Tsogo Sun expects split to unlock value
Tsogo Sun’s planned split into three separate listed entities is aimed at reversing the group’s valuation decline, according to management.
CEO Jacques Booysen told Business Day on Thursday the move was intended to "unlock value" for shareholders. Management believed Tsogo’s shares were undervalued, partly because risks to the gaming unit — including a mooted smoking ban — were weighing on the valuations of other business units, he said.
Tsogo’s stock has lost about a third of its value since August 2016, having declined from R32 then to R21.37 on Thursday.
Listed peer Sun International has declined similarly.
Tsogo, which is trading at a price-to-earnings ratio of 9.4 and is majority owned by Hosken Consolidated Investments (HCI), said this week it had begun the process of splitting into three units: hotel management, gaming and property.
Tsogo had agreed to transfer seven casino properties, worth R23bn, to its Hospitality Property Fund subsidiary, which it planned to unbundle to shareholders over time.
Booysen said Tsogo had taken its time on the deal as it had to ensure it would have security of tenure and affordable rentals. Both parties had agreed to a 15-year notice period in their lease agreements, while "we’re certain the rent’s affordable, and if you move that rental up to Hospitality you could get a valuation uptick".
Booysen said Tsogo might shift two more Western Cape casino properties to Hospitality in the future, although these assets could act as security for fundraising while they remained under the operating company.
The two properties had been more difficult to move owing to licensing conditions in the province and minority shareholdings. If Tsogo were given permission to relocate a casino in the Western Cape to the Cape Town metropole, it could develop the property itself and then offer it to Hospitality.
Meanwhile, the transfer of the first seven properties would probably be complete by the first quarter of 2019, and the group was "in the beginning stages" of working out how it would spin off the hotel management unit.
"Certainly the intention is not to drag this process out — we want to move as quickly as possible, but we’re just going to have to look at the practicalities of the split. The Hospitality part should be early next year and I would imagine hotels shouldn’t take much longer than that," Booysen said.
Tsogo said in May that if the split had happened its adjusted earnings as a standalone entity would have been R954m in the year to March, versus group reported earnings of R2bn.
Meanwhile, Booysen said it was difficult to predict what impact the smoking ban would have, though its effects were likely to be short-lived.
"There’s no real comparison anywhere else in the world — in the other jurisdictions where they did this, they went from freely smoking anywhere to a total ban. In SA, we’ve had fairly restrictive smoking practices for a long time already, so I think the impact might not be as [severe]."