Stock Focus: Tsogo Sun (TSH)

Tsogo Sun is Southern Africa’s premier gaming, hotel and entertainment group, listed on the JSE.

Its key shareholders are Hosken Consolidated Investments Limited , a JSE listed investment holding company (47.6%); SABMiller plc, the London listed brewing company (39.7%); financial institutions and the general public (19%).

Gaming properties include: Monte Casino, , Gold Reef City, Silver Star, Mykonos, The Caledon, Sun Coast, Black Rock.

Hotels include: Palazzo, Sandton Sun, Sun Coast Towers, Sun Square, Sun1 (Budget)

Just under 80% of revenue and Ebitdar comes from gaming.

History

The Tsogo Sun heritage dates back to the founding of Southern Sun

Marcel von Aulock - Chief Executive Officer
Marcel von Aulock – Chief Executive Officer

Hotels in 1969. Various mergers and acquisitions have seen the group grow and expand over four decades, most significantly as a result of the successful application for casino licences following the legalisation of the gambling industry in South Africa in 1994.

Tsogo Sun’s collection proudly comprises over 14,500 hotel rooms across all sectors of the market in South Africa, Africa, the Seychelles and the Middle East; 14 premier gaming and entertainment destinations; theatres, cinemas, restaurants and bars; and over 250 conference and banqueting facilities, including the internationally and locally renowned Sandton Convention Centre.

Prospects: Where is the growth potential?

1. Diversifying into office and retail

Ron Huddy - Chief Financial Officer
Ron Huddy – Chief Financial Officer

Tsogo is one of the better companies when it comes to developing opportunities around their key gambling hubs. Already further development of office blocks and retail space will be phased in over the next 5 years around Monte Casino. Tsogo had already (in May 2014) acquired the remaining 49% of the Pivot Offices for R142m.

2. Strong cash flows

As with most gaming companies, they have incredibly strong cash flows. They also own most of their own assets which gives them the ability to spend money when opportunities arise.They are currently in the process of acquiring assets throughout Europe and the UK via Redefine and, depending on what they buy, it could present an interesting growth opportunity.

3. Relaunching loyalty programmes

Loyalty programmes continue to assist companies in understanding their customers better. With the variety of gaming and leisure groups in South Africa, effective loyalty programmes remain key to capturing market share.

Risks

Risk #1: Very SA-centric

More than any of the other gaming and hotel brands, Tsogo Sun is reliant on the tourism and general economic recovery in South

John Copelyn - Non-Exec Chairman
John Copelyn – Non-Exec Chairman

Africa. If we continue to see stagnant SA growth, Tsogo Sun will under perform its peers. Considering the strong balance sheet it would be exciting to see Tsogo targeting a couple of offshore acquisitions. Tsogo will see the strongest returns from a rejuvenation of the domestic economy.

Risk #2: Regulation will always be a threat to gaming

The heavy revenue/operating profit reliance of Tsogo on gaming will always make it sensitive to regulatory shifts. It’s position as a significant player in the gaming space offsets the risk related to either the removal of Tsogo license or the broadening of the gaming net by the issuance of new licences in South Africa. National and provincial taxing of gaming should also be considered.

Risk #3: Hotel demand remains low

With South African politicians tightening their belts and corporate demand yet to recover, it seems the hotel industry is in for a tougher time. While this is the smaller portion of the company revenue, it once again relies on the general economic prosperity of South Africa improving.

Source: Tsogo Sun Integrated Report 2014 and Website