Tsogo Sun Chief Executive, Marcel von Aulock joined Alec Hogg on CNBC Africa’s Power Lunch following the release of its interim results which showed headline earnings per share to be flat for the period. This result is largely due to the extensive investments that the group have been focusing on, and if anything prove, that despite a dampened recessive environment it is fully dedicated to its strategy of long-term growth. Companies that focus on the expansive big picture in trying times are known to flourish when the upswing comes. – LF
ALEC HOGG: Leading hotel group, Tsogo Sun posted interim results this morning. Adjusted headline earnings per share, were unchanged at 81 cents, and so was the interim dividend, they’re paying 29 cents a share there. The company also reported a four percent growth in income to almost R5.5bn and a drop in adjusted earnings. Joining us in the studio is Marcel von Aulock, the Chief Executive of Tsogo. Talking a little earlier to our market watcher, Gary Booysen, we noted that your share price was off six percent today but looking at the graph, it has actually come a long way. Only a few months ago, you were R25.50. You are now sitting at R28.80, so I guess there had to be some kind of pull back, why such optimism in the run up to the results?
MARCEL VON AULOCK: Alec, I think the recent run in the share price was more to do with us going into the global emerging market indices. We’re the only leisure company that’s big enough, with enough liquidity, to get put into those indices and they rebase during the month of November, so you had a whole lot of global tracker funds that had to buy the share, to get their proportion into it. I think that’s what was pushing the price, as far as we can establish, and then the daily moves will only go up or down.
ALEC HOGG: That makes a lot of sense but you must be watching the share price. You guys have taken a big bet, the management team.
MARCEL VON AULOCK: We have but it’s a very long-term bet.
ALEC HOGG: How long?
MARCEL VON AULOCK: Basically, the rest of my working life, so the plan of the thing is that you don’t sell it, you hold it and this is the way to make money. It is to stay in the share for as long as you possibly can.
ALEC HOGG: How have you invested around you guys?
MARCEL VON AULOCK: For me, it is probably almost just about everything I’ve got, it is in the company, but it’s a solid company. The current results are tough. There’s a whole series of issues, that hit us, in the six months, but the core business is very strong. It produces a lot of cash. We’ve continued to invest in it. We’re building new operations. We’ve just done the Silver Star refurbishment. We bought a whole lot of acquisitions during the period, so we’re pretty, confident and just quite happy to look through the short-term cycle. The consumer in South Africa is under a lot of pressure. You keep hearing that in every commentary, you read and we no different. Gaming win growth of two percent is not where we want to be. Our costs are running between six and eight. We need to get gaming/win up to at least that level, to keep their margins.
ALEC HOGG: Gaming win?
MARCEL VON AULOCK: Gaming win is what we keep as a casino, so bets minus parts and that’s our biggest contributor to revenue. It’s about 65 percent of our revenues and it is pure, discretionary leisure spend, so if people aren’t feeling good and don’t have a positive sentiment that number is not going to grow fast.
ALEC HOGG: How do you balance that because, I guess, there would always be a temptation when your profits are under pressure, in a period like this, to increase what you take out of the gaming pot?
MARCEL VON AULOCK: What you don’t have is any form of pricing pro. You can’t do that. The odds of the games are set up front, on the tables anyway. The rules of roulette are the rules of roulette and you can’t change that. You have the ability to change on slots but it is very sensitive and if you increase your win percentage, through changing the settings, you degrade the experience of the customer, and almost instantly, your market will dry up. Those things are hardly ever touched. What we do see is the high-end of gaming is stronger than the main floor and that’s been a consistent trend for about the last three years. We don’t mess with the system.
ALEC HOGG: So the rich are getting richer.
MARCEL VON AULOCK: The rich have money and they have, generally, a stronger ability to look through economic hardships. They’re not affected anyway in life, whereas your classic middle class are under a lot of pressure. Their bond prices are going up because interest rates have gone up, and the fuel prices, etcetera.
ALEC HOGG: Yes, it’s interesting the point you make about the, you call them slots, one-armed bandits that the players are extremely sensitive to that take out. Marcel, what is nice about these results? What is encouraging for anybody who’s a shareholder? Is the way that, not only that you are heavily invested, but that the company continues to invest aggressively, in this very difficult time, for the industry. When you get together at strategy sessions, what occupies your mind in that regard?
