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
|Investment activity expenditure||R2 045 million||R1 643 million|
2015 performanceTsogo Sun has continued to allocate capital in terms of its stated growth strategy and accordingly has invested R2.0 billion during the year as follows:
- concluded agreements with Liberty Group Limited (‘Liberty’) for a 10% increase in the group’s equity interest in The Cullinan Hotel Proprietary Limited (‘Cullinan’) to 60% and the acquisition by Cullinan of various hotel businesses from Liberty. The net investment by the group is R762 million and the effective date of the transaction was 30 April 2014;
- acquired a 25% interest in Redefine BDL Hotel Group Limited for R145 million, a leading independent hotel management company in the United Kingdom with approximately 60 hotels under management, with effect from 1 May 2014;
- acquired the remaining 49% interest in Tsogo Sun One Monte Proprietary Limited, the Pivot office development, for R144 million with effect from 19 May 2014;
- completed the R206 million expansion of Emnotweni Casino, which included the construction of an expanded casino floor, additional gaming positions, additional covered parking, a conference and eventing area and restaurants. R18 million was spent during the year;
- completed the US$30 million expansion of Southern Sun Maputo, including the addition of 111 rooms and conference facilities, the expansion of the existing restaurant, lobby and back-of-house facilities and the refurbishment of the existing 158 rooms. The hotel was closed from April 2014 and the refurbishment was completed during August 2014. R207 million was spent during the year;
- completed the R560 million expansion and redevelopment of Silverstar Casino, which includes additional dining options, an outdoor events area, cinemas, 10-pin bowling alley, laser tag games, an expanded and enhanced casino floor and parking. R321 million was spent during the year and the project was completed during October 2014;
- acquired the remaining 15% minority shareholding in the Garden Route Casino for R51 million during October 2014;
- acquired the Garden Court Polokwane land and buildings for R80 million with effect from 31 March 2015;
- continued the R630 million refurbishment and expansion of Gold Reef City Casino and Theme Park which will include 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. R142 million was spent during the year; and
- commenced the planning phase for the expansion of the Suncoast Casino and Entertainment World following receipt of the requisite regulatory approvals. The expansion includes a destination retail mall, additional restaurants and entertainment offerings, a multipurpose venue, resort style roof-top swimming pools, additional parking, an expansion of the casino floor to incorporate an additional 900 gaming machines and 16 gaming tables. Construction is expected to commence in 2016 with three years to completion. R141 million was paid during the year including the R100 million to the KwaZulu-Natal Gaming and Betting Board to be spent on charitable or social infrastructural developments in the KwaZulu-Natal province.
In addition to the capital invested in the growth strategy, the group managed the exit of SABMiller from its long-term 39.6% shareholding in the group, including a specific repurchase of 133.6 million Tsogo Sun ordinary shares for R2.8 billion on 28 August 2014. The shares were acquired at a price of R20.96 per share representing an 18.6% discount to the final book build price achieved on the sale of the SABMiller investment of R25.75 per share.
The group opened the 353-room Southern Sun Abu Dhabi under management contract in the United Arab Emirates on 30 April 2014 and concluded a management agreement for a 150-room hotel in Tete Mozambique to be opened in the first quarter of 2016.
Investment activity expenditure
|Southern Sun Maputo expansion||207||111|
|Gold Reef City redevelopment||142||22|
|Mpumalanga fourth licence bid||1||5|
|Redefine BDL hotels||145||–|
|Pivot office minorities||144||–|
|Garden Court Polokwane||80||–|
|Garden Route minorities||51||–|
|Southern Sun Ikoyi equity(1)||–||505|
|Southern Sun Hyde Park||–||67|
|Monte Circle and Signature Square land||–||45|
|Garden Route Hotel||–||6|
|Acquisitions and minorities||1 183||1 063|
|Loans and investments||1||24|
|Investment activity expenditure||2 045||1 643|
|(1)||The total investment in Southern Sun Ikoyi is R702 million including take on debt of R197 million included in acquired with acquisitions in the increase in net interest-bearing debt in the cash flow|
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 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 transaction entered into with Sun International Limited and Grand Parade Investments Limited for the acquisition of a 40% equity interest in each of SunWest International Proprietary Limited and Worcester Casino Proprietary Limited for an aggregate R2 185 million has been cancelled. The revised implementation date of 31 August 2015 could not be achieved.
The Mpumalanga Gaming Board withdrew the second request for proposal for the fourth casino licence. The group is pursuing a legal challenge in this regard, following the submission of a bid proposal in response to the request.
The group has announced a new 500-room hotel complex in the Cape Town city centre, with the opening scheduled for the third quarter of 2017.
The group is considering creating an entertainment and hospitality-focused Real Estate Investment Trust (‘REIT’), into which it would transfer its extensive owned hotel, retail and office property portfolio. Evaluation of this opportunity continues and no firm decision has been made 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.