam­bered aboard as a sig­nif­i­cant mi­nor­ity part­ner. Whether it would have been bet­ter to walk away from and re­tain the Vo­da­com stake is an in­ter­est­ing ques­tion to de­bate — al­beit merely as an aca­demic ex­er­cise.

But what is clear from the an­nual re­port is that HCI is find­ing it a far less ar­du­ous task to build its over­looked prop­erty di­vi­sion into a real con­tender.

The prop­erty seg­ment was started in typ­i­cally low-key fash­ion by HCI in 2013, but at the end of the fi­nan­cial year to end-march, the profit be­fore tax from the real es­tate en­deav­ours topped R102m, ex­clud­ing a fair-value gain of R169m.

The prop­erty seg­ment chipped in a not-in­sub­stan­tial R63m to HCI’S head­line earn­ings of R1.3bn — in other words, roughly 4% of the bot­tom line.

HCI holds some in­trigu­ing re­tail prop­erty de­vel­op­ments, mostly in and around Cape Town. Cope­lyn re­ports that fur­ther real es­tate ac­qui­si­tions are be­ing ne­go­ti­ated.

How­ever, he does con­cede that the cur­rent pipe­line will not be bulked up at the pace of pre­vi­ous years, as the po­lit­i­cal and eco­nomic en­vi­ron­ment dic­tates a cau­tious al­lo­ca­tion of cap­i­tal (as well as a move from pre­dom­i­nantly re­tail as­sets). Still, I won­der how long it will be be­fore HCI gives se­ri­ous thought to sep­a­rately listing its prop­erty as­sets — re­mem­ber­ing that sub­sidiaries such as La Con­corde and Deneb In­vest­ments are also un­der­pinned by real es­tate (and not of the re­tail va­ri­ety).

Chips down for Sun

Sun In­ter­na­tional, which has a mar­ket cap­i­tal­i­sa­tion of about R6bn, is lum­bered with debt of more than R15bn.

Ad­mit­tedly the un­der­ly­ing op­er­a­tions, par­tic­u­lar the casino prop­er­ties, spin cash. But the high-rolling times are long gone, and Sun needs to ur­gently give thought to delever­ag­ing its bal­ance sheet. The com­pany has ad­mit­ted it is eval­u­at­ing a num­ber of op­tions in this re­gard, the most likely be­ing a rights is­sue backed by ma­jor share­hold­ers.

In the past, I’ve of­ten won­dered about the wis­dom of bundling to­gether the smaller casino prop­er­ties, and sell­ing them off in a bid to cull debt.

I pre­sume there’s no chance of that now. The Board­walk in Port El­iz­a­beth, for in­stance, en­dured a gru­elling trad­ing pe­riod, with casino rev­enue down 9%. But cost in­fla­tion and in­creased ex­pen­di­ture on mar­ket­ing to counter the grow­ing threat from al­ter­na­tive gam­ing modes like lim­ited pay­out ma­chines (LPMS) and (es­pe­cially) elec­tronic bingo ter­mi­nals (EBTS), meant earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (Ebitda) plunged 44% to R34m. De­press­ingly, directors note that the open­ing of an EBT out­let in nearby Uiten­hage will fur­ther af­fect the Board­walk’s rev­enues.

Sun’s other small ur­ban casi­nos — Meropa (Lim­popo), Wind­mill (Free State), Flamingo (North­ern Cape), Carousel (North West) and Golden Val­ley (Western Cape) — col­lec­tively re­ported a 7% fall in rev­enue and a 19% drop in Ebitda.

But Sun’s al­ter­na­tive gam­ing busi­ness, Sun Slots (which trades mainly in LPMS), looks in rude health, with com­pa­ra­ble rev­enue up 8% to R504m and Ebitda in­creas­ing 7% to R114m.

We bid for the first free TV li­cence and sur­vived two gru­elling years in which the com­pany lost a le­gendary R1m/day Johnny Cope­lyn

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