Tsogo waits on SA rebound while expanding casinos

Johannesburg - Tsogo Sun [JSE:TSH] is positioning itself for an economic rebound in South Africa as the continent’s largest gaming and hotels company upgrades casinos in its core market.

While there’s enough gambling space to meet demand at present, chief executive officer Marcel Von Aulock said he’s confident the strategy of adding more square meters and betting machines to venues will pay off. The fortunes of the gaming business are reliant on consumer sentiment, and its fixed-cost nature means profit will jump if revenue increases, he said.

“We’re at the tail end of the transformation of the portfolio,’’ Von Aulock said in an interview at Bloomberg’s Johannesburg office on Friday. “We’ve done all the work, so we are kind of waiting for the uptick to come.”

Tsogo, which gets about 65% of its profit from gaming and 30% from hotels, is investing even as the South African economy is forecast this year to grow at the slowest pace since a 2009 recession.

The Johannesburg-based owner of the Montecasino and Gold Reef entertainment complexes has completed upgrades at its third-and fourth-largest casinos and will spend about R2bn to expand its Suncoast gaming and entertainment site in Durban. The company has also invested in hotel refurbishments and acquiring properties that it previously leased.

Despite the economic challenges in South Africa, which accounts for more than 90% of profit, Tsogo was able to increase gaming wins by 6% in the year through March, while revenue at its South African hotels grew 9%, largely because of a stronger-than-expected fourth quarter.

The shares rose as much as 3.4% in Johannesburg on Monday, and traded 0.3% higher at R28.62 as of 9:20. The stock has gained 18% this year, valuing the company at R30bn. That compares with a 4.3% rise on the FTSE/JSE Africa All Share Index.

While Tsogo Sun owns and operates hotels in other sub-Saharan African countries, it’s unlikely to follow rival Sun International in adding casinos outside South Africa, the CEO said. The company, which has a casino market share of 40% in its home market, is wary of unfamiliar rules, regulators and customers that come with international expansion, Von Aulock said.

“We just haven’t seen any reason for it,” he said. “Maybe one day when we completely run out of things to do in South Africa.”

As well as the Suncoast expansion, Tsogo hopes to add a new Cape Town casino by moving the license from a smaller facility. Local authorities first need to change regulations to allow for a relocation application process, a move Von Aulock said could come by the end of the year.

Tsogo Sun is also seeking South African regulatory approval for a deal to buy control of Johannesburg-listed Hospitality Property Fund in exchange for a number of Tsogo’s own hotel properties.

The company is seeking opportunities to expand its hotel portfolio in the rest of Africa, and is considering the construction of an “economy hotel” in Maputo, the capital of neighboring Mozambique, Von Aulock said.

Tsogo needs to “make sure we’re in the right place, make sure the product is good,’’ Von Aulock said. “At some point the economy will turn.’’

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