Tsogo unchained, but still weighed down

Tsogo Sun South Africa

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Recently freed from the group’s struggling hotel interests, Tsogo Sun Gaming’s earnings were predicted to surge to new heights in 2019, but higher than expected costs haunt the South Africabased operator.

Tsogo Sun Gaming reported that its adjusted earningsper- share was lower than expected as a result of higher finance costs for the six month period ending 30 September 2019. Adjusted headline earnings per share, the main profit measure in South Africa, was 68.4 cents compared to 78.8 cents last year, down 13 percent.

This measure strips out certain one of items, such as R564m ($38.3m) profit from discontinued operations, which, when included, meant that basic earnings per share were up by 63 percent.

However, when not included, an increase in the cost of debt as a result of the unbundling of the Tsogo Holding’s hotel interests in June has weighed the headline earnings down. In its financial announcement, Tsogo Sun Gaming said it has been focusing on cutting costs and improving operational efficiency at its head office and casinos, the results of which will be seen in the next financial year.

“The group has intensified its focus on cutting costs and to improve operational efficiency especially at head office and casino level,” it said along with the results. “With the further focus of appropriate and reduced capital expenditure spend, the group intends to reduce debt levels in the next financial year.”

Despite some turbulence from the break with the hotel group, first-half total income for Tsogo Sun Gaming rose 5 percent to R6bn ($406.4m) from growth in its gaming, food and hotel room businesses.

Strictly on the gaming front, this largely came from its recent investment in alternative gaming formats, most notably limited payout machines (LPMs) and electronic bingo terminals (EBTs), which are now outperforming their more traditional counterparts. “The bingo and LPM divisions’ ongoing improvements in the quality of product and sites should continue to deliver positive growth,” the company added.

The group’s casinos have been more hit and miss, however total income increased three percent on the prior period to R4.6bn ($330m) and net casino gaming win growth for the six months till September was similar to the previous six.

“Gauteng growth has been muted, but retained its market share for the first six months compared to the 2019 financial year, while the KwaZulu-Natal provincial gaming win was below the market growth with the Suncoast Casino performance in particular requiring improvement,” the company’s report continued.

“It is evident that the approximately R1.4bn ($100m) investment is not yielding satisfactory returns.

The new management team will address the inefficiencies at the property, although there are some design challenges which will be difficult to overcome. The declining performance of the Hemingways casino in the Eastern Cape is also receiving attention.”

Meanwhile, Tsogo Sun Hotels, which was unbundled from the Tsogo Sun Gaming group in June, reported first-half headline earnings per share of 5.2 cents in a separate announcement.

The new, separately-listed business also manages Tsogo Sun Gaming group’s casino-based hotels in South Africa, altogether managing more than 14,400 hotel rooms across the country.

“We are cautiously optimistic for the short-term into next year as it still is a tough operating environment,” said the hotel group CEO Marcels von Aulock. “However, there is enormous longer-term upside potential for tourism and business tourism growth in the country.”

The hotel group recorded R2.1bn ($150m) in income for the six months to 30 September 2019, while operating profit came to R320m ($22.8m).

It noted that profit attributable to equity holders of the company came in at R54m ($3.9m). As it said in its pre-listing statement in June, Tsogo Sun Hotels did not declare interim cash dividends for the period. The group plans

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