Stubbing out profit
Gaming and leisure group Tsogo Sun has made it abundantly clear that the opening of Sun International’s Time Square casino in Pretoria’s vibrant suburb of Menlyn is not going to drastically change the odds in the local casino sector.
Tsogo’s casinos in the competitive Gauteng market put in a mixed performance, with business at Silverstar and Montecasino crimping but Gold Reef City increasing revenue and profit lines.
Perhaps a bigger threat to Tsogo — and the entire gaming sector — is the smoking ban being mooted by the health department.
Electus Fund Managers’ Damon Buss says about 60% of gaming revenue is generated in the smoking sections of SA casinos. Citing Australia and Chile, he says the global experience of such smoking bans has been an almost immediate 20% drop in casino revenues, which take 18 to 24 months to recover.
But Buss believes the fact that SA already has restricted smoking areas — something none of the countries with a smoking ban had in place before implementation — might mute the initial effect.
Still, casinos are high fixed-cost businesses, and Buss believes the lean and mean Tsogo has minimal fat to cut, so margins could decline substantially. Unless the group can get a meaningful uplift from an improving economy, its shares may smoulder at current levels for a while still.
After the smoke clears
Reinet,* the 10-year-old investment vehicle controlled by the Rupert family, last week reported that its stake in British American Tobacco (BAT) now represents only 62% of its total portfolio. I say “only”, because BAT last year represented more than 70% of the portfolio, and it has previously accounted for as much as 85% of its intrinsic value.
It would be wonderful to report that BAT’S portfolio dilution was caused by a surge in the value of Reinet’s other investments rather than a marked slide in the cigarette giant’s shares in recent months. But aside from the steady plodding at Pension Insurance Corp, there’s not much in the private equity and specialist fund investments that will lift shareholder spirits.
At the end of March the value of private equity and related partnerships was €736m (2017: €780m) — equivalent to just 14% of the total portfolio and not much bigger than Reinet’s borrowings of R661m.
One might say Reinet’s portfolio diversification efforts don’t support the management (and performance) fees paid to Johann Rupert — yet.
The record will show that over the past 10 years Reinet has sold more than 16m BAT shares for €720m and borrowed about €700m; investments made to date total €2.1bn and outstanding commitments are €445m. It finished its financial year with an NAV of €5.1bn, representing growth of 8%/year.
In terms of Reinet’s original premise around capital preservation in times of turmoil, it’s mission accomplished. But it would clearly have been far better to invest directly in BAT over the past 10 years than in the discounted proposition presented by Reinet. The big question is whether investors will punt for Reinet or BAT over the next 10 years.
Plucked payout?
Some shareholders in Quantum Foods were a little miffed at its 20c/share interim payout after the food counter generated cracking profits from its egg division. The egg price is expected to soften in the second half, which may explain the caution around the payout.
I still expect a solid year for Quantum, and shareholders can reasonably expect a bumper distribution to be hatched in the second half. That said, the company would do well to diversify away from a largely commodity offering in poultry, animal feed and eggs. There may also be some wisdom in retaining a chunk of cash so Quantum can buy back more of its unloved shares in the open market.
A big threat to Tsogo —and the entire gaming sector — is the smoking ban being mooted by the health department