You should never waste a good crisis and, indeed, many of the well-run listed companies have exited the last two years of pandemic-induced misery in much better positions. Not only did they use this period for deep efficiency gains (i.e. cost cutting) that have boosted their margins, but many weaker, worse-run competitors likely went out of business and given the survivors’ market share gains.
Tsogo Gaming (TSG) is an excellent example of this. While Sun International (SUI)—with the astute backing of Value Capital Partners—is doing a good job of turning their ship around, Tsogo Gaming was already an efficiently-run, best-of-breed casino group pre-COVID.
Yet, Tsogo Gaming’s H1:23 results out last week show that this perception was only relative to peers and not necessarily an absolute fact…
If we compare Tsogo Gaming’s latest H1:23 results to its H1:20 results (importantly, the six months ending September 2019 was pre-COVID), revenue has not fully recovered and is still -8% down. If we assume that there was cumulative inflation of about 16% across this period, then revenue still has over 24% more to recover to get to pre-COVID levels.
And that is the only bad news.
H1:23’s operating costs are down -12% versus pre-COVID levels. But there has been inflation here too. In real-terms (i.e. excluding inflation), Tsogo Gaming’s operating costs are actually down by a whopping -28%! This waterfalls through the Group’s income statement as EBITDA margin has risen to 35.6% from 33.2% pre-COVID and (excluding the one-off separation fee paid to Southern Sun) this translates into Headline Earnings Per Share (HEPS) that is +30% higher than pre-COVID levels.
Imagine how much higher Tsogo Gaming’s profits would be if its revenue was back at pre-COVID levels…
While there are plenty of variable costs in the Group (these are costs that increase as revenue increases), the majority of the costs of running casino’s are pretty fixed (e.g. building, machines, tables, staff and licenses).
If I assume that about a quarter of Tsogo Gaming’s operating expenses are variable, then if revenue was +24% higher for Tsogo Gaming (i.e. in line with pre-COVID + inflation), I estimate that their HEPS would have been nearly double what was reported in H1:23 and nearly one-and-a-half times more than their pre-COVID HEPS!
Tsogo Gaming has certainly not wasted this crisis and I take my hat off the management here. They have done a sterling job under the circumstances.
If I annualize H1:23 HEPS (excluding the Southern Sun one-off), Tsogo Gaming is trading on a Price Earnings (PE) of c.7.7x. If I go one theoretical step further and work out my hypothetical “normalized” earnings (keeping the efficiency gains while normalizing revenue to pre-COVID nominals), I estimate that the share may be trading as low as c.4.0x PE.
They say that the “house always wins”, but over the pandemic I think the opposite happened. That said, “the house” has certainly put in a lot of blood, sweat and tears to come out of this nightmarish period stronger. Well done to them!
ARTICLE ORIGINALLY APPEARED ON MONEYWEB