As one of the companies that did not waste the COVID crisis, Tsogo Gaming’s (TSG) FY 23 results confirm my earlier view (Tsogo Sun Gaming beating the odds).
The gaming Group’s full-year revenue rose +27% y/y while H2:23 revenue grew +7.2% versus H1:23 showing how the momentum rose during the twelve-month period. The cost-cutting, rationalization 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 FY 23 HEPS growth of +38% y/y.
A further analysis of H1 versus H2 earnings results reveals that Tsogo’s H2:23 grew more than one-and-a-half times as profitable as its H1:23, boding well for (hopefully) a more normalized FY 24E.
In fact, if I take the simplistic liberty of annualizing only H2:23’s headline earnings, this implies full-year HEPS would have been c.188cps or +23% higher than the 152cps HEPS the Group reported. This would also place the Group’s share price on a Price Earnings on 6.6x.
Is this cheap or expensive? Well, Sun International is on a 17x PE, though its latest results are till end of December 2022 and, thus, somewhat lagging Tsogo Gaming’s FY 23 (till end of March 2023). Casting one’s eye further afield, offshore casino groups’ shares trade on forward multiples that range from about c.10x to as high as nearly c.30x.
The negatives in Tsogo Gaming’s results are simple and have been adequately communicated by other companies and media, from loadshedding and its demand & operational costs to weakening consumer. Not to dismiss these gigantic negatives, but they are well communicated everywhere and 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, we have found when smoking is banned in casinos, gambling revenues tend to drop on average by c.-15% (the range is from -2% to -25%). But this is an historic pre-pandemic statistic and includes casinos where gamblers can pop across border to smoke and gamble elsewhere (not easily possible in South Africa). Thus, we think that this potential smoking ban may only affect Tsogo Gaming’s casino revenues by between -5% to -10% if implemented.
Despite these overwhelming negatives, Tsogo Gaming generated a FY 23 Return on its Assets of c.10% (using headline earnings), a Return on Equity of over 30%, strong cash flows and, even after spending nearly c.R1bn on capex, managed to degear its balance sheet by c.R1bn.
Interestingly—especially following its separation from what is now called Southern Sun Hotels (SSU)—Tsogo Gaming has built a c.10% stake in City Lodge (CLH). Marry this investment with management’s plans for FY 24E where they note that “[a]ttractive opportunities in the hospitality industry [are] to be pursued”, and an interesting potential corporate action is starting appear on the JSE.
Would Tsogo 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? 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 discovered Zoom and Teams meetings are much cheaper), there is not a clear and obvious fit of these two businesses. Or am I missing something?
ARTICLE ORIGINALLY APPEARED ON MONEYWEB.