Inorganic growth

 

Inorganic growth will be a combination of capacity increases in existing businesses, greenfield developments in new markets and acquisitions within the group's core competence. In all situations, a discipline around due diligence and feasibility is critical to ensuring the success of growth projects.

The propensity for growth projects to absorb both financial and human resources must be carefully evaluated within the group's capacity tolerances as these can impact some of the pillars of sustainability.

Key performance indicators

  2016
Rm
  2015
Rm
 
Investment activity expenditure 962   2 045  

2016 performance


Tsogo Sun has continued to allocate capital in terms of its growth strategy and accordingly spent R1.0 billion during the year as follows:
  • continued the R640 million refurbishment and expansion of Gold Reef City Casino and Theme Park which includes an increased casino offering, cinemas and additional restaurants at the casino and additional food and beverage outlets and improved access systems at the Theme Park, with an improved linkage to the casino complex and an expansion of the Apartheid Museum. Phase one of the project, which excludes the Theme Park, was completed in November 2015. R256 million was spent during the year;
  • continued with the planning for the expansion of the Suncoast Casino and Entertainment World with construction anticipated to commence in September 2016 with two years to completion. The investment in the expansion has been decreased to R2.1 billion and will include a 22 000 m2 destination retail mall, additional restaurants and entertainment offerings, additional parking, an expansion of the casino floor to incorporate an additional 900 gaming machines and 16 gaming tables. An amount of R100 million made available to be spent on charitable or social infrastructural developments in the KwaZulu-Natal province was paid in the prior year and forms part of the investment. R47 million was spent during the year;
  • acquired 55% of the Hospitality Property Fund Limited ('HPF') B-linked units for R252 million in August 2015; and
  • acquired a 25% interest in International Hotel Group Limited (an associate), along with the major shareholders of Redefine BDL, for R315 million between September 2015 and March 2016. The property fund, which has a dual listing in Luxembourg and on the Johannesburg Stock Exchange, will pursue hotel opportunities in the United Kingdom and Europe, the hotels being managed by Redefine BDL.

Investment activity expenditure

  31 March
2016
Rm
  31 March
2015
Rm
 
Gold Reef City redevelopment 256   142  
Silverstar redevelopment 28   321  
Suncoast expansion 47   141  
Monte Circle and Monte Place 27   6  
Emnotweni expansion 2   18  
Hemingways expansion   6  
Blackrock expansion   3  
SUN1 expansions 20   16  
Southern Sun Maputo expansion 15   207  
Other   1  
Expansion capex 395   861  
International Hotel Group 315    
HPF B-linked units 252    
Majormatic/Extrabold 15    
Pivot Office minorities   144  
Garden Route minorities   51  
Acquisition of Liberty hotels   762  
Redefine BDL   145  
Garden Court Polokwane land        
and buildings   80  
Other   1  
Acquisitions and minorities 582   1 183  
Loans and investments (15)   1  
Investment activity expenditure   962     2 045  

Looking ahead

The group remains highly cash generative and continues to pursue significant opportunities to invest capital in its growth strategy.

Our medium-term growth strategy focuses on opportunities that are expected to yield greater return on investment and effort at lower levels of risk.

In gaming, the focus remains on capacity increases in our existing properties, particularly in specific markets where changing demographics are driving growth. With only one of the known national licences that is not allocated an attractive proposition, we remain acquisitive for existing licences, but only at the right price. African expansion would only become attractive as regional economies develop a more robust middle market and enable regulatory environments. Expansion outside South Africa remains unattractive due to the additional risk of operating in diverse regulatory environments and the limited economies of scale that can be achieved.

In hotels, we remain opportunistic in South Africa and will acquire properties if they are well located, align with our business model and are realistically priced. Although occupancies are improving they are not yet at long-term averages and there should not be significant hotel stock being added to the market at this stage of the cycle. We would, however, actively seek opportunities to land bank, build or lease in superior locations or nodes that are expected to grow more strongly in the future. In other jurisdictions we continue to evaluate opportunities to manage, lease or own hotel properties in markets where we believe we have a competitive advantage and will mostly focus on the territories we already operate in.

The group continues to implement a variety of projects and acquisitions including:
  • the group concluded a transaction with Sun International Limited and Grand Parade Investments Limited for the acquisition of a 20% equity interest in each of SunWest International Proprietary Limited and Worcester Casino Proprietary Limited for an aggregate R1.35 billion;
  • as previously noted, agreement has been reached with HPF to acquire a controlling stake through the injection of appropriate hotel assets having a value such that the issue of shares to the group at the time will result in the group owning not less than 50% of the shares following the reconstitution of HPF's capital into a single class of shares. All resolutions required in order to approve the transaction were passed by the requisite majority of shareholders at the general meeting of HPF shareholders held on Monday, 11 April 2016. The acquisition is subject to the fulfilment of conditions precedent, which included the approval of the competition authorities, which was received on 10 August 2016. The anticipated effective date of the transaction is 1 September 2016;
  • agreement has been reached for the further acquisition of two hotels from Liberty by Cullinan, being Garden Court Umhlanga and StayEasy Pietermaritzburg for R310 million. Regulatory approval has been received and control will follow in the next few months;
  • the potential to bid for the relocation of one of the smaller casinos in the Western Cape to the Cape Metropole remains an opportunity for the group should the provincial authorities allow such a process; and
  • the Mpumalanga Gambling Board withdrew the second request for proposal for the fourth licence. The group is pursuing a legal challenge in this regard.

The ability to continue to pursue these and other opportunities in line with the group's investment strategy will depend on the final outcome and impact of the variety of potential regulatory changes considered by government and will require the successful interaction with various regulatory bodies including gaming boards, city councils, provincial authorities and national departments. The group continues to constructively engage with the various spheres of government in this regard.

Inorganic growth