Keep feeding those slots
Tsogo and Sun International have made punters a packet on their shares this year. But dividends are still a way off
The odds have dramatically shortened for punters betting that the JSE’s listed gaming groups will get back to their cash-spinning ways.
Over six months Tsogo Sun Gaming’s share price has spurted 42%, while Sun International — which still holds a portfolio of hotel properties, including Sun City — has seen a 21% charge. Over a year Tsogo’s share price is up an astounding 163%, while Sun has registered a nearly 50% gain.
But while the easy money has clearly been made, some context is useful in assessing whether there is still upside in both groups’ share prices.
First, the share price recoveries are bounces from periods in 2020 when the market was factoring in dramatic measures (rights issues and asset sales) by both Tsogo and Sun to alleviate cash flow crunches.
Tsogo dribbled down under 200c, and Sun traded under 900c.
It’s worth remembering that five years ago Sun and Tsogo (which had not yet separated out its hotel portfolio) were trading at more than R30 and R90 respectively. Admittedly, 2016 was a far more buoyant trading period for casino operators, what with the economy still being quite vibrant and the competition from alternative gaming less intense.
Perhaps it’s better to look at the share price ranges prior to Covid, which would set Sun at about R50 and Tsogo (after splitting out the hotels business) at about R15 for 2019, when the local economy was distinctly moribund.
At the time Sun and Tsogo were largely viewed as ex-growth, albeit still able to generate the cash to service debt, pay for maintenance and refurbishments and sustain regular dividends.
Paul Whitburn, portfolio manager at Rozendal Partners, reckons that for the short term, Tsogo and Sun’s mainstay casinos can at best hope to get back to 85%-90% of 2019 trading levels. He believes the groups’ respective alternative gaming segments — mainly limited-payout machines (LPMs), electronic bingo terminals (EBTs) and sports betting — will continue to trade ahead of expectations.
Since the outbreak of Covid, casinos have endured total closure, alcohol bans, curfews that affected peak-hour trading and capacity restrictions. The steady rollout of vaccines should ensure that further trading restrictions are limited, but it would be unwise to discount a possible Covid fourth wave later this year.
That said, investors would be foolish not to acknowledge that Sun and Tsogo are very dif
ferent businesses now — and may still adapt further through restructuring.
In terms of structure, Sun is more obviously changed. Its Latin American casino business was jettisoned, and its positions in a couple of smaller operations (Naledi and Carousel) were relinquished. The group, importantly, turned to its shareholders for a sizable rights issue — the second in almost as many years.
Tsogo, on the other hand, managed to avoid dumping any parts of its portfolio or resorting to a rights offer.
Small parcels of land have been sold, and larger tracts of real estate are flagged for sale (including some valuable coastal land near Mykonos Casino). Structurally, the gaming portfolio has not changed. It is clear, however, that Tsogo is emerging from the pandemic leaner and meaner, with CEO Chris du Toit believing that ongoing cost-saving initiatives should provide sustainable benefits.
It is worth noting that Tsogo’s earnings before interest, tax, depreciation and amortisation (ebitda) margin moved from a sliver in the six months to end-September 2020 to a more reassuring 30.6% in the second half to endMarch 2021.
Of course, the 49% cut to Tsogo’s costs for the year ended March might be taken with a pinch of salt — given that gaming activity was markedly curtailed by the restricted trading conditions.
And in his annual review, Du Toit says it’s still difficult to “accurately” determine “where the operating cost base will finish” when things get back to normal.
Du Toit tells the FM: “If we assume the 2023
financial year might be our first normal year of trading since the Covid outbreak, you need to remember that cost savings are affected by costs that are certain to go up — electricity and security services, for instance.”
Sun was more forthcoming about cost savings in its recently released interim results to end-June. The group put total annualised sustainable cost savings at R650m, and implied an ebitda margin improvement on the 2019 figure from 28% to 34%.
Holding this margin, however, for the second half might be difficult considering the July Covid shutdown — when Sun (and Tsogo, for that matter) would have incurred such costs as rates and taxes as well as certain employee charges.
