New-look RECM & Calibre (RAC) appears to be worth a flutter now that its investment focus has been narrowed down to a single big bet on alternative gaming group Goldrush.
Listed in 2010, RAC has enjoyed great success — most notably cashing in its unlisted and indirect stake in health retailer Dis-Chem — but has also endured some disasters, including an ill-fated charge into Distribution & Warehousing Network and a brief flirtation with specialist retailer CNA.
Last year, the group bundled all its investments aside from Goldrush into listed subsidiary Astoria. RAC is now effectively a clean proxy for Goldrush, which plies its trade in electronic bingo terminals (EBTs), limited-payout machines (LPMs), online gaming and sports betting.
RAC owns 58.8% of Goldrush. Investors might reasonably assume that at some stage the other shareholders in the gaming group might swap out their holdings for RAC scrip, which would presumably see the listing taking on the corporate identity of Goldrush. Who knows, this could even be tagged to a capital raise should Goldrush spy any well-priced peers.
There remains a niggling issue in the form of the management fees accruing to founding executives when the group now essentially consists of a single asset. That issue, IM is sure, will be dealt with in the near future.
As things stand, RAC looks an attractively priced option on Goldrush. The group set a value of R960m on its stake in Goldrush, underpinning a NAV of R14.48 a share.
Even casual observers in the gaming sector will know that the LPM and, to a lesser extent, EBT operations have bounced back faster than the traditional casino businesses after the gradual lifting of Covid restrictions. In the year to end-March Goldrush saw revenue up 52% to almost R1.4bn. This was achieved on 11 months’ trading — July last year brought an effective shutdown of outlets due to Covid.
The core EBT segment — somewhat restricted in the period in how many machines it could operate and how many patrons could be allowed on site — grew revenue to R847m. But this was still 10% down on pre-Covid levels.
The LPM segment saw revenue of R367m, 7% ahead of pre-Covid levels. The spurt in top line came from the sports betting operations, which hiked revenue 51% to R172m.
Gut feel is that RAC will look to culling debt before entertaining a maiden cash dividend payout
In terms of justifying RAC’s R960m valuation of Goldrush, sustainable earnings before interest, tax, depreciation and amortisation (ebitda) came in at R343m and profit after tax at R100m. Against historical and current market ratings for casino stocks, this valuation does not seem unreasonable.
That said, 2023 could be a good year for Goldrush. In its latest trading statement, issued at the AGM in late July, RAC indicated that Goldrush continued to trade well during the first four months of the new financial year.
To quote: “This has led to the rolling 12-month ebitda at the end of July being expected to exceed R380m.”
RAC confirmed that Goldrush’s EBT operations had benefited from the lifting of the mask mandates in late May, and that the company was on track to deploy additional LPMs. Retail sports betting again saw strong in-store growth, and online saw a further improvement in sales.
There was good news on the balance sheet too. After financial year-end, Goldrush refinanced a liability to a machine supplier and consolidated this debt with its current bankers. The process yielded not-insubstantial discounts of R35m.
RAC’s banking arrangements have been renegotiated to reduce the cost of funding and provide more flexibility. At last count, debt was about R250m.
This really means RAC can repay debt without penalty — but still retain the option of buying back shares or paying dividends.
Gut feel is that RAC will look to culling debt before entertaining a maiden cash dividend payout. With strong cash flows likely at Goldrush in the year ahead, the debt should not be a lingering issue.
Whether RAC would consider buying back its own shares at current levels will be interesting to monitor. With Goldrush looking capable of generating close to R400m in ebitda in 2023, the current price looks quite tempting. Of course, finding enough willing sellers in the open market might not be that easy, considering the relative lack of liquidity in RAC stock.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.