Tsogo Sun Gaming reports half-year recovery, but new Covid variant a threat

JSE-listed Tsogo Sun Gaming’s half-year results to the end of September, released on Thursday, show that the group has put its loss-making 2020/2021 year behind it as the gaming giant reported a surge in earnings and reduction in debt levels.

The first half recovery was well-received by the markets as the group’s share price rose more than 6% on Thursday. However, the gains were wiped off on Friday morning with the market digesting news of a new Covid-19 variant in the country.

Read:

SA detects new Covid-19 variant, implications not yet clear

Rand takes a tumble, rising above R16 to the dollar

By around midday its share price was down some 10%, trading around R9.50 a share.

Figures

The group reported a 159% increase in headline earnings to R323 million for the half-year, compared to a R543 million loss for its comparative first-half.

Whilst this is an improvement on last year’s levels, its latest earnings are 52% below the 2019/2020 comparable period.

Tsogo Sun Gaming also saw income in the current period increase by 144% in comparison to 2020 levels to R3.8 billion. This also highlights its recovery, but the increase still remains below 2019 levels.

Business health

The owner of popular casino and entertainment complexes, such as Suncoast in Durban and Joburg’s Gold Reef City and Montecasino, was nevertheless still affected by Covid-19 lockdown restrictions during the half-year.

South Africa’s third wave of the pandemic between late June into July hit operating times, alcohol sales and patron numbers (due to capacity or social distancing restrictions) at its casinos.

However, the business is now much healthier than it was last year, with the group managing to improve its Ebitda (earnings before interest, taxation, depreciation and amortisation) margin – which was recorded at 12% in 2020 – rebounding to 2019 levels of 33% in the current period.

Tsogo Sun Gaming says it wants to continue to limit the pandemic’s financial impact on the business by reducing its cost base and managing operational efficiencies, with the group hoping to see its business normalise by 2023.

“As the group gradually returns to a normal state [hopefully in the 2023 financial year] after continuous restrictions affecting the business over an extended period, certain expenses, some of which are beyond our control [such as utility costs], will continue to increase, offsetting some of the saving initiatives achieved,” it notes.

“The visibility of where the operating cost base will finish when we return to a normalised trading environment, remains difficult to determine accurately at this point in time,” the group adds.

Read: Hotel and office property markets will continue to underperform in 2022 – FNB

Meanwhile, Tsogo Sun Gaming says that it plans to offload non-core assets – mainly surplus land – valued at R58 million to free up some capital.

“With the ongoing cash flow constraints, no major development projects are planned for the second half of the 2022 financial year.”

“Investment opportunities within the industry are continuously being evaluated,” the group points out.

Impact of new Covid-19 variant

According to FNB Wealth and Investments portfolio manager Wayne McCurrie, Tsogo Sun Gaming has shown a spectacular turnaround despite the difficult trading environment it found itself in the past 20 months.

However, he cautions that the discovery of the new Covid-19 variant – called B.1.1.529 – can “only mean bad news” for the entertainment group as it may slow down its recovery momentum, especially considering that the UK plans to place South Africa on its red list (again) from this Sunday.

“Even though overseas tourists are not the major part of their business, it is a large part of their business,” McCurrie tells Moneyweb.

“I am pretty sure even if other countries don’t put a physical restriction on tourists coming here, everyone will see that we are on the red list and everyone will have a look at the new variant and it will stop quite a few people from coming,” says McCurrie.

Read: UK stops flights from SA over Covid variant worries

Despite this, he is hopeful that although the fourth wave of infections is now seemingly underway in South Africa, the new variant will not have as much of a devastating impact as previous waves. This is because the country will be facing the fourth wave with a large proportion of the population either already exposed to the virus or vaccinated.

McCurrie adds that Tsogo Sun Gaming’s business will not be as badly affected by future waves  of infection for the above reason, as well as the fact that harsher lockdown restrictions will most likely not be on the cards for government because of the devastating impact its had on the economy.

Reducing debt

Tsogo Sun Gaming meanwhile notes in its latest results that it is on track to reduce its medium to long-term debt levels, which will help it reduce risk and funding costs. The group managed to reduce its net interest bearing debt and guarantees by R1.5 billion, from R11.8 billion in the previous comparable period.