Is the alternative gaming sector still a solid long-term bet for punters seeking more attractive odds than what the more mature casino sector offers?
In recent years alternative gaming assets have trumped the traditional casinos for growth. But load-shedding has become a major drag on the electronic bingo terminal (EBT) and limited-payout machine (LPM) segments, which are widely regarded as mini-casinos without the onerous capital expenditure requirements. But sports betting and online gaming thrusts are no longer looking like rank outsiders.
For now, RECM & Calibre (RAC) — which owns 58.8% of Goldrush, an EBT, LPM and sports betting specialist — is the only pure alternative gaming play on the JSE. The main casino groups, Sun International and Tsogo Sun Gaming, do own substantial alternative gaming interests, but these are outweighed by the casinos.
Punters, though, can consider developments at Grand Parade Investments (GPI), which owns 30% of LPM specialist Sun Slots (Sun International owns the rest).
GPI has a new controlling shareholder in investment banker Greg Bortz, who has interests and alliances in horse racing and sports betting. It is widely speculated that Bortz could bring new alternative gaming assets into GPI — which is in the fortunate position of holding a 15% stake in the cash-spinning GrandWest casino in Cape Town.
GrandWest is also controlled by Sun International, which would dearly like to have full control of this valuable asset and, no doubt, the outstanding 30% in Sun Slots too.
But back to the original question.
Looking at results from the big players, it is abundantly clear that the growth trajectory for EBT and LPM operations has darkened. Considerable backup power in the form of generators is needed to ensure uninterrupted EBT operations.
The LPM operations — comprising mainly small slot machines — are not as power-vulnerable as EBTs or casinos. But they are usually housed in small pubs, sports bars or eateries, and owners of these establishments sometimes shut up shop during extended load-shedding.
Tsogo reported that its EBT operations had squeezed margins, with revenue of R835m translating into earnings before interest, tax, depreciation and amortisation (ebitda) of R181m in the year to end-March. The ebitda margin of 21% is markedly skinnier than the margin achieved by the smaller urban casinos.
Tsogo’s VSlots LPM segment fared much better. Tsogo CEO Chris du Toit reckoned it was remarkable that VSlots achieved record ebitda of R564m with “unrivalled margins”. The FM estimates the ebitda margin for VSlots at 29%, which is better than most of Tsogo’s smaller casinos and not too far from the 34% margin earned by the group’s two Mpumalanga casinos. In fact, the LPM business is now larger in top line and ebitda than the combined revenue from Tsogo’s casinos in all provinces aside from Gauteng and KwaZulu-Natal.
Sun International reported that its Sun Slots business proved “remarkably resilient” with a strong recovery in trading in the financial year to end-December. The number of LPMs active for play topped 5,160 — an increase of 508. There are plans to raise the total to 6,500.
Sun Slots’s income increased 20% to almost R1.5bn with adjusted ebitda up 17% to R313m despite the drag from load-shedding in the last quarter of 2022. The margin sits at just under 21%.
RAC released its year to end-March results last week, showing an 18% gain in revenue for Goldrush to R1.64bn and a 2% gain in underlying ebitda (stripping out a R23m gain from early settlement of a finance arrangement) to R351m. The margin was 21%, which is in the same ballpark as Sun and Tsogo’s operations but is commendable considering the challenges.
RAC CEO Piet Viljoen conceded that Goldrush was not prepared for stage 6 load-shedding.
The escalation of blackouts from September 2022 highlighted that some maintenance of diesel generators was neglected during Covid lockdowns
— Piet Viljoen
“The escalation of blackouts from September 2022 highlighted that some maintenance of diesel generators was neglected during Covid lockdowns, which meant we were not able to operate to full capacity during the extended blackouts.”
Viljoen estimated the additional cost of generators to be in the region of R50m a year. “To express this in a tangible number… this direct expense translates to a reduction of at least R348m in the equity value of Goldrush.”
It would seem that EBTs and LPMs will chug along reassuringly for the foreseeable future, and perhaps stretch their earnings if load-shedding tapers off. The cash flows should underpin good dividends, which will be interesting for RAC once its debt of R273m is whittled down.
Cash flows, of course, could be mobilised more aggressively for other alternative gaming avenues. Sun, Tsogo and RAC are putting a big effort into building sports betting and online gaming niches.
Du Toit said a key focus for Tsogo in financial 2024 would be the expansion of its playTsogo online gaming initiative and the Bet.co.za sports betting businesses. He noted: “Significant resources are being applied to the growth of the online betting division. Gross gaming revenue from online betting [launched in December 2022] is still at an infant stage of just more than R100m for the year.”
Sun has achieved great success with SunBet, which hiked revenue 86% to R339m and swung adjusted ebitda from a loss of R2m to a gain of R42m in the year to end-December. SunBet made more in ebitda than the combined figure generated by Sun’s well-entrenched Flamingo (Kimberley) and Golden Valley (Worcester) casinos.
Sun CEO Anthony Leeming said SunBet remained an “exciting prospect with long-term transformational growth potential for the group”. SunBet managed sprightly growth of 135% in the second half.
Leeming noted: “Active players on our rapidly expanding online sports betting and gaming platform continued to grow, with additional games being offered … We continue to invest in people, systems and marketing to significantly increase our share of the fast-growing online gaming market.”
Goldrush already has a fair bit of traction in sports betting; its 29 retail outlets offer 561 betting positions, and it has two licensed betting portals — Gbets and www.goldrush.co.za.
Revenue from sports betting increased 6% to R183m with retail stores growing 5% and online offerings 7%. Sports betting, though, is not plain sailing. Viljoen reported that in the second half some sports results went against the book and reduced profitability, but assured investors and analysts that the individual bets and payouts were well within the company’s risk limits. “In any betting business the impact of such events is reduced through size, and therefore the team continues to increase the number of stores and betting positions.”
Viljoen cautioned that online betting remains fiercely competitive. “Even more operators have entered the market in the past year — some of them with enormous marketing budgets.”
But he argued that the increasing sophistication of bets and games meant it was difficult to distinguish between them and the traditional online casinos.
All things considered, prudent punters might look to bet on alternative gaming from the relative safety of Sun and Tsogo, which offer operational diversity and brand leverage.
RAC is the bolder play, and at a share price of R11.10 the odds are attractive. The price discounts a last stated NAV of more than R14 a share, and its R510m market value should be viewed against its nearly R80m share of Goldrush’s latest net profits.
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