Hotels hope wheels of fortune turn
WALK through Montecasino any time of the day or night, and it’s bustling with people under fake blue skies and Tuscan surroundings as if the world outside doesn’t exist.
Unfortunately, many of these people don’t come to gamble, and if they do they don’t spend as much as they once did. They come to walk, eat, drink and watch movies and shows.
“Footfall has continued to grow over recent years, but people are spending less. Casinos have broadened their entertainment offering with theatres and movies, places to hang out,” said De Wet Schutte, equity analyst at Avior Research.
Where casinos were virtually printing cash a few years ago, times have become tough.
Growth in casinos peaked in 2007 when credit extension was of the order of 20% year on year and consumers had cash in their pockets.
As casinos are the main contributor to the big listed hotel and casino operators – 70% of turnover and earnings with SA’s largest operator Tsogo Sun and 81% for second-largest operator Sun International — it is a vital part of operations.
So what are prospects like for the casino and hotel groups in an environment with muted growth and no more licences to spur growth?
“There are very strong arguments and signs that the South African casino industry is mature. Having said that, we are a growing economy and when discretionary spending improves and a wealth effect takes hold you can expect casinos to show stronger growth,” says Schutte.
The National Gambling Act permits 40 licensed casinos in the country, and 37 of the 38 licensed casinos are operating. Tsogo Sun, Sun International and the unlisted Peermont Global together account for 35 of the licensed casinos.
In terms of hotel growth, it is a lot better than in 2010, but still tough. Rather than building new hotels, operators are buying distressed hotels.
So what are big hotel and casino groups doing? Announcements this week show some realignment.
Tsogo Sun will acquire 40% of SunWest, which operates the GrandWest Casino and Table Bay Hotel, and Worcester Casino, which operates the Golden Valley Casino.
Sun International will buy a 5.6% stake in the Sibaya Casino in KwaZulu-Natal for R130-million, and is also acquiring a significant stake in the limited-payout machine market.
Sun International CEO Graeme Stephens says the deal to buy into limited payouts was partly to move into new areas and partly as a defensive move with operators encroaching on his group’s turf.
So is this just a case of rearranging the deckchairs? Apparently not. Casinos are investing in existing facilities to lift revenue.
But tough times have taken their toll. Sun International restructured its senior and middle-management team last year, and may now shed 1 700 of its 7 000 workforce in SA.
The Tsogo Sun share price has risen 13.4% this year compared with the Sun International share price gain of 4.6%. First-half profit at Sun International fell 21% for the six months to December to R302-million on a 3.6% rise in revenue to R5.41billion while revenue from casinos, accounting for 78% of the total, rose less than 1% to R4.22-billion.
First-half profit for Tsogo in the six months to September was stronger, and revenue was up 9% with a 20% increase in adjusted earnings.
Full-year results will be released this week.