There were such difficult deliberations for mobilising dividend deposits last week: buy the dip in cryptocurrencies, or take advantage of a buckling Richemont share price? The latter, of course. Richemont sits with a heap of cash — €7.4bn at last count (and zero, I presume, cryptocurrency) — sloshing around the balance sheet. This gives it the firepower for latching on to any opportunities in a less than glittering trading period for the global luxury brands sector.
Presumably Richemont is aware, though perhaps not interested, that struggling stone hunter Gemfields has its Fabergé business under strategic review. That aside, the enormous cash pile also means Richemont’s dividends can be sustained through a leaner trading period — a precautionary strategy that characterises all Rupert family-controlled companies over the decades.
Speaking of dividend flows, the latest annual report from Hosken Consolidated Investments (HCI) is a riveting read for shareholders and investors alike. For value investors, who appreciate concerted growth efforts in new ventures, it’s probably worth hearing out HCI chair Johnny Copelyn, with the share price trading at about R130 vs a carrying value of about R303 a share.
Broadly speaking, the group is made up of reliable cash-spinners such as gaming group Tsogo Sun and hotel group Southern Sun; Frontier Transport Holdings (which operates the efficient Golden Arrow Bus Services in Cape Town); television broadcast group eMedia Holdings; HCI Coal; specialist industrial businesses under Deneb Investments; and a large property portfolio. Then there are the so-called growth assets, comprising mainly oil and gas exploration and, to a lesser extent, platinum via Toronto Stock Exchange-listed Platinum Group Metals.
While HCI collected a heap of dividends, mainly from its listed investments, there are worrying structural issues. Tsogo Sun, arguably the most important cash-spinning engine, finds itself at the back of the field when it comes to the online gaming phenomenon that has swept through South Africa. And this at a time when bricks-and-mortar casinos and alt gaming options (limited-payout machines and electronic bingo terminals) are looking distinctly ex-growth.
Copelyn is brutally frank in noting: “While Tsogo Sun has been a dominant business in the casino industry for many years, its failure to develop a successful online offering to date has significantly threatened this position.” He adds, for good measure, that “realistically, it seems unlikely Tsogo will dominate the online space”. Frankly, neither will rival Sun International — not against juggernauts Hollywoodbets and Betway. But at least Sun has found encouraging traction, and is growing a fair-sized online gaming offering at a cracking pace.
So it seems Tsogo is pinning its hopes on becoming a “medium-sized online offering” over time. I know better than to bet against Copelyn, having followed his corporate chess mastery for more than 2½ decades, but the market has certainly made a dire pronouncement on developments. Tsogo is down 32% year to date, compared with Sun shifting up 8%. Over three years, Sun is up 74% and Tsogo down 36%, and the respective shares are accorded earnings multiples of 8.65 and 4.8 — a most disturbing disconnect. Most market watchers believe it can only be a matter of time before HCI convinces Tsogo, which in late 2022 actually acquired a physical casino in the form of the Emerald casino near Vanderbijlpark, to play urgent catch-up by snagging online gaming businesses.
While some shareholders argue Tsogo should throw every cent it can into the online space, I have my doubts about this
— Johnny Copelyn
That, I believe, is not the answer. It will be expensive and risky to snap up a cohort of mom-and-pop online gaming businesses. There might be one or two worthwhile operations to pursue, but certainly not an aggressive land grab. Copelyn says that “while some shareholders argue Tsogo should throw every cent it can into the online space, I have my doubts about this”.
He says the issues that held Tsogo back were not a failure to allocate sufficient resources to the business, “but lay elsewhere”. Copelyn did not specify, but argues that Tsogo has come to grips with many of these problems and now has an offering of games that matches all other sites. He concedes, though, that “late arrivals cannot generate the level of marketing nor the size of bets offered by the major players, which today are essentially international companies even if they were originally South African developments”.
So, what does HCI do about the sputtering in its most important cash engine? Copelyn maintains Tsogo’s potential strength lies in its ability to convert gamblers in its enormous customer base into users of its online offering. Unfortunately, Tsogo has lagged Sun in such endeavours, with the latter operating on an integrated basis for almost a dozen years. The “old” Tsogo structure saw the now separated Southern Sun hotel group with its own loyalty programme, along with Tsogo’s individual casino. The benefits of these loyalty programmes were nontransferable.
Copelyn says Tsogo has made an enormous effort to consolidate its services into an integrated offering — including an integrated app and rewards programme, with points that can be moved between its hotels, casinos and general entertainment services. This now includes the online offering, and at last count it had registered 180,000 users. It’s a long way back for Tsogo, and the share price shows the odds are certainly stacked against it reshuffling a winning hand in the online space. Still, Tsogo simply has to generate compelling cash flows until at least HCI’s big bets in oil and gas exploration in Namibia and the southern Cape coast pay out.
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