With 81% of its profits generated in hard currencies – primarily the British Pound – JSE-listed horse racing company Phumelela was hit by adverse currency movements in its financial year to end July.
With losses after Brexit, dropping translated UK earnings by 20%, shareholders can be well satisfied with the overall same-again earnings and dividends for the year. Internal challenges remain, including an ongoing court case with bookmakers and the need to cut costs in a loss-making legacy business. But Phumelela’s R437m deal for 50% of booming betting supermarket operation Supabets will bring fresh impetus and ideas to the SA operations, while a normalised currency environment would also have a significant impact as earnings are highly geared to the Rand. As you’ll hear in this interview, CEO Rian du Plessis is approaching the new financial year with confidence. As well he might, with the previous headwinds likely to change in a more positive direction, writes Alec Hogg for Biznews.
AH: Well, it’s a warm welcome now to Rian du Plessis, the Chief Executive of Phumelela who joins us from Cape Town. Financial results just out Rian, for the year to the end of July. Having had a long history with you and watching this company over many years, it’s quite clear now that the strategic decisions that were taken some years back, have not just paid off for Phumelela but in fact, rescued the whole business.
RdP: Very much so, Alec. I can’t claim credit for it. My predecessors and my management team decided before I joined, to internationalise the business and to diversify into fixed odds and other businesses. I’ve just carried through on the strategy and it has really paid off very well for us.
AH: Well, you’ve got to take at least some of the credit because the move into the fixed odds business has been under your watch. You got pretty aggressive on that in the past year with the acquisition of Supabets. Has that had much contribution yet, to the results?
RdP: We’ve got 50% of Supabets and it’s included for only five months of this year – the reporting.
AH: So, there’s a whole lot more to come.
RdP: Next year, it will be a full year.
AH: What would the impact of that have been, had it been for a full year?
RdP: It would have been positive on our earnings, definitely.
AH: So, the earnings (generally)… If you want to break it down, you take the international side and then you take the South African side. South Africa’s losing money. International is making money and growing. Can you just give us a sense of the contributions between the two sides now?
RdP: Well, the International side now contributes (I think) upwards of 80% of the group’s profits, which is in years where the Rand is strong, the past year was painful. I think on a like-for-like basis, the British Pound was 20% weaker against the Rand over the period under review so in constant currency terms, our headline earnings would not have been up by two percent. It would have been up by 30% – headline earnings per share.
AH: So, that’s ‘all other things being equal’ and I guess then, you are a Rand hedge.
RdP: Yes, very much so. Our revenues (M&A mainly) – our biggest currency exposure is to the British Pound, followed by the Aussie Dollar and the Euro.
AH: So, what exactly do you do to generate these international earnings?
RdP: We sell the live picture of South African racing. Alec you may know that we race 364 days per year – every day, except Christmas Day – and we export the live picture of South African racing to some 40 countries around the world.
AH: So, South African racing is the core business, which is then leveraged into the international community.
AH: As far as keeping the South African side of the businesses going…obviously, you have to do that because you want to have South African racing flourishing but that is costing you increasingly every year, it seems.
RdP: Yes Alec, but it is part of our DNA. It is the raison d’être for our tote licenses, so we will do the best that we can and we will continue to invest in South African racing because it’s that very product that we export internationally. If the quality of our racing drops or the frequency of it drops, our international revenues will drop.
AH: You mentioned in your results that the disappointing part of the business, was the tote operations in South Africa (or what you call the traditional tote operations). Would you unpack that?
RdP: Yes. It’s mainly that racing is down five percent and tote soccer was down nine percent, giving us a nett decline of seven percent, which was due to a depressed economy on the one hand and increased competition from the lottery.
AH: The more difficult economic circumstances: to what extent does that account for the decline there?
RdP: I would venture to say the bulk of it. We would have been marginally up if it had been in a normal economy. We compete for the disposable income of people, just like all other people do.
AH: But Rian, give us a feeling. Was it getting worse towards the end of the financial year in July? Just to get a sense of where the South African economy is going…
RdP: It was pronounced towards the end but we’ve actually seen a marginal turn in August and September.
