Growth strategy in action – 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 competencies. 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

  2018
Rm
  2017
Rm
 
Investment activity expenditure 2 576   2 590  

2018 PERFORMANCE

In terms of the group's continued growth strategy R3.3 billion was spent during the year, including:

  • the acquisition of HCI and all other shareholders' interests in Gameco for a combination of 98.5 million Tsogo Sun shares and R1.7 billion in cash;
  • the continued construction on the R1.6 billion expansion and refurbishment of the Suncoast Casino and Entertainment World. The project includes past spend with the Salon Privé scheduled to open in July 2018 and the remainder of the project scheduled to open in December 2018. In total, R291 million was spent during the year;
  • the acquisition by HPF of various sections and exclusive use areas of the Sandton Eye sectional title scheme from Savana Property Proprietary Limited and an existing real right of extension in the scheme from Sandton Isle Investments Proprietary Limited for R302 million;
  • the development of a US$16 million 125 room StayEasy in Maputo, Mozambique, which opened during April 2018. In total, R145 million was spent during the year; and
  • the opening of a new 504 room SunSquare and StayEasy branded leased hotel in the Cape Town City Bowl during August 2017. The spend on furniture and fittings was R34 million during the year.

INVESTMENT ACTIVITY EXPENDITURE

  31 March
2018
Rm
  31 March
2017
Rm
 
Sandton Eye (Radisson Gautrain) 271    
StayEasy Maputo 145    
Mykonos land 30    
Galaxy Bingo 24    
SunWest and Worcester casinos   1 272  
Suncoast expansion 291   112  
Cape Town land   110  
SunSquare and StayEasy City Bowl FF&E 34   53  
Gold Reef City redevelopment 19   34  
SUN1 expansions   25  
Monte Circle and Monte Place 26   16  
Other 3   4  
Expansion capex 843   1 626  
Acquisition of Gameco 1 733    
Cullinan minorities   459  
Acquisition of Liberty hotels   310  
Mykonos minorities   190  
Blackrock minorities   5  
Acquisitions and minorities 1 733   964  
Investment activity expenditure 2 576   2 590  

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 casino gaming, the focus remains on capacity increases in our existing properties, particularly in specific markets where changing demographics are driving growth. Once the Suncoast expansion is complete in December 2018, apart from the relocation of a casino licence into the Metropole, no further expansions of the physical properties are planned, and the focus will shift to adding additional licensed slot machines and tables as demand increases. With only one of the national licences that is not allocated being potentially 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 alternative gaming we will continue to roll out additional LPM sites in Vukani where there is demand and in Galaxy will roll out electronic bingo in KwaZulu-Natal in the four sites operating as ISO sites with paper bingo at year end. Galaxy has an additional three bingo licences in KwaZulu-Natal that have not yet been rolled out and these will be activated when practically and commercially feasible. In addition no bingo licences have yet been awarded in the Western Cape, Northern Cape and Free State and applications will be made in these provinces when legislation permits. Where there is demand, applications will be made to expand the existing bingo sites and increase the number of machines.

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. Following the proposed split of the group into three listed businesses, acquisitions would most likely be by HPF with the hotel opco securing a lease contract over the hotel where appropriate. 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 in which we already operate.

The group continues to implement a variety of projects and acquisitions including:

  • the internal restructuring and negotiations with HPF for the acquisition by HPF of certain of the casino precinct properties currently owned by the group in consideration for the issue by HPF of new shares in HPF, and the unbundling of the group's entire interest in HPF as announced on SENS on 2 March 2018 and updated on SENS on 18 April 2018 and 9 July 2018;
  • the potential to bid for the relocation 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. The Western Cape Provincial Treasury published a draft bill and regulations intended to permit the relocation of outlying casinos to within the metropole; and
  • the acquisition of additional hotel properties by International Hotel Properties Limited, which currently owns nine hotels in the United Kingdom, is anticipated in the future and the group may apply additional capital in this regard.
Inorganic growth