Flushed out

Peer­mont to exit JSE gam­bling board and an­other player dicey

Finweek English Edition - - Companies & markets - BY MICHAEL COUL­SON

IN THE DON­ALD GOR­DON era it was more re­ward­ing to in­vest in Lib­erty Life shares than in the com­pany’s so-called in­vest­ment prod­ucts (where do you think DG put his own money?). Sim­i­larly, it’s nor­mally more prof­itable to in­vest in com­pa­nies pro­vid­ing gam­bling ser­vices (I hate the weasel word gam­ing pre­ferred by casino op­er­a­tors in a spu­ri­ous bid to sug­gest that they’re in­volved in some­thing as up­lift­ing as cricket or rugby, and I’m glad the JSE also es­chews the term in its de­scrip­tion of the sec­tor) than to en­rich them by throw­ing money away at their ta­bles.

So with­out en­dors­ing the so­cial de­sir­abil­ity of gam­bling, I re­gret that one of the four gam­bling shares is about to dis­ap­pear and that it’s ru­moured that there may be a bid pend­ing for an­other.

I went along to the meet­ings to con­sider the private eq­uity bid for Peer­mont Global in case there might be a dis­si­dent share­holder: there wasn’t and the bid was nod­ded through.

With the three largest share­hold­ers (Gen­bel Se­cu­ri­ties, RMB As­set Man­age­ment and Coro­na­tion As­set Man­age­ment) to­gether hold­ing 73% and com­mit­ted to the bid, re­sis­tance would have been fu­tile any­way.

How­ever, the latest pre­lim­i­nary fig­ures – iron­i­cally, pre­sented by MD/CEO Ernie Jou­bert, who built up the group but will be leav­ing as a re­sult of the buy­out and aiming to re­peat his suc­cess in Spain – con­firm just what a loss the delist­ing will be.

The fig­ures may be aca­demic, but for the record, rev­enue last year rose 32%, op­er­at­ing profit 38% and com­pa­ra­ble, or ad­justed, HEPS no less than 39% to 81,5c/ share.

Com­mend­ably, and un­like the stingy prac­tice of many takeovers, there’s a fi­nal div­i­dend, though to­tal dis­tri­bu­tion of 28,6c is still al­most 12% less than in 2005.

Tucked away in the small print, Peer­mont re­minds us that HEPS has grown at a com­pound 28,7% since the list­ing in 2004.

The cash price for Peer­mont – 1 290c/ share, an­nounced as long ago as last Novem­ber – was then a 44,7% pre­mium to the share price be­tween mid-June and midJuly last year. That’s equiv­a­lent to less than two years’ likely growth in earn­ings – and the share price, too, as­sum­ing the rat­ing re­mains un­changed.

The exit price is also at a his­toric price: earn­ings rat­ing of only 15,8. So the buy­ers are hardly pay­ing over the odds.

When I re­marked to Peer­mont chair­man Alan van Biljon – an old ac­quain­tance from the days when he worked for SA’s gam­bling pi­o­neer, Sol Kerzner – that it was a pity to see Peer­mont leav­ing the JSE, he replied that it may be back be­fore too long. No doubt that’s the ob­ject of the ex­er­cise. Mean­while, mi­nor­ity share­hold­ers will lose out on growth in the in­ter­ven­ing pe­riod.

And now it’s ru­moured that dis­ap­pointed bid­ders for Peer­mont may switch their in­ter­est to Gold Reef, whose full name – in an­other fu­tile bid for re­spectabil­ity – was re­cently changed from Gold Reef Casi­nos to Gold Reef Re­sorts.

Gold Reef has just an­nounced a 25% gain in 2006 HEPS to 127c/share, a lit­tle lower than the 29% gain at half time but still pretty good, though flat­tered by the dam­age done to the 2005 re­sults by neg­a­tive me­dia re­ports on the Gold Reef theme park. Im­ple­men­ta­tion of a new em­pow­er­ment deal de­layed dec­la­ra­tion of the an­nual div­i­dend but 51c was paid for 2005; so if cover is main­tained that should be around 63c for 2006.

At 2 400c, on a p:e of 18,9 and es­ti­mated yield of 2,6%, Gold Reef may be a lit­tle more pricey than Peer­mont. Still, you could have picked up plenty of shares be­low 300c only five years ago, so it has also been a great in­vest­ment – es­pe­cially for the canny Krok brothers, who founded it – and would be missed.

Peer­mont’s mar­ket cap of R4,3bn and Gold Reef’s R5,4bn add up to less than that of the in­dus­try pi­o­neer and leader, Sun In­ter­na­tional’s R14,7bn. Its re­cent in­terim fig­ures to De­cem­ber 2006 dis­closed rolling 12-month ad­justed HEPS of 629c and div­i­dends of 340c.

At 12 550c, that’s a p:e of 20 and yield of 2,7%, though you’d get a lower p:e if you take what Sun In­ter­na­tional calls its “ba­sic” EPS of 865c.

Fi­nal and small­est mem­ber of the sec­tor is horserac­ing op­er­a­tor Phumelela, with a mar­ket cap of just R1,1bn. It has a July fi­nan­cial year-end and the in­terim re­port will prob­a­bly be out by the time you read this.

How­ever, a trad­ing up­date said ba­sic EPS for the six months to Jan­uary should be 110% to 120% higher than last year, helped by the R40m pro­ceeds from ter­mi­na­tion of the New­mar­ket race­course use agree­ment.

That tells us less than noth­ing about

Apart from Sun In­ter­na­tional, which may have been held back by its size and rel­a­tive cor­po­rate ma­tu­rity, the other three have all out­per­formed the in­dex

for some years.

nor­mal trad­ing per­for­mance, but I’m sure it will turn out to have been sat­is­fac­tory.

For what it’s worth, in the year to last July, HEPS were 82c and dis­tri­bu­tion 40c, giv­ing a some­what out­dated p:e ra­tio of 18,2 and yield of 2,7% at the cur­rent 1 495c.

Apart from Sun In­ter­na­tional, which may have been held back by its size and rel­a­tive cor­po­rate ma­tu­rity, the other three have all out­per­formed the in­dex for some years.

They should con­tinue to do so. And what­ever your moral at­ti­tude may be to gam­bling as an in­vestor, you must hope that they’ll stay on the JSE boards for years.

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