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TSOGO SUN WARNS GOVT MEDDLING MAY INHIBIT INVESTMENT

Tsogo Sun Holdings, which owns and/or operates around 100 casino resorts and hotels in Africa, the Middle East and Seychelles, has warned that proposed regulatory changes by the South African Government may discourage it from further investment in the industry.

In its report to shareholders for the six months to the end of September it said:

“Despite a difficult trading environment for gaming and hotels, the group remains highly cash-generative and has significant opportunities to invest capital in its growth strategy at attractive rates of return. The ability to continue to pursue such investments will depend on the final outcome of, and impact from, the variety of proposed regulatory changes by Government.”

It warned: “Regulatory risks represent a threat to the group with possible changes to tax regulations and an increased cost burden of compliance with various imposed regulations being the most significant.”

Looking back over the past six months, it said the integration of the Gold Reef properties into the Tsogo group was largely complete.

It also recorded the purchase of The Grace (shown above) in Rosebank for R85-million and said it had also reached agreement for the acquisition of an additional 16.5% effective interest in the Suncoast Casino in KZN for R510 million, bringing the total ownership of that operation to 90%. This acquisition remains subject to approval by the KwaZulu-Natal Gambling Board.

On 26 September, Tsogo Sun Emonti, a subsidiary company of the group, started trading under its new gaming licence and construction has begun on the R400 million redevelopment of the Hemingways casino in East London.

The first half of the financial year saw accelerated growth in revenue across many of the group’s casinos. Hotels, which benefited from the World Cup in June and July 2010, had shown revenue decline on the prior period, as would be expected, although the effect was exaggerated in the six-month reporting period and would have less impact on the full year.

The underlying operations of the group remain highly geared towards the South African consumer (in gaming) and the corporate market (in hotels) with both sectors experiencing difficult trading conditions and increased administered costs. “The group is poised for growth if these sectors of the South African economy improve.

“Regulatory risks represent a threat to the group with possible changes to tax regulations and an increased cost burden of compliance with various imposed regulations being the most significant. “The group continues to engage with the various regulatory bodies and other Government departments to ensure that proposed changes are warranted and capable of being implemented without having a negative impact on both current and new investment in the industry and consequently on employment levels.”

Tsogo Sun reported that the hotel industry in South Africa was still experiencing the dual impact of depressed demand and over supply, with overall industry occupancies of around 52% for the six months to September.

“The group`s hotels are likewise affected. However, as a result of the strong sales and distribution channels available within the group, a significant occupancy and rate premium is being achieved in the segments in which the group operates.

“With little recovery in the core corporate market, the group`s system-wide occupancies remain under pressure in South Africa at 58.9% (2010: 59.3%).”

Average room rates in the total South African operations declined by 16% to R760, with virtually all the decline attributable to the higher achieved rates during the World Cup in the prior period. Operating costs were well controlled with a 3% increase on the prior period, despite regulated utility costs and property rates increases.

The offshore division of hotels achieved total revenue of R153-million for the six months, representing a 21% improvement on the prior year, assisted by the inclusion of Southern Sun Nairobi as a leased hotel (previously managed) with effect from 1 August 2010.

Looking ahead, Tsogo Sun said: “Despite a difficult trading environment for gaming and hotels, the group remains highly cash-generative and has significant opportunities to invest capital in its growth strategy at attractive rates of return. The ability to continue to pursue such investments will depend on the final outcome of, and impact from, the variety of proposed regulatory changes by Government.

Source: Hotel and Restaurant – Andrew Moth