Gaming shares: Good odds on casino move?
Who will be the big winner if the law is changed to allow Cape Town to have a second casino licence?
The Cape Town casino market could soon be dealt a new hand, with gaming giants Sun International and Tsogo Sun betting on very different outcomes.
Changes have been on the cards since 2013, but a final decision seems imminent regarding the Western Cape government’s proposal to amend legislation to allow the transfer of an existing provincial casino licence to the Cape Town metropolitan area.
At the moment Sun’s GrandWest casino in Goodwood is enjoying an extended period of exclusivity (its official exclusivity period ended in 2013) in Cape Town.
After a prolonged period of stasis, the proposal for a second casino licence for the city was put back on the table in February this year when a notice was placed in the Government Gazette.
Initially the Western Cape government wanted comment about the proposal before the end of June 2018, but this deadline was extended to the end of this month.
The development of a new Cape Town casino could realistically be as far as three or four years away.
The nub of the proposal is that the Western Cape government, in an obvious bid to bolster tax revenues, has proposed that one of the existing provincial casino licences be allowed to be relocated to either the city centre-VA Waterfront hub, the Goodwood-Bellville area or the Strand-Somerset West neighbourhood.
The four provincial licences, one of which could be mobilised for a move to Cape Town, are the Golden Valley casino in Worcester, the Garden Route casino near Mossel Bay, the Caledon casino and the Mykonos casino near Langebaan.
Worcester is under the control of Sun, but the other three provincial licences are controlled by Tsogo. Tsogo has also managed to snag a significant minority stake in the Golden Valley casino as well as in GrandWest.
The key premise behind having the five provincial casino licences was to spur development, job creation and revenue generation, especially in vulnerable economic hubs.
The Garden Route and Mykonos casinos can be considered vibrant operations with a fair economic impact on the surrounding area. Caledon and Worcester, on the other hand, appear to be subscale operations with a limited economic effect on local communities.
With this in mind, one could easily presume that Tsogo would look at relocating the Caledon casino to Cape Town. If Sun had the appetite (and the balance sheet) to develop a second Cape Town casino, the Worcester casino could come into play.
But there are obvious complications.
Sun is labouring under a heavy debt load. Simply put, it would battle to find the capacity on its balance sheet even for developing a small casino node.
Sun, through the cash-spinning GrandWest, is also the dominant player in the Western Cape and Cape Town casino market. It would be unlikely, then, that it would be allowed to further consolidate this dominant position by re-locating a second licence to Cape Town.
Electus Asset Management analyst Damon Buss believes Sun risks losing the most.
At the moment Sun’s GrandWest casino is enjoying an extended period of exclusivity in the city
"The decision to sell a piece of its crown jewel [GrandWest] to Tsogo was nonsensical, as it reduced the amount of cash it receives from arguably the best casino in the country. It has since invested this capital in assets with significantly worse cash generation — like Sun City, Time Square and portions of the Latin American expansion.
"It has also given its competitor a shareholding in all five Western Cape casinos, putting Tsogo in a position of benefiting whether casino relocations are allowed or not."
Sun’s best bet, it seems, is to convince the provincial authorities that another casino in Cape Town will not generate the envisaged tax revenue flows and that closing casinos in outlying areas would have a damaging effect.
Sun argues that, if relocated, casinos in Table Bay and the eastern region (Bellville-Goodwood) are forecast to earn gross gaming revenue (GGR) of R395m and R510m respectively. This effectively means the relocation would result in a small increase of only R96m, or 3.5% in GGR for the province, because a large portion of the GGR will come from the cannibalisation of GrandWest.
Sun also contends provincial tax revenue is forecast to fall by 8.2% a year if GGR shifts from GrandWest, where it is taxed at the highest marginal rate, to a relocated casino, where a lower marginal rate will be applicable.
Sun says that in order for relocation to be tax neutral, provincial GGR would have to grow by R300m or R350m — a demanding increase of about 30% on the current Cape Town gaming revenue.
For Sun the critical issue is without doubt that a licence relocation would have a substantially negative effect on GrandWest, where a GGR drop of about 24% and a decline in profit before tax of 40% has been pencilled in.
Sun CEO Anthony Leeming explains that the greater effect on GrandWest profits would be due to certain operational costs remaining fixed and not adjusted downwards with GGR. As a possible compromise, Leeming says GrandWest would be willing to fork out a reasonable exclusivity fee to retain the current status of GrandWest as the only casino in Cape Town.
Johnny Copelyn, CEO of Tsogo’s controlling shareholder, Hosken Consolidated Investments, maintains that change in the Cape Town metropole is inevitable, not only in the form of a second casino licence but also the eventual granting of electronic bingo terminal licences.
Copelyn points out that no other major urban hub — Johannesburg and Durban being prime examples — is serviced by a single casino.
He stresses, though, that if Tsogo pursues a second casino licence in Cape Town, this opportunity will probably be for a relatively small development.
The inevitable awarding of bingo licence routes in the Western Cape will be a key factor.
Electronic bingo terminals easily replace smaller casino operations at properties such as Caledon and Worcester, with punters hardly noticing the difference. This would also drastically limit any negative effect from relocating a casino licence to Cape Town.
Buss firmly believes Tsogo stands to benefit the most from a second casino licence relocation. "Tsogo has more capacity to invest in building a new casino."
Buss also thinks Tsogo may be looked at more favourably by the Western Cape government for a Strand-Somerset West licence as the group has only a 35% market share of the total Western Cape gaming market, compared with Sun’s 65%.
A casino in the Strand area could also be an acceptable compromise for Sun, as the potential for drawing away clients from GrandWest would be limited.
Buss feels a casino in the Strand makes logical sense, given the larger mid-high LSM consumer base in that catchment area.
"We don’t believe a City-Waterfront licence will be viable, as it seems to be premised on providing a casino to cater for Cape Town’s large tourism industry."
Casino operators have acknowledged that tourists account for a minuscule portion of their client bases as people do not typically travel far to gamble.