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GAMING – LOADED DICE

Sports betting and limited payout machines are gaining in popularity but limited by regulations.

SA’s 37 casino operations are taking around three-quarters of total legal gaming spend , a dominant position that insiders say will not be seriously challenged.

Casino Association of SA CEO Derek Auret argues that gaming modes like limited payout machines (LPMs), horse racing and sports betting are very different markets from casinos. “I’m not saying these gaming modes won’t have an impact on casinos. But the casino industry in SA is a very attractive product, harnessing the latest technology to draw in the punters.”

Prescient Securities gaming analyst Cheree Dyers believes other gaming modes could, in time, pose a challenge to casinos. “Even though for every R100 spent, R76 is spent at casinos, this form of gaming is exposed to the long-term threat of online gaming and the proliferation of LPMs, which target the lower end of the market.”

She points out that the broader leisure industry has shifted focus to the lower end of the market. “There is definitely a critical mass in these markets for operators that are essentially making entertainment accessible.”

The LPM market, concentrated in pubs, taverns and restaurants, is the most visible alternative to casinos. LPMs offer convenience; “pub-going punters” can take a flutter in their neighbourhood tavern or eatery.

Overall, LPMs should be a fast-expanding and cash- generative business (albeit with considerably lower margins than physical casinos) which does not require huge start-up expenditure.

But the sector — in which two listed companies, HCI and Grand Parade Investments (GPI), compete — has been stifled by regulations.

Still, both HCI and GPI have pressed ahead and are finally seeing meaningful returns on their respective investments in Vukani Gaming (VSlots and Luck@it) and Grandslots.

GPI, which operates close to 5000 LPMs in the Western Cape, KwaZulu Natal and Gauteng, managed to hike its interim gross gaming revenue from Grandslots by 25% to R194m. Key market share gains were registered in the Western Cape and KwaZulu Natal.

Delving into GPI’s interim numbers it’s possible to deduce from the segmental report that the LPM business chipped in about R19m at operating profit level. That means the business, which is still in its rollout phase, is earning a gross margin of close to 10%, a number that should improve substantially as the new sites are bedded down.

HCI CEO Johnny Copelyn is bullish about LPMs, but bemoans the red tape that entangles expansion plans. “The hoops you have to jump through to get five machines in a restaurant are quite unbelievable. The nature of regulation in the LPM industry is quite inappropriate to what is really a small piece of SA’s gaming sector.”

Copelyn says Vukani is operating at half capacity, having installed 4000 LPMs out of a possible 8000 . “We make money on 4000 machines, but I believe the R50m we pull in profits from our LPM operations should have the potential to grow into R200m-R300m.”

Another frustration for Copelyn is that the maximum payout on LPMs has been pegged at R500 since the launch of the sector in the late 1990s. “It’s 15 years later and not a single change to that number.”

An upward change in the payout limit would no doubt boost the revenue lines of LPM operators substantially. To date, though, there has been no indication that the payout limit may be revised.

But the Gambling Review Commission recommended in 2010 that instead of simply allowing for two categories of slot machines in SA (casino and LPM), some flexibility in the rules be introduced.

The commission argued that LPMs located in convenience venues should retain the current maximum stake and payout limit, while dedicated gambling venues should be allowed machines with higher stakes and payouts. “These latter might be described as medium payout machines or MPMs.”

It is the MPM format that might appeal to tote specialist Phumelela, which would look to incorporate these higher-paying machines ( the maximum payout might be R3000) into its “racino” offering based at its racing venues.

Another gaming mode that is gaining in popularity is sports betting. Again there are two JSE-listed counters competing in this segment — horse racing specialist Phumelela and financial services boutique Purple Capital.

Phumelela CEO Rian du Plessis expects the company’s BettingWorld subsidiary will increase its contribution to group operating profits from the current 15% to around 50% in five years’ time as the focus on soccer and rugby is broadened to include other mainstream sports.

Purple Capital entered the sports betting market in late 2010 when it acquired PowerBet, which trades under the Voltbet brand.

At the time of the deal Purple Capital, which owns the GlobalTrader online trading platform, noted the parallels between sports betting and financial trading houses . “Clients trade on an outcome in the immediate future — sports on weekends, markets during the week”.

Purple Capital chairman Mark Barnes predicts sports betting could make up 20%-30% of the total gaming market within 10 years. “People don’t see it as the same as gambling … it’s more entertainment than gambling.”

Purple Capital’s recent interim results to end-February show great strides ( off a low base) for PowerBet. Revenue more than doubled to R40m with the number of bets placed increasing 57% to 147282. Perhaps one worrying development was the reduction in margins from 6% to 4%, the cost of winning market share. Barnes says PowerBet, once critical mass is built, should operate on margins of 6%-11%.

PowerBet is also pushing the entertainment angle by partnering with the Blue Bulls rugby franchise to capture betting flows in the stadiums (following the “pie, pint and punt” model).

Negotiations with two other major rugby franchises appear to be under way .

Rugby franchises have to fork out for player incentive bonuses . Would hedging out these commitments with bets on the teams be considered an appropriate funding strategy?