Tsogo Sun Gaming back on a winning streak

Tsogo Sun Gaming (TSG) is one of the companies that did not waste the Covid crisis, and its results for the year to 31 March 2023 confirm the view I shared of the counter six months ago in Tsogo Sun Gaming beating the odds.

The gaming group’s full-year revenue rose 27% year on year, while H2:23 revenue grew 7.2% versus H1:23 showing how the momentum rose during the 12-month period.

The cost-cutting, rationalisation and efficiency gains from the pandemic were held onto, and the revenue growth cascaded down the income statement with operating and financial leverage to arrive at full-year headline earnings per share (Heps) growth of 38% y/y.

Read: Tsogo Sun triples full-year dividend in post-Covid rebound

A further analysis of H1 versus H2 earnings reveals that Tsogo’s second half grew more than one-and-a-half times as profitable as its first half, boding well for (hopefully) a more normalised full-year to March 2024.

In fact, if I take the simplistic liberty of annualising only H2:23’s headline earnings, this implies full-year Heps would have been around 188 cents per share (cps), or 23% higher than the 152cps the group reported. This would also place the group’s share price on a price-earnings (PE) multiple of 6.6 times.

Is Tsogo Sun cheap or expensive? Well, Sun International is on a PE of 17 times, although its latest results are for the year to end December 2022, and thus somewhat lagging Tsogo’s results for the year to March 2023.

Casting one’s eye further afield, offshore casino groups’ shares trade on forward multiples that range from around 10 times to as high as nearly 30 times.

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The negatives in Tsogo Sun Gaming’s results are simple – from load shedding to demand and operational costs and weakening consumer sentiment – and have been adequately communicated elsewhere Not to dismiss these gigantic negatives, but there is diminishing marginal returns on writing further on this.

As a more unique negative, Tsogo management explains that the Department of Health is pushing ahead with its banning of smoking in casinos and that this will have a detrimental effect on (legal) gambling.

Globally, it has been found that when smoking is banned in casinos, gambling revenues tend to drop on average by around 15% (the range is between 2% and 25%).

But this is a historic pre-pandemic statistic and includes casinos where gamblers can pop across a border to smoke and gamble elsewhere (not easily possible in South Africa). Thus, this potential smoking ban may only affect Tsogo Sun Gaming’s casino revenues by between 5% and 10% if implemented.

Despite these overwhelming negatives, the group generated a full-year return on its assets of around 10% (using headline earnings), a return on equity of over 30%, strong cash flows, and – even after spending nearly R1 billion on capex – managed to degear its balance sheet by around R1 billion or 11%.

Interestingly – especially following its separation from what is now called Southern Sun Hotels (SSU) – Tsogo Sun Gaming has built a stake of around 10% in City Lodge Hotels (CLH).

Marry this investment with management’s plans for its current financial year, where it notes that “[a]ttractive opportunities in the hospitality industry [are] to be pursued”, and an interesting potential corporate action is starting to appear on the JSE.

Listen/read:
Tsogo Sun Gaming now owns almost 10% of City Lodge
Southern Sun retains dividend despite ‘strong profit’
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Would Tsogo Sun Gaming buy City Lodge outright?

Would the group seek to build up a position here that is meaningful enough to get a board seat and, perhaps, seek a corporate relationship? Or something else entirely?

Given that City Lodge’s core hotel occupancies come from domestic business travel (which is still in the doldrums from Covid as businesses have discovered that Zoom and MS Teams meetings are much cheaper), there is not a clear and obvious fit of these two businesses. Or am I missing something?

What do you think about Tsogo Sun Gaming buying a circa 10% stake in City Lodge? Write a comment below or Tweet me your thoughts.