Just over half of the R2bn gross value attributed to investment company RECM & Calibre’s (RAC) portfolio is underpinned by its 50% stake in unlisted alternative gaming business Goldrush.
The importance of Goldrush will be even more pronounced when (rather than if) RAC pushes ahead with plans to take outright control of mostly dismantled offshore investment company Astoria. RAC already has close to 30% of Astoria, and will — if my sources are reliable — look to inject most of its deep-value investments, other than Goldrush, into this Mauritius-domiciled company (which also has listings on the JSE and the Namibian Stock Exchange).
That would leave RAC a pure play on the alternative gaming market, which, as confirmed by recent results from Sun International (which owns Sun Slots) and Tsogo Sun (which owns Vukani and Galaxy Bingo), is still seeing vibrant business in the limited-payout machine (LPM) and electronic bingo terminals (EBT) niches. RAC gives a fairly detailed overview of Goldrush in its annual report, and — as a shareholder — the performance of this gaming business really helps offset some ugly losses incurred on some of the group’s dud investments like Distribution & Warehousing Network and hapless diamond miner Trans Hex.
RAC’s appreciation is evident in CEO Piet Viljoen’s letter to shareholders, where he urged: "If you ever come across [prime movers] Mergan Naidoo or Ray Hipkin, buy them a drink and send us the bill. We owe them much gratitude — not only for what they have done in building Goldrush, but also for the way in which they have done it." Goldrush hiked revenue 22% to R1.3bn in the year to end-March, with sustainable earnings before interest, tax, depreciation, amortisation and rentals (ebitdar) coming in 17% higher at R350m. The ebitdar figure looks reassuring against net debt of just under R600m (remembering Goldrush is still actively engaged in rolling out new sites). Most encouraging is that the core EBT operations — which could justifiably be described as mini-casinos (but with nothing near the capex demands) — grew top line 23% to R905m.
If you ever come across Mergan Naidoo or Ray Hipkin, buy them a drink and send us the bill. We owe them much gratitude
RAC indicates that the multiple used for valuing Goldrush remains unchanged at a modest seven times, which is below gaming market leader Tsogo Sun’s more than 10 times. The rating, though, does take into account potential operating risks like draconian smoking bans — and I would add regulatory inefficiencies that can hamper rapid expansion. Interestingly, RAC points out that after many years of reinvesting all cash flow back into Goldrush, "we are finally getting to the point where we can anticipate some dividends coming our way".
This statement comes despite RAC noting that the 2020 financial year will be the heaviest year in terms of expansion capex for Goldrush as it moves to snag opportunities in KwaZulu-Natal as well as grow the LPM and sports betting market share. In terms of sports betting, the RAC annual report shows the Goldrush G-Bets operations growing from just R9m in 2016 to R95m in the 2019 financial year. Sports betting remains a fractious market, but there are increasing signs of traction.
For those with a penchant for gaming’s solid cash flows and dividend attributes, Goldrush is worth about R23 a share to RAC — which will also have its NAV boosted when the bulk of its R586m debt is culled by the inflow of R452m from a special "liquidation" dividend from Astoria. Admittedly, prospective investors might be spooked by RAC’s other investments in deep-value assets that require nerves of steel (like Unicorn Capital Partners, for instance). But the prevailing discount strips out much of these risks, and offers attractive odds on a quality business like Goldrush. That said, I wonder if RAC has had offers coming through for its stake in Goldrush in recent months. Seems to me that such a business would be subject to a good deal of interest these days.
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