AH: What can you do about this? Clearly, when the economy is tough, business people can’t just sit back and be fatalistic about it. What is it that you can implement? Are there any operational things you can do to try and improve the situation?
RdP: There are only two things that we can do. 1) We take market share or attempt to do so. 2) Cut costs. Normally, the answer is a combination of both because if the economy is not growing then if you want to grow your turnover, you’ve got to grow your market share. You’ve got to take business away from your competitors.
AH: How are you planning to do that?
RdP: Well, we are competing very favourably, through Betting World, InterBet and SupaBet, and we are taking market share.
AH: On the cost cutting: have you got some scope there?
RdP: Yes, you will see in our results announcement we have implemented a voluntary retrenchment program as well as an early retirement program, which will cost us R30m in the new financial year and we’ll have a payback period of two years so that is very much a part of modernising our business. We are embracing technology as a business. We’ve now installed free Wi-Fi in all of our retail outlets. We’re implementing self-help terminals and mobile phone apps to make the cost of taking the bet cheaper, going forward and to meet the needs of the modern society. The tote has been around since forever and it has been in a desperate need of modernisation, which we’re attending to now.
AH: You did mention earlier a couple of times – Supabets. It was a huge deal for Phumelela – R437m with both shares and cash. The strategy there: what exactly is it? It’s 50% of Supabets, which you also elaborated on but what is the strategy there? What is that going to bring to the group?
RdP: Two things in the main. The one is that Supabets have perfected the high upper market retail betting outlet concept. Out of their ten stores, they made more money than the whole of Phumelela made out of 300 stores. Compared to your traditional betting outlet, which was 200-300m2, their stores are often 4000/5000m2 and provide a completely different betting experience, which we are benefitting from now. Between Betting World and Supabets, we’re entering into joint ventures where the Hypermarket store will be taken forward. That’s on the retail side. On the software side, Supabets has really excellent software, particularly on the sports side, where Betting World has been somewhat lacking, particularly when it comes to loyalty schemes and in-play betting. We’re implementing that in Betting World as well now.
AH: Not in the results, which is interesting is that in Supabets, I presume they weren’t betting on South African horseracing. Is that going to be brought into their package now?
RdP: Absolutely. We’re reintroducing horseracing. They used to do horseracing when they initially started. The product was not profitable for them, so they discontinued horseracing and they’
AH: What about the management for this company? How’s that going to work, because 50/50 can sometimes be tricky?
RdP: No. We actually have a very good relationship with the Anastassopoulos family – the two brothers, Phil and Photios and also the third brother, Pana and they’re excellent operators. We’re very happy and grateful partners of theirs.
AH: And one of them is coming onto the board.
RdP: Yes, Photios has come onto the Phumelela Board. They were paid partly in shares so it’s only appropriate for him to come and have a watch over his share price and share value.
AH: He’s got about 9% of the company. Is that right?
AH: As far as the board’s concerned, somebody who served the company very well for a long time – Peter Malungani – the Chairman is stepping down after 20 years.
RdP: Yes, we’re very sad to see Peter go but 20 years is a long time and he indicated that it was time for him to step aside. So, he’ll be sorely missed and we are just very thankful for all the years’ service that he has given us.
AH: Who’s going to replace him?
RdP: I’m not at liberty to disclose that as yet.
AH: So, you haven’t appointed the new chairman, clearly.
RdP: Not yet, no. He will step down at the AGM and the board will then appoint the successor chairman.
AH: Rian, just having a look at one of the other issues that has been ongoing – the civil and criminal lawsuits that you have against bookmakers: explain what’s behind that and perhaps give us an update.
RdP: Look Alec, the bookmakers…In order to display Tellytrack or the live South African picture in their betting shops, they need to sign a lease agreement with Tellytrack and pay for the right to display it. It’s a product that costs us millions and millions to put together and it’s only fair that they pay a fair price for it. Unfortunately, the price that Tellytrack has charged…certain people have decided that in their opinion, that is too much, which we respectfully differ and the Competition Commission has also found that the price is not excessive but they’ve chosen to go the illegal route. So, they go ahead to Multichoice and purport to be something other than for display in a retail betting outlet, sign a contract with Multichoice and then illegally display it in their betting shops, which is a criminal offence as well as a civil offence against us.
