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TSOGO PLANS MONTE, SUNCOAST EXPANSIONS

‘We’ll probably double the size of Suncoast by the time we’re finished.’

HILTON TARRANT: Gaming and hotel operator, Tsogo Sun, which owns Montecasino, Gold Reef City, Suncoast, a host of other casinos, as well as the Southern Sun Hotel brands, reporting results for the first half of the financial year to the end of September. Revenue up 9% in the six months to R5.2bn, adjusted headline earnings per share up 20%. Chief executive, Marcel von Aulock, joins us now. Marcel, you saw in these six months continued growth from the previous six months but you do say in your results statement today that monthly results remain inconsistent, what do you mean by that?

MARCEL VON AULOCK: We’ve done well to get to 9% growth in revenue, so as a headline number we’re happy with that but it’s been exceptionally hard work to get to it. You have a great month and then you have a tough month, we see volatility between different regions, particularly in gaming win, which is obviously a big driver for us. So you don’t get that feeling of a real consistent growth coming through and that volatility is a little concerning because it makes it hard to determine how stable this recovery is but over the six month period we grew revenue by 9% and we’re quite happy with that.

HILTON TARRANT: And I guess that volatility mirroring conditions in the South African economy?

MARCEL VON AULOCK: Very much so, we see it in two spaces that while they’re not linked they follow the same trend, it’s your transient guest in hotels, which is the Mr X that we don’t contract with directly, people going about their business who rock up on a given night and your mass market gaming, as opposed to your privé, your really high-end gaming. Both of those are driven by the economy and if the economy is sitting at 2.5% growth it’s just not pushing those people to be more economically active, we need the economy to pick up.

HILTON TARRANT: Marcel, on the casino side of things, the past 12 to 18 months, perhaps even longer, have really been characterised by expansions and upgrades across your properties, within these six months R1.3bn in expansion capex has been spent and that pace of expansion, that pace of upgrade is not looking to let up any time soon.

MARCEL VON AULOCK: No, I think we reported a while ago that we got a 30% capacity increase in our licences in Gauteng, it takes a while to roll that out and you’ve also got to look through the current economic conditions, so what I’ve just explained about low growth etc, we’ve taken a view it’s going to take us a couple of years to roll out all this capacity they’re big projects, we’re looking through the cycle and saying that the economy will pick up, your growth rates a few years out will be higher, we want the capacity installed on the ground when that comes so that you’re not trying to build then. A lot of it is new construction of restaurants, movie houses, entertainment facilities, etc and that does take a while to roll out.

HILTON TARRANT: That Silverstar expansion on track. Interesting tit bit from the numbers today at Gold Reef City your work starts next year on the theme park and the casino and you are looking at potentially trading during the nighttime at that theme park, that’s something novel.

MARCEL VON AULOCK: Ja, we want to change the way the theme park is structured, at the moment you pay your money and go in and you have access to the historical area as well as the rides and that sort of thing, and we want to try and split that really to encourage families to come more. So that you basically access the restaurants and the museum portions for free and then you pay for the rides but generally that’s kids and not parents and so on. So it needs a whole refresh and new work on the aesthetics and so on, and that’s all in that plan together with linking it more effectively to the casino side, introducing additional footfall drivers like movies and new restaurants and so on.

HILTON TARRANT: What about Montecasino, we spoke a couple of months ago about that approval to add a number of new gaming positions and that will be rolled out in the coming years. You are getting to a point, I guess, where you’re pretty boxed in in Fourways.

MARCEL VON AULOCK: We’ve got a lot of land, so we’ve still got undeveloped bulk on Montecasino and we have in a consortium with some other developers, bought all the land around us. So we’ve got ability to roll out substantial additional stages at Montecasino. Our licence gave us an extra 700 gaming positions, of which we’ve put about 200 on the floor, the other 500 we can’t fit, so that’s going to require a new build, we need additional parking again, so we’ll build another multi-storey parkade, probably another hotel and expand the casino floor space. But quite frankly, with all the projects we’re running at the moment that’s sitting on the 2015/2016 planning.

HILTON TARRANT: And Suncoast, we spoke about this about six months ago at your full year numbers, that operation now wholly-owned within the Tsogo Group, you are in the regulatory phase as far as expansion and build is concerned there. Are you going to follow a similar strategy to Monte, to Gold Reef, to Silverstar where you add an event area, where you bulk up on the entertainment, restaurants and hotels?

MARCEL VON AULOCK: Yes, in addition to that we’re putting in a destination retail mall attached to it because we’ve got a lot of land at Suncoast. So it will have a shopping mall, it will have resort swimming pools on the roof, additional parking, so a substantial increase at that facility. We’ll probably double the size of the Suncoast development by the time we’re finished. We hope to get through the approval processes there by first quarter next year and be able to start construction shortly thereafter.