MARCEL VON AULOCK: The toughest thing is exactly that. When we look at a five-year forecast for the business and you imply reasonable sort of assumptions, you say, ‘look we should grow by a nominal GDP at least’ and we can control our costs, and we can see what the cash flows are like and occupancies in hotels normalise and so on. You can see the growth potential of this business is enormous. Reconciling that to the last six months trading is the challenge and not getting distracted by the last six months that have been tough. You’ve got to, not be reckless, so you can’t just say ‘well, don’t worry. It will be fine in time’. We understand the drivers of the business. We can see where we perform well, and where we don’t, and the core markets are there.
Monte Casino, in the six months, grew its casino win by ten percent. Now, we’ve been pulled down by other casinos, Gold Reef had a very, poor six months, Silver Star was under a lot of construction and so on, but for the core, Monte Casino business, to do a ten percent growth and that’s the biggest casino revenue generator in the country, tells you the core business is fine. You’ve just got to look through these cycles and the Africa hotel business had Ebola threats. None of us saw that coming six months ago. Will it pass? Sure. Does it make our hotels less valuable? No. That’s the cycle-type we’ve got to look through.
ALEC HOGG: Is Monte Casino bigger than Grand West?
MARCEL VON AULOCK: It is smaller, in terms of the number of slots, and tables but it is bigger in revenues.
ALEC HOGG: And the whole Grand West deal that you’ve done there, it’s been…for those of us outside, it looks like you guys have done a very good business deal but you wonder if it is not anti-competitive.
MARCEL VON AULOCK: There is no competition between Grand West and the small casinos in the Western Cape because they are more than 100kms apart, so there’s no difference whether we’re invested in that or not. We, essentially replaced Grand Parade Investments as the shareholder, or will replace them. The Competition Commission is still doing the investigation. We’re hoping to get the recommendation, whatever they’re going to recommend, by the end of this year. We’ll probably have the hearings and so on, first quarter next year, so we should know in three or four months but, certainly from our side, we don’t see any anti-competitive issue in that.
ALEC HOGG: It’s another bet in South Africa though. How is it given, what’s happening to the South African economy, relative to the rest of Africa and your investments that you are making (outside of the borders), Abu Dhabi looks like a juicy investment that you’ve just concluded? What is the balance between the two at the moment?
MARCEL VON AULOCK: Anything outside of South Africa, for us, is still quite small. In a total group sense, it’s about five percent of our business. For hotels, we say it’s around 20 percent of the hotel, business is outside the country, and we haven’t gone casinos off shore. It always stayed with the hotel business. Look, they are taking strain at the moment, because of the Ebola because we are mostly in Africa but that will turn and that will grow for us.
We acquired the hotel in Nigeria. I still think that is going to be a great acquisition for us. South Africa remains our single, biggest opportunity because we’ve got such good assets. The casino assets we’ve got are absolute top class. We’ve got something like 30 percent of the formal hotel stock in the country. When the economy, as we keep saying that’s when we really should shine. Our fear is that if we are wrong with all these investments we’re too early. It’s hard to keep saying that every six months and it is very hard to see any form of economic improvement coming through and so on but no one puts up a sign and says, “Look the recession is over in six months.”
ALEC HOGG: Okay, Marcel, just to close off with quickly; you guys have changed your approach to your financial approach to the business. Have you see that within the executive team as well; are they sharper and more focused?
MARCEL VON AULOCK: There’s a lot of focus. The one thing about a recessionary type environment, it’s like a bushfire. It cleans out a lot of nonsense, so everyone is very focused on cost control. Everyone is very focused that if they’re spending that it generates some sort of return. That it is something that should be done, as opposed to the largesse that even if you try and fight, it comes in good times. When you are growing revenues at 20 percent, everyone feels flush and things get into the business, so there is a very intense focus (internally) on cost.
ALEC HOGG: And from the executive team, no doubt, as well given your enormous indebtedness, as you were confirming just a moment ago. That was Marcel von Aulock, who’s the Chief Executive of Tsogo Sun. Go and have a look at those numbers on SENS and you will see that there is an enormous investment that’s been done, at the company. In fact, in the six-month period, R4.7bn was invested and if you compare that it’s a market cap of R32bn, it’s about 15 percent of the market cap, in this period alone, has been allocated. That is quite a vote of confidence into the future.