AH: Why is it such a big deal, though? Are they not paying? Is it a material amount involved here or is it more the principle?
RdP: It’s a material amount. Just for the production and distribution of the product, without sharing a part of the cost of putting up the show, it costs us over R120m. We’re recovering less than R20m from bookmakers at the moment and they do more than 50% of the betting on the live product.
AH: Let’s just say that horseracing was done in a foreign country and was sold into South Africa (because you have this example of selling South African horseracing into the UK), how much would they be paying for the picture if that were the case?
RdP: Well, it actually includes international picture. The norm – internationally – is exactly what Tellytrack is charging. The norm is three percent of turnover. If you do a lot of turnover, you pay a large amount. If you do a little turnover and the product is poor, you pay a lesser amount. That is the norm. That is what we pay Tab and other international operators when we bet on their product, and that’s exactly what Tellytrack is charging bookmakers locally.
AH: It seems to be a very fine balancing act or a bit of a tightrope that you’re walking here because you’ve got your South African operations that are costing you a lot of money but on the other hand, you’re generating revenue internationally. How do you keep that in balance? Do you have any kind of formula on how the two work?
RdP: No. I think we drive both of them as best we can and hope for the best. There’s no formula of driving the one ahead of the other. We’re driving both as hard as we can.
AH: From a profit/shareholder perspective, you’re almost becoming like a Naspers now, with 81% of your profits coming from equity accounts. In other words, the investments you’re making – the way you’re generating income from outside of South Africa – and I suppose that has its own challenges.
RdP: That does have its challenges but it is working for us Alec, and long may it continue.
AH: So, if we look ahead to the new financial year to July 2018, what are the major areas that you’re going to be focusing on?
RdP: We’re going to be doing some joint venture with Supabets and we are going to be implementing new technology throughout the retail environment, and two new websites with loyalty schemes and in-play betting. The one website will be powered by Interbet and the other website will be powered by Supabets, so it’s exciting times for us.
AH: That’s interesting. It’s more of a partnership – more of a co-op in a way, than the route you might have followed in the past.
RdP: Very much so. It’s our style to play to one another’s strengths and our partners have got strengths in areas where we were weak. Similarly, where we are strong (notably horseracing), we have something to offer them.
AH: I also noticed from your numbers that you’ve been buying back shares. What prices were you happy to buy the shares back at and why?
RdP: We need to buy shares for our share option scheme and we will continue to buy shares in due course. Alec, I stand to be corrected but I believe that we had been buying at more or less present levels.
AH: So, at these current share prices you still see value in the stock.
RdP: Very much so. Yes.
AH: And if we have a look to the year ahead; if the Rand behaves itself or perhaps, if the Rand were to weaken, then you could see quite a strong uplift given that so much of your revenue comes in Pounds.
RdP: Yes, Alec. Rand weakness is not good for South Africa but it’s very good for Phumelela.
AH: Is there any kind of a formula that one could look at – say, the percentages of the weakness that translates to profits?
RdP: I wouldn’t want to do a direct formula. No.
AH: But the reality is that with 81% of your profits coming from offshore, it kind of speaks for itself.
RdP: Yes. I think you can basically (probably) look at…a good 70-odd percent of the decline in the currency should translate itself into our earnings, more or less but I wouldn’t want to be held to that.
AH: So, when we sum it all up, it is a Rand hedge so watch what the Rand is doing. You see a slight improvement in the South African side of the business but you do have some exciting opportunities in the work that you’re doing together with your new partner in Supabets.
RdP: Absolutely, and Interbet, if I may add – both Interbet and Supabets.
AH: We didn’t touch on Interbet. Perhaps we could finish off with them. It is an unusual and a very innovative model that they are bringing to the party. Where does that fit within the whole Phumelela operation?
RdP: Well, you will soon see the Tab website being replaced by Interbet being inside and a Tab fascia so whatever you can do on Interbet today (excluding the exchange), you will be able to do on Tab, which is a superior offering to what you can do on Tab online at the moment.
Article reproduced with kind permission and grateful thanks to Alec Hogg and Biznews
Watch the results presentation below:-