HCI, whose assets span casinos to buses, may not be in as big a pickle as feared – especially if banks play nicely

Hosken Consolidated Investments (HCI), an investment company that carried substantial debt into the Covid-19 lockdown, appears to have bought itself some much-needed breathing space.

The group, which is anchored by its casino and alternative gambling interests in Tsogo Sun Gaming, holds debt of close to R3bn.

With the gaming interests stalled by the pandemic — and HCI’s substantial hotel interests also laid low — concerns have mounted around finding cash to service the debt.

A trading update published last week wasn’t pretty: though headline earnings will not be more than 20% different to the R12 a share reported for 2019, HCI will be forced to take impairments to intangible assets and property at its important gaming operations.

There will also be downward revaluations of investment properties and impairment of the hotel operations, as well as impairments at certain exploration assets in its oil and gas investments.

But in about a fortnight the share price of HCI has doubled from about R16.71 to R33 at the time of going to press.

At the lower price, the share was pencilling in a disastrous scenario — and the FM was aware of several nasty rumours swirling about the group at the time.

The rebounding share price, however, suggests the situation at HCI might not be as grave as initially reckoned.

While it is easy to argue that HCI, on the back of Tsogo Sun Gaming, was dragged up with the rest of the JSE last Wednesday when investors decided to remove their stifling risk-off masks, Sun International, Tsogo Sun Gaming’s main rival, also managed a sprightly bounce-back.

More specifically, there were some small bullish clues more astute investors might have picked up on at HCI.

First, Toronto-listed Platinum Group Metals (PGM) last week announced a plan to place a relatively small number of shares to raise fresh capital of about R35m.

A release from PGM noted that HCI, as an existing major beneficial shareholder, was expected to participate in the share placement. How bad could it be if HCI is still prepared to invest more in PGM?

There was also some debate around the dividend paid out by passenger transport subsidiary Hosken Passenger Logistics & Rail (HPL&R). A number of market watchers felt that if HCI was in dire need of cash, the dividend declaration by cash-flush HPL&R could easily have been markedly bigger.

The FM, though, believes that improved sentiment for HCI probably stems from speculation that the group might be successful in renegotiating loan arrangements with banks, without having to dump assets or raise fresh capital.

Details of a new debt structure might only be detailed in the soon-to-be-released March year-end results.

But the FM would imagine HCI trying to extend loan waivers as deeply as possible into 2021, given that Tsogo’s casino operations might only start churning cash flows in September again.

If anyone can convince banks on loan leniency, it is HCI CEO Johnny Copelyn.

HCI also does have a solid portfolio of assets, which includes the cash-generative HPL&R, broadcast group eMedia and a sprawling property portfolio.

On the negative side, a disproportionately large investment in Impact Oil & Gas, with hindsight, probably won’t be generating the hoped-for returns in the short term.

That said, historically strong cash flows from the casino and gaming operations — even if Covid-19 precautions mean a more restrictive business model — could convince banks to take a longer-term view.

There are certainly opportunities to quickly bring down debt.

There was the recent generous dividend declaration from HPL&R, as well as the outstanding dispute with the lottery operator (which involves a substantial loan).

HCI has now bought out minority shareholders in subsidiary Niveus, and has access to that company’s cash pile.

At a push, it might be possible for HCI to sell off its 10% stake in the 100MW Karoshoek Solar One project in Upington — perhaps fetching between R250m and R350m.

At this point, it seems doubtful that HCI would embark on capital-raising through a rights issue.

For one thing, the share price discounts a realistic value on net portfolio value, and the group’s main shareholder, Sactwu Investments (see Fox page 16), might not be willing to participate in a fundraiser.

If things do get more desperate, the FM would think a specific issue of shares for cash might be the preferred route for HCI.

The bigger value investors would probably relish an opportunity to secure a decent parcel of HCI shares. Perhaps Copelyn’s cash-flush offshore vehicle, Oceania Capital Partners, would also take part.

Source- Business Day – Marc Hasenfuss