Chief Financial Officer's review

We measure our creation of shareholder value through the increase in adjusted headline earnings per share and the generation of free cash, our efficiency through Ebitdar margin and our financial risk through our net debt:Ebitdar ratio and unutilised net facilities.

Trading for the year ended 31 March 2018 was impacted by the continued pressure on the consumer due to the macro-economic environment, extremely weak sentiment and political uncertainty.

Rob Huddy – Chief Financial Officer

OVERVIEW

This report should be read in conjunction with the consolidated financial statements available separately on our website which set out the financial position, results and cash flows for the group for the financial year ended 31 March 2018.

Commentary on the organic growth during the year is included in the segmental operational performance on pages 65 to 67.

Commentary on inorganic growth is included on pages 68 and 69.

Commentary on net interest-bearing debt and interest rate and currency risk management is included in the financial strength and durability section on page 54.

    Income R14.0 billion   Overview 6%    
    Ebitdar R5.3 billion   Overview 4%    
    Ebitdar margin 37.7%   Overview 0.5pp    
    Adjusted HEPS 197.8 cents   Overview 5%    
    Dividends in respect of the year 102.0 cents per share   Overview 2%    
    Free cash flow R1.9 billion   Overview 13%    
    Net debt R12.5 billion  
    Net debt:Ebitdar 2.4 times  
    Investment activities R2.6 billion  
    Unutilised net facilities R4.7 billion  

INCOME STATEMENT COMPARISON FOR THE YEAR ENDED

  31 March
2018
Rm
  31 March
2017
Rm
  % change
on 2017
 
Income  13 975     13 222       
Gaming win  7 940     7 483       
Revenue               
    Rooms  3 160     3 078       
    Food and beverage  1 561     1 434       
    Property rental income  549     445       
    Other  765     782     (2)   
Ebitdar  5 271     5 049       
Casino Gaming  3 408     3 540     (4)   
Alternative Gaming  238     –       
Hotels – South Africa  1 470     1 359       
             – Offshore  119     146     (18)   
Foreign exchange losses     (38)      
Corporate  35     42       
Ebitdar margin  37.7%     38.2%     (0.5pp)   
Long-term incentives  24     (49)      
Property rentals  (282)    (242)    (16)   
Amortisation and depreciation  (912)    (846)    (8)   
Exceptional items  (439)    787       
Finance costs (net) (1 157)    (1 023)    (13)   
Associates and joint ventures  63     38     66    
Income tax  (410)    (665)    38    
Non-controlling interests  (187)    (542)      
Attributable earnings  1 971     2 507     (21)   
Adjustments  (5)    (520)      
Adjusted earnings  1 966     1 987     (1)   
Weighted average number of shares in issue (m) 994     957     (4)   
Adjusted HEPS (cents) 197.8     207.6     (5)   

* Variance not meaningful

Trading performance

Trading for the year ended 31 March 2018 was impacted by the continued pressure on the consumer due to the macro-economic environment, extremely weak sentiment and political uncertainty. The trading results were assisted by the acquisition of Gameco comprising the Galaxy Bingo and Vukani Slots businesses on 20 November 2017 and the acquisition of HPF and two hotel businesses from Liberty in the prior year and negatively impacted casino gaming by the opening of the Time Square Casino in Menlyn. The potential impact of the positive political developments have resulted in improved sentiment which has not yet translated into a significant improvement in trading, although trading in the second half was better than in the first half of the year. In the low revenue growth environment continued cost control remained a significant focus during the year.

Total income for the year of R14.0 billion ended 6% above the prior year with a 6% growth in net gaming win and assisted by a 9% growth in food and beverage revenue and strong growth in property rental income. The net gaming win growth is assisted by the acquisition of Gameco during the year.

Operating expenses including gaming levies and VAT and employee costs, but excluding exceptional items and long-term incentives, increased by 6% on the prior year mainly due to non-organic growth in the business as a result of acquisitions and expansions, offset by savings initiatives. Excluding the non-organic growth and foreign exchange gains/losses, operating expenses increased by only 1% due to tight overhead control. Non-organic represents all new business operations commencing during the current and prior year.

Ebitdar at R5.3 billion for the year was 4% up on the prior year. Excluding the impact of the Gameco acquisition total income grew by 1% and Ebitdar was flat on the prior year. The overall group Ebitdar margin of 37.7% is 0.5pp down on the prior year.

Long-term incentives

The long-term incentive credit on the cash-settled incentive scheme of R24 million values the liability (including dividend adjustments) by reference to the company’s share price which is adjusted for management’s best estimate of the appreciation units expected to vest and future performance of the group. A share price of R25.50 was used to value the liability at 31 March 2018.

Rentals, amortisation and depreciation

Property rentals at R282 million are 16% up on the prior year mainly due to the opening of the SunSquare and StayEasy Cape Town City Bowl hotels on 1 September 2017, offset by the renegotiation of the Southern Sun Nairobi lease.

Amortisation and depreciation at R912 million is 8% up on the prior year due mainly to the capital spend during the current and prior years.

Exceptional items and adjustments

Exceptional losses for the year of R439 million relate to fair value losses on the revaluation of investment properties of R191 million, mainly related to the non-Tsogo leased hotels in HPF, goodwill and intangible asset impairments of R112 million, pre-opening costs of R19 million, transaction costs of R33 million, restructure costs of R38 million and plant and equipment disposals and impairments of R70 million, mainly related to the Suncoast expansion, interest rate swap fair value adjustments of R2 million and fair value losses on non-current assets held for sale of R1 million, offset by previously impaired loans recovered net of impairments of R27 million.

