Picture: THINKSTOCK
Picture: THINKSTOCK

Shares of Phumelela Gaming & Leisure stumbled on Friday after the betting and racing group said it had breached loan covenants on R300m of debt amid uncertainty over new gambling laws that had already dented its profitability.

Phumelela’s share price, which touched a 12-month low of 460c, has lost more than 65% over the past year.

The nub of the issue is amendments to Gauteng’s gambling regulations, which took effect on April 1. It entails a 3% levy on punters’ winnings that has cost the company an average R6m monthly in income.

In a statement to shareholders, Phumelela said it is in a “challenging financial situation” and is in breach of its loan covenants.

Due to the reduced profitability and the levy, the carrying value of assets may have to be reassessed, it said.

Regarding the breach of covenants, Phumelela said its executives are in regular contact with banking executives to keep them informed about developments.

They indicated the group cannot pay a final dividend, with cash conservation the “utmost priority as is cutting our coat according to the diminished cloth available”.

The directors added that capital expenditure is also under scrutiny.

“While we subscribe to prudent spending to ensure a competitive estate, recent negative events mean we must economise to be able to maintain necessary capex in future,” they said.

The directors noted that Phumelela has strong international cash flows and profits — topping R204m in the year to end-July 2018 and R113m in the six months to end-January 2019.

But they cautioned that a substantial proportion of international income enables Phumelela to survive in SA and ensures a world-class racing product for international punters.

“Should the local operations be in jeopardy, and that includes the betting operations, the domino effect through the entire horse-racing value chain would be disastrous; it would destroy an already fragile industry and eliminate international income.”

• With Nick Hedley and Marc Hasenfuss
gernetzkyk@businesslive.co.za