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DEBTS AND DIVIDENDS

14 Oct General

The latest annual report from investment company Hosken Consolidated Investments (HCI) – which carries a fair chunk of debt at the centre — highlights the need for strong and stable cash flow over the years ahead. The report shows HCI’s array of investments currently earns around R500m/year of cash. But CEO Johnnyy Copelyn says acquisitions made by HCI — mainly into the Tsogo Investment Holdings (TIH) shareholding – have cost many times that amount and have invariably been achieved by taking on debt at the centre of the holding company.

“We felt it sensible to reduce the amount of debt held at the level of one or two of our subsidiaries as they struggled in exceptionally difficult trading environments during the past financial year. The combination of these two factors focused HCI’s need to limit the total practical exposure of the holding company to debt.”

Of course, living-off of assets in the prevailing economic climate isn’t the easiest of tasks. Still, HCI did manage to sell its interest in dairy products group Clover (albeit not without a few tense moments in the boardroom) for around five times the entry price made five years ago.

Copelyn reckons its overall debt levels have now been reduced to levels “that appear to us to be more prudent”. Of course, the key to adequately servicing the central debt (R4,6bn on a non-current basis and net debt of around Rlbn on a current basis) is HCI’s participation in merging gaming group TIH with listed gaming group Gold Reef Resorts (GRR). The annual report estimates current trade in GRR would place HCI’s interest in the merged company at around R7,7bn — equivalent to about 6000c/share in value.

Of course, there are still regulatory hurdles to cross, but Copelyn reckons that should be finalised before year-end 2010. Perhaps more intriguingly, he notes: “It opens the next door of building the company further in the future. The merged entity should achieve this, both by acquisitions into new markets and a significant uptick in tourism and consumer spend, which we believe must come back into its current markets at some point, be it next year or later.”

But for those HCI shareholders fretting about debt levels at the centre, it’s fairly encouraging to read the merged group has a stated dividend policy of paying out 50% of net profit.

Source: Finweek – Marc Hasenfuss