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WHEN THE CHIPS ARE DOWN

Gold Reef’s imminent merger with Tsogo Sun will result in the newly formed group overtaking Sun International ;is SA’s leading gaming group.
However, the industry’s depressed state was reflected in Sun International’s 7% decline in earnings from flat revenue of R6,2bn) in the year ended June 2010.

As if in answer to US President Barack Obama’s call for consumers to shun casinos and places like Las Vegas, SA’s large gaming groups continued to struggle, while other sectors recovered in 2010.

Sun International’s operating proflt fell 13% for the period as consumers held back on discretionary spending.

CEO David Coutts-Trotter foresees more of the same: Though trading conditions are stabilising, it is expected that demand within the gaming and hospitality industries will remain weak in the year ahead.”

Sun International’s share price has been under pressure since a mid-April high of almost R100/share to current levels of around R85.

Gold Reefs share price has been similarly depressed, dropping from a 12-month peak of R21/share in February to just under Rl7 this month.

Sun International (R9,5bn market cap) is almost double the size of Gold Reef (R4.9bn) but a merger between Tsogo and Gold Reef will produce a new entity worth an expected R21bn, according to I-Net Bridge.

Things are still difficult, and recovery has not come back in,” says Gold Reef COO Christian Neuberger. “Revenue is flat and costs have increased, but we are cautiously optimistic that with anotherinterest rate cut things will get better.”

However, the group may struggle to return to the five-year high of R35/share right before the global economic meltdown.

Avior Research’s hotel, gaming & leisure analyst De Wet Schutte is also confident that the fortunes of the sector will improve.

The set of results we got today is still a reflection of the tough trading environment in the hotel and gaming space, but the fact that the share is up [in the last month] is an indication that the market is looking for growth. We’ve probably seen the worst days,” says Schutte.

This despite the prospects of a double dip in the economy.

“We don’t subscribe to a doubledip theory,” Schutte says. “No matter how you look at it, gaming is entertainment and as long as people feel the need to be entertained, there will be a role for casinos. In the absence of online gaming it fills a specific market that you can’t replicate.”

He admits it’s unlikely there will be a return to the activity of 2006 when revenues were growing at 30%. The positive thing for us is that a lot of the capital expenditure in the domestic operators was over the past three years for Gold Reef, Tsogo and Sun International.”

Significant changes are taking place in the sector, such as the expiry of Sun International Grand West Casino’s 10-year exclusivity clause in Cape Town. The consolidation taking place is a reflection of the fact that the industry is saturated and new developments are unlikely to happen in SA as operators opt to expand internationally.

Sun International is more exposed to these markets, while Gold Reef is limited to the local market. However, this will change once the merger with Tsogo is complete, giving the group access to Tsogo’s operations in the Middle East and Mauritius.

Sun International’s edge will have to come from its resorts, such as Sim City and Zambezi Sun. where neither Tsogo nor Gold Reef are active.

Source: Financial Mail – Zweli Mokqata