HILTON TARRANT: If you step back and take a kind of 50 000 foot view at your gaming properties you’re not only competing with rivals, your traditional rivals in the space, you’re competing for attention, you’re competing for spend, you’re even competing with things like DStv BoxOffice.

MARCEL VON AULOCK: It is entertainment/leisure spend and that’s why the way…has been allocated we’ve always argued we don’t compete with other casinos because people stick to the casinos in their area. What you’ve got to do is make your destination as attractive as you can and Montecasino is about the finest example of that, multiple restaurants, multiple entertainment offerings. Our visitors live within a 20 kilometre radius generally of Montecasino and they visit us regularly, as opposed to a Las Vegas-style destination resort you might go once in a few years and that’s why this continuous refreshment and expansion is required. In places like Silverstar and Montecasino we’ve got the added advantage that we’re in growing residential areas, so you’ve got for example the Steyn City development coming in Fourways, you’ve got the new regional mall that opened next to Silverstar, yesterday I think it opened, with additional housing developments. So those areas are getting more and more people, as well as the people who are in the areas growing income and we’ve got to try and keep pace with that.

HILTON TARRANT: On the hotel side of things here in South Africa industry-wide occupancies at just under 60%, 58.5%, we’re not too far off where we were a decade ago and it’s going to take some time yet before this recovers.

MARCEL VON AULOCK: I think so, we’ve had some strong recovery in rates and we’ve had some encouraging trading in our contracted business like government, corporates, the groups and convention business has been very strong. The occupancies are still low, our long-term trends are 68%, sort of our 20-year average, the second half of the year is at a higher level than the first half of the year. So the numbers that we’re reporting now should improve over the year, all else being equal because you do come into your peak periods now, both leisure in December and your peak business periods being early next year. So you’ll see a stronger second half but hotels are still below where they should be over time, there is a recovery, which is nice.

HILTON TARRANT: On the lower end of the market, the budget offering,
Formula 1, you now wholly own that business and you’ve refreshed that as a Sun1 and I think most people listening to this won’t recognise how much work you’ve done there, a far cry from its previous incarnation, which had a fairly colourful reputation

MARCEL VON AULOCK: [Laughing] Ja, it had its day but no, I’m delighted with the work they’ve done that, we’ve refreshed the product completely, we’re spending in total about R135m , R140m by the time we’re done. All the interiors redone, all the bedrooms, we’ve done the signage, the curb appeal, so that product is looking great and we’re looking to build new ones as we go forward. It’s interesting that is a very good barometer of the economy that sector and the occupancies haven’t picked up to their traditional highs. I’m pretty sure you’d see it in some of our competitors in that segment is the same and that’s your transient business that’s not around. As I said earlier, we look through the cycle on this stuff and we think that that business can be really good for us in a few years’ time.

HILTON TARRANT: Marcel, trading across the continent under the Southern Sun brand we’re starting to see a large number of the big international hotel groups focus on the continent, is competition starting to heat up?

MARCEL VON AULOCK: It is, the trouble with Africa is there tends to be pretty small markets, so as soon as a single new large hotel comes into town you go from undersupply to oversupply quite quickly. All of that said, in the markets we’re in the Southern Sun brand has real value because Africa has got a lot of South Africans working in it and our brand is recognised, our frequent guest programme is recognised, so we do well in Africa. What we did in the last six months is (a) we bought the Southern Sun Ikoyi Hotel in Lagos, Nigeria, which we previously managed for a third party, and that’s probably doubled our offshore earnings in one transaction. It’s a lucrative hotel, it was a very expensive acquisition, we spent R700m on that but it’s cemented us in that Lagos market. Then the other project we started construction on is the expansion and the renovation of the Southern Sun Maputo, where we will increase that hotel by double the size number of rooms, introducing conferencing and so on. Those are markets we’ve done particularly well in, notwithstanding international brands that have been around.

HILTON TARRANT: And are you going to continue looking at those markets and bolstering your offerings in those markets or will you look at new territories?

MARCEL VON AULOCK: We do look at new territories but generally if I can I’d look at areas where we already have a presence. You’ve been through the initial due diligence on the country, you understand the tax laws, you understand the land laws, you understand labour laws in those countries. So if we can expand to a number of hotels in Nigeria rather than move across in order to plant flags in different countries it would be beneficial but we’re pretty open to stuff and we’re looking at projects all the time.

HILTON TARRANT: Marcel von Aulock is chief executive of Tsogo Sun Holdings.

Soure: Moneyweb – (podcast)