Mid Cap Darlings - Tsogo Sun Holdings


Mid Cap Darlings - Tsogo Sun Holdings

Published Date: 2019-04-04 | Source: INCE|Community | Author: Sifiso Skenjana

Mid Cap Darlings - Tsogo Sun Holdings

Currently, Tsogo Sun Holdings has a diversified portfolio of assets including those in gaming entertainment and hospitality. The familiar assets attributable to the group include Montecasino, Suncoast, Gold Reef City, Caledon, Garden Court, InterContinental and StayEasy amongst others, adding up to 300 restaurants and bars, and more 250 conference and banqueting facilities, including the Sandton Convention Centre.

The group, on the 15th of March 2019 announced that it would unbundle and list a new company, Tsogo Sun Hotels (THL) subject to regulatory approval. This means that there would be two companies after the unbundling; the first would be "Tsogo Sun Gaming Limited" focusing on the casino and alternative gaming operations; and the second would be company "Tsogo Sun Hotels Limited", whose focus would be on the hotels and hospitality operations.
The company states that the separation of the Group into two focused entities will provide shareholders with greater investment choice and the ability to manage their exposure to gaming and hotel operations respectively.

The Gaming Business Model: Tsogo has broad exposure to the major casino and gaming facilities in the across six provinces. The net gaming revenue was expected to be roughly 62% of group revenue, with Monte Casino making the bulk of that revenue at 25% of total gaming revenue. This business is often subject to legislative risk overhang as policymakers look to tighten up against smoking and illegal gambling.

The Hotels Business Model: The hotel business hosts a total of 98 hotels and 16212 rooms as at September 2018. The average occupancy rate was 62.8% and is expected to moderate to 60.6% despite a revenue increase expectation of 4% going into 2019.

Macro Landscape & Growth Prospects

Gambling statistics found a gross gambling revenue (turnover less winnings) increase of 6.7% in 2018, up from 3.8% in 2017. This despite a depressed household income environment on the back of higher VAT, petrol prices and unemployment. Casinos still make up a bulk of gambling revenues at 63.9% in 2018, despite accounting for 84.4% in 2010. The big gainers have been sports betting, now making up 21.6% and Limited Payout Machines making up 10.2% of gross gambling revenue.

The hotel space continues to be competitive particularly with the growing presence of luxury apartments and Airbnb both giving consumers more of the homely feel on their business travels. Opportunities for offshore expansion continues to exist for the hotel chains and may be a source of revenue and occupancy growth in the medium term.
An investment into Tsogo will give you exposure to both these businesses, and you will as investor also have an opportunity to analyse in detail which of these suit your investment portfolio.

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About The Analyst: The Mid Cap Darlings is brought to you by the Awkward Economist - Sifiso Skenjana. He has a breadth of experience in portfolio management, economic research and investment strategy and management consulting. He is founder and financial economist at AFRA Consultants. He is currently pursuing his PhD.