THIS EMERALD IS NO GEM

Tsogo Gaming’s surprise acquisition of the Emerald Casino is a head-scratching move given its woeful margins and Tsogo’s own debt.

Reading through Tsogo Sun Gaming’s interim results reinforces my long-held notion that a comeback from dastardly setbacks is always possible.

That, of course, has been difficult for me to apply in the past few days, after I was given an unceremonious thrashing in the mixed finals of the Fish Hoek tennis club championship. Every attempt at grabbing traction for a comeback was swatted back in a most violent fashion.

Tsogo shareholders, I’m sure, will be feeling victorious after suffering such a beating during the Covid lockdowns. The core casino division’s income in the six months to end-September still lags pre-Covid levels, but the more efficient operating structures set up to combat the financial side effects of the pandemic mean that earnings before interest, tax, depreciation and amortisation (ebitda) are almost back to where they were in 2019. Dividends are flowing again. One also has to remember that interim trading in KwaZulu-Natal, where Tsogo has invested hugely in the Suncoast complex, was dampened by flooding.

Of course, punters might fret about the cost of keeping the lights on during load-shedding in the second half as well, with Eskom’s fizzle intensifying in recent months. But overall the cash spinning looks rather convincing. The star performer in the interim period was the limited-payout machine segment, which posted record ebitda of R285m. Hopefully the electronic bingo terminal segment can follow suit in the second half.

What really caught my eye, though, was Tsogo’s (surprise) acquisition of an effective 55% stake in the Emerald Resort & Casino in Vanderbijlpark. Emerald was one of a handful of casinos not owned by the big three casino groups — Tsogo, Sun International and unlisted Peermont. I seem to remember that not too long ago original owner London Clubs, after being taken over by Caesars Entertainment, was trying to sell Emerald to Peermont. That deal fell away, and Caesars sold it to Metropolitan Gaming (which looked very much like the old London Clubs). The big question is whether Tsogo should be trying to mop up more market share in the competitive Gauteng market when it is still tightly geared.

Tsogo’s debt, though reduced by more than R500m in the interim period, is still high at R8.5bn. There’s no indication of what Tsogo paid for Emerald,  the results commentary simply noting that “acquisitions and the hotel separation transaction concluded during the period amounted to a net cash outflow of R506m”. I would imagine that Tsogo snapped Emerald up on the cheap, with directors pointing out that this casino precinct was “already on a deteriorating path before the onset of the pandemic”.

Emerald is no gem, even compared with other casinos in smaller urban centres. Emerald’s results for the six months to September 2022 showed an ebitda margin of just 10% compared with pre-Covid levels of 19%. I don’t think I’ve ever seen such a low margin at a well-established casino property. It’s also well below Tsogo’s group ebitda margin of 40%. By further comparison, Tsogo’s three “small” casinos in outlying urban nodes in the Western Cape managed an interim ebitda margin of close to 45%, and the two casinos in Mpumalanga showed 36%.

The smaller Tsogo casinos — Goldfields in the Free State and Hemingways in East London — are holding up above 30%. Clearly Emerald’s margin will need to be fattened up rather quickly for the precinct to start washing its own face. The funny thing is that Emerald is not a small operation. It would slot in as the sixth-largest casino in Tsogo’s 14-strong portfolio, but on an ebitda basis only the Goldfields casino would be smaller. In other words, a turnaround at Emerald would be fairly significant. This might take some time, with Tsogo no doubt needing to spruce up Emerald’s core gaming offering. Is a 30% margin by 2024 a realistic expectation?

An enviable margin

Speaking of margins, Kaap Agri might need some more time to win over sceptics with regard to its decision to pursue opportunities in fuel retailing. A useful segmental review showed its core Agrimark retail business generating revenue of R7.83bn and profit before tax (PBT) of R481m. By contrast, the retail fuel and convenience store segment (RFCS) showed a not insubstantial R6.3bn in revenue — but just R100m in PBT.

So Agrimark operates on an enviable PBT margin of more than 6% (eat your hearts out, mainstream retailers!), while the RFCS, now bolstered by the recent acquisition of fuel retailer PEG, operated on a stingier 1.5% margin. As more fuel forecourts are rolled out or acquired, the margin will remain no more than a sliver. But as Kaap Agri has reiterated, it’s not about fuel sales but rather a matter of the rolling out of convenience stores and quick-service restaurants on the forecourts.

The sales mix of fuel sales, retail and quick-service restaurants should start changing noticeably in the next five years as forecourts become busy retail hubs, building up sturdier profits and an acceptable return on invested capital. ​

Source; Business Live – Marc Hasenfuss