What Sun and Tsogo can, however, look forward to is a bumper October in light of the easing of lockdown restrictions — most notably with regard to curfew hours and alcohol sales — which is likely to give a considerable boost to the revenue line.
What will also be key to the longer-term fortunes of Sun and Tsogo is the sustainable performance of their individual gaming assets. Sun CEO Anthony Leeming disclosed that in the interim period Sun’s casino market share in Gauteng increased to 29.5% and in KwaZulu-Natal to 38%.
The market share gain in Gauteng is noteworthy, with Sun having banked heavily on its “new” Time Square Casino in Menlyn snatching business from nearby rivals, which include Tsogo’s Montecasino and Gold Reef City properties as well as unlisted Peermont’s Emperors Palace. One might argue, though, that Time Square’s success will have a profoundly negative impact on Sun’s Carnival City Casino in Brakpan.
Sun can also breathe easier in the key Cape Town market, where GrandWest Casino’s dominance is unlikely to be challenged for at least the medium term. A second casino licence is on the cards for Cape Town, which would entail transferring one of the four existing Western Cape licences to the city.
Though Tsogo — which owns the Caledon, Mykonos and Garden Route casinos — would be odds-on favourite to transfer a licence to Cape Town, the group’s balance sheet will need considerably more reinforcement before any sizable new development can be considered.
GrandWest performed respectably in the half-year, generating R635m in revenue and producing ebitda of R192m. Sun will also be encouraged that Time Square posted ebitda of R128m from revenue of R481m — though ebitda will need to be markedly higher to justify the property’s more than R4bn development cost.
The star performers for both Sun and Tsogo have been the alternative gaming operations, which have proved more resilient than traditional casinos.
In the interim period Sun’s Sun Slots LPM operations and sports betting business SunBet generated about R165m in ebitda, which is 20% more than the collective contribution from its smaller casino cluster comprising Carnival City (R63m), the Boardwalk (R16m), Meropa (R25m), Flamingo (R8m), Windmill (R17m) and Golden Valley (R8m).
Tsogo also reported solid performances from its EBT and LPM operations in the year to endMarch, with this division bringing in as much as R297m in earnings.
The other big question is whether Sun and Tsogo decide to clean up their portfolios, which would go a long way to paying down debt.
It’s hardly an ideal time to sell assets but a consolidated Sun, comprising its larger Time Square, GrandWest and Sibaya (Durban) casinos along with its LPM and sports betting operations, would be a far more compelling mix.
Carnival City is big enough to warrant attention as a standalone operation for sale, and there might be some merit in Sun unbundling its small casino operations into a sellable unit with a collective annual ebitda that might exceed R150m for the full year to end-December 2021.
The difficulty for Sun, though, is offloading its hotels portfolio (the Table Bay Hotel in Cape Town, the Wild Coast Sun and the Maslow in Joburg), and finding a buyer for legacy gaming and leisure operation Sun City. Arrangements such as Sun City’s Vacation Club preclude a quick and easy sale at Sun City, and there is a way to go in achieving sustainable profits after an interim ebitda loss of R81m.
As for Tsogo, there has been speculation that the group might consider selling its strategic minority stake in Sun’s SunWest subsidiary, which operates the GrandWest and Golden Valley (Worcester) casinos. In 2016 Tsogo paid R1.35bn for 20% of the business, and it should still be able to fetch a premium price for that stake, with GrandWest’s monopoly in the lucrative Cape Town market unlikely to be challenged for the foreseeable future.
As far as debt goes, the Sun group’s is much smaller now — R7.6bn compared with R11.1bn last year. With some headroom in the balance sheet, the FM reckons it might not be too long before Sun can revisit buying the remaining
30% stake in the cash-spinning Sun Slots business, perhaps even at a similar price to its first tilt in 2019.
Tsogo finished the year to end-March with net debt of R10.8bn, and it will need much improved trading in August and September to pay that down.
Degeared gaming counters will be a novelty on the JSE, given that in their heyday both Sun and Tsogo were comfortable that reliable cash flows could service the large debt bills.
But it will be a while before debt is reduced to levels that allow Sun or Tsogo to resume dividend payments, which means bets are off until November when Tsogo’s interim numbers give a clearer picture for prospects in 2022.