The strong performance by Niveus Holdings on the JSE since its separate listing from Hosken Consolidated Investments in September last year suggests investors are starting to recognise the potential of limited payout machine (LPM) gaming.

Niveus holds Vukani, a major player in the LPM sector, as its largest investment. The other major JSE player in the LPM market is Grand Parade Investments (GPI), which holds operations in the Western Cape (Grandslots), Gauteng (Grand Gaming) and KwaZulu Natal (Kingdom Slots).

GPI’s Grandslots is in the enviable position of dominating the lucrative Western Cape market, where chairman Hassen Adams has recently claimed a 56,8% market share.

Since the launch of LPMs over 10 years ago most investors have regarded the sector as a poor cousin to the casino industry. The machines are mostly placed in clubs, bars and restaurants.

Enthusiasm for growth in LPMs has also been tempered by perceptions that the roll-out of machines is being hampered by red tape, with operators facing waits of between four and six months to get machines up and running.

Still, statistics show the industry has made headway in recent years. Gross gaming revenues (GGR) have moved closer to R1,2bn.

This is only a sliver of the more than R18bn total GGR revenues generated in SA (mostly by casinos). But relative returns are rather attractive since LPMs do not have the same capital layout burden as casino operations – which, aside from large development costs upfront, also have to fund the upgrading and maintenance of physical infrastructure.

And a big change could be ahead. Since its inception the LPM sector has operated within a R5 maximum wager and R500 maximum return bracket.

The industry, however, has petitioned the gaming review commission to take into account inflationary forces and changes to disposable income over the past decade.

The industry has asked for a maximum wager of R30 and a maximum win of R3000 – changes that would have a marked impact on cash flows for LPM businesses and might explain the firm tone in their share prices of late.

Niveus is the purest LPM play available to investors since its other investments – mainly liquor group KWV and a presence in the electronic bingo industry – are relatively small (at this stage). GPI’s LPM operations are still overshadowed by its passive holdings in casinos, which include GrandWest in Cape Town, Sibaya in Durban and the Golden Valley casino in Worcester.

Niveus’s Vukani produced a compelling R82,5m in earnings before interest, tax, depreciation and amortisation (Ebitda) from GGR of R253m in the six months to September despite roll-out hitches in Gauteng and Limpopo. It seems reasonable to pencil in Ebitda of R200m in the medium term if Niveus can overcome its obstacles and the minimum bet/maximum payout restrictions are lifted.

With Vukani currently producing practically all Niveus’s profits, the share can be viewed as a proxy for further growth in the LPM sector.

But GPI is not a bad option either. Its LPM GGR jumped 25% to R396m in the year to September with the number of active machines increasing 15% to 7439.

GPI also recently opted to manufacture LPM machines in Cape Town in a joint venture with the Gauselmann Group of Germany.

The issue with GPI is that its LPM operations are valued at around R273m compared with the much larger R1,1bn value accorded to the casino operations.

Considering the warm reception the market has been giving Niveus, GPI might consider partially unbundling the self-sustaining LPM interests into a separate listing.

This way it could keep a strategic or majority stake, but also woo further empowerment investor (and possibly institutional) participation in a company that has solid growth prospects and attractive dividend attributes.

Source: Financial mail – Marc Hasenfuss