Exceptional gains for the prior year of R787 million relate to fair value gains on the revaluation of investment properties of R757 million related to the non-Tsogo leased hotels in HPF, the release of a fair value reserve for the available-for-sale HPF investment of R46 million, profit on sale of investment properties of R36 million related to the Inn on the Square disposed of by HPF and gains on bargain purchases of R82 million, offset by property, plant and equipment disposals and impairments and loan impairments of R94 million, including an impairment of the Southern Sun Ikoyi of R75 million, interest rate swap fair value adjustments of R6 million and transaction and restructure costs of R34 million.

Net finance costs

Net finance costs of R1.2 billion are 13% above the prior year due to the increase in debt to fund the growth strategy.

Share of profits of associates and joint ventures

The share of profits of associates and joint ventures of R63 million improved by R25 million on the prior year mainly due to earnings, including the group’s share of exceptional gains of R15 million, from International Hotel Properties Limited and RBH Hotel Group Limited, the group’s European hotel investments.

Taxation

The effective tax rate, which excludes the group’s share of profit of associates and joint ventures, for the year of 16.4% is impacted by the release of deferred tax liabilities of R307 million on the disposal of assets to HPF, tax exempt dividend income, pre-tax profits attributable to the HPF non-controlling interests due to its real estate investment trust (‘REIT’) tax status, offset by the non-deductible fair value losses on investment property referred to above and non-deductible expenditure such as casino building depreciation.

The effective tax rate for the prior year of 18.1% is impacted by the non-taxable fair value gains on investment property and the gains on bargain purchases referred to above, the release of deferred tax liabilities of R56 million on the disposal of assets to HPF, tax exempt dividend income, pre-tax profits attributable to the HPF non-controlling interests due to its REIT tax status, deductible foreign exchange losses on local country currency movements in the African operations that reverse on consolidation and offshore tax rate differentials, offset by non-deductible expenditure such as casino building depreciation and the effective interest on the SunWest and Worcester acquisition.

Non-controlling interests

Profit attributable to non-controlling interests of R187 million is R355 million below the prior year mainly due to HPF non-controlling interests’ share of profits and the fair value losses on investment properties in the current year and gains in the prior year, offset by increased local currency profits at Southern Sun Ikoyi and Southern Sun Maputo due to foreign exchange losses in the prior year not repeated in the current year.

Earnings

Group adjusted headline earnings for the year at R2.0 billion ended 1% below the prior year. The adjustments include the reversal of the posttax impacts of the exceptional gains or losses noted above, in addition to the release of the deferred tax liabilities of R307 million noted in taxation above and the exceptional gains in the share of profit of associates and joint ventures, net of tax and non-controlling interests. The adjustments in the prior year include the reversal of the post-tax impacts of the exceptional gains or losses noted above, in addition to the reversal of the remeasurement of the Cullinan put option included in net finance costs, the release of deferred tax liabilities of R56 million noted in taxation above and the exceptional gains in the share of profit of associates and joint ventures, net of tax and non-controlling interests.

The number of shares in issue increased during the year on the acquisition of Gameco with the weighted average increasing by 4% and the resultant adjusted headline earnings per share is 5% down on the prior year at 197.8 cents per share.

CASH FLOW

  31 March
2018
Rm
  31 March
2017
Rm
  % change
on 2017
 
Cash generated from operations  4 394     4 771     (8)   
Dividends received  110     134         
Net interest paid  (1 148)    (1 076)        
Income tax paid  (688)    (627)        
Operating equipment  (55)    (65)        
Maintenance capital expenditure  (675)    (925)        
Free cash flow  1 938     2 212     (12)   
Dividends paid to shareholders  (1 015)    (975)        
Pre-acquisition dividend paid  –     (133)        
Dividends paid to non-controlling shareholders  (161)    (113)        
Disposal proceeds     145         
Investment activities  (2 576)    (2 590)        
Treasury share settlement  86     –         
Cash proceeds of rights issue  995     –         
Other  (8)           
Increase in net interest-bearing debt  (732)    (1 448)        
Opening net interest-bearing debt  (12 113)    (9 248)        
Acquired with acquisitions  191     (1 536)        
Accrued interest, prepaid                
borrowing costs and currency moves  117     119         
Closing net interest-bearing debt  (12 537)    (12 113)        

Cash generated from operations for the year reduced by 8% on the prior year to R4.4 billion. Net finance costs increased by 7% due to the increase in net debt, taxation paid increased by 10% mainly due to refunds received from SARS in the prior year, dividends paid to shareholders and non-controlling interests increased by 8%. The prior year included an HPF pre-acquisition dividend paid of R133 million. Cash flows utilised for investment activities of R2.6 billion (net of the R1.0 billion rights issue in HPF) consisted mainly of replacement capital expenditure and the acquisitions and investments described under the inorganic growth section on page 68.

DIVIDENDS

The board of directors declared a final gross cash dividend from income reserves in respect of the year ended 31 March 2018 of 70.0 cents per share. The number of ordinary shares in issue at the date of this declaration is 1 059 189 290 (excluding treasury shares of 88 468 494). The total dividends declared in respect of the 2018 financial year amounted to 102.0 cents per share which is 2% down on the 2017 financial year and which equates to 52% of fully diluted adjusted HEPS.

SUBSEQUENT EVENTS

There are no matters or circumstances arising since 31 March 2018, not otherwise dealt with in the financial statements, other than the progress noted on the HPF transactions on page 69, that would materially affect the operations or results of the group.

LOOKING AHEAD

Given the weak state of the South African economy and many of the commodity-focused countries in which the group operates, trading is expected to remain under pressure. Growth will depend on how these economies perform going forward, including the impact of changes in commodity prices and the level of policy certainty that the government is able to achieve. Nevertheless, the group remains highly cash generative and is confident in achieving attractive returns from the growth strategy once the macro-economic environment improves.

  • RB Huddy
    Chief Financial Officer

    15 August 2018