Phumelela hit by decline in tote revenue
– from Business Day
HORSE racing and betting group Phumelela posted a 9% drop in headline earnings per share to 42,6c as the strong rand and a decline in tote agency revenue hurt earnings, it said on Friday.Income from international operations fell 28% to R39,8m. However, excluding the effect of the Racing UK product, revenue increased 34%. The company lost the international distribution rights to the Racing UK product in March last year.“Profit before tax from international operations is up 20% despite our loss of the rights and a rand that averaged 10% stronger against our major trading currencies,” CEO Rian du Plessis said.In constant currencies, profit from international operations was up 31%. Excluding the profit generated by the rights agreement last year, profit from international operations was “up a whopping 54%”.“This indicates resilience at operational level and the benefit of our diversification strategy in the face of generally negative macroeconomic and industry- specific factors.”“Locally, we faced intense competition for the leisure rand, and, while betting turnover in our Tote branches increased by 2%, turnover in Tote agencies declined by an alarming 7%. The greater decline generated by Tote agencies is ascribed mainly to the proliferation of the open bet. This matter is receiving our full attention,” Mr du Plessis said.Phumelela saw a change in the way bets were placed in the period under review. More people were taking to betting online, finance director Andreas Heide said.Good growth was achieved in Limpopo and Mpumalanga, where soccer pools had started to take off. Numbers betting also increased, Phumelela said. Mr du Plessis said in future many punters would be reached by mobile technology. “We are taking the bet to the people; we are losing by asking people to come to us .”The company was in talks with SA Rugby to launch a similar programme to its Soccer 6, Mr du Plessis said. “We will launch regardless of whether SA Rugby gives us the go-ahead, but it would be great to get official recognition by the official sporting bodies.”In the long term, the company would be looking to enter the market in India, he said.
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Phumelela Gaming Profit Down
– from Independent
Phumelela Gaming and Leisure (PHM) reported a 9% decline in diluted headline earnings per share to 42.77 cents for the six months ended January 2011 from 47.10 cents a year ago. The company declared an interim dividend of 25 cents per share.The company said local trading conditions, particularly for the group’s bookmaker and other agent totalisator operations, remained challenging while the strong rand against the major trading currencies impacted negatively on its international operations.Despite this, profit before income tax from the group’s international and ongoing fixed odds (Betting World) operations increased by 20% and 12% respectively.Total income decreased by 1% to 443.4 million rand, primarily due to income from the terminated Racing UK (RUK) rights agreement included in the comparative period after the agreement was terminated on 28 February 2010. Excluding RUK income, total income increased by 5%.Total net betting income increased by 3% to 333.5 million rand. Excluding RUK income in the comparative period, other operating income increased by 16%.The group is engaged in talks for a possible merger with the Western Cape racing region following agreement between the KwaZulu-Natal and the Western Cape Boards to unbundle Gold Circle operations.Looking ahead, the group said despite difficult trading conditions management is encouraged by a marked improvement in the local betting handle trend from January 2011 to date. If the current momentum is maintained local operations are positioned for growth in the second half.International operations continue to trade well despite Rand strength and the loss of the RUK rights, the company added.
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One of the most generous dividend payers on the JSE?
ALEC HOGG: In this special podcast, we speak with Rian du Plessis who is the chief executive of Phumelela. Interim results out today for the six months to the end of January – Rian you’ve got to be one of the most generous dividend payers on the whole of the Johannesburg Stock Exchange. Your headline earnings are down but once again you’ve maintained your dividend and it’s interesting to look back – in 2008 when you made 117 cents for the year you paid a 68 cents dividend – that’s come all the way down and last year you made 79 cents. It looks like you might make even less this year, yet you’re maintaining that dividend. Isn’t there a point in time when you’re going to perhaps have to cut it?
RIAN DU PLESSIS: Well naturally, if profits continue to decline, we will have to cut our dividend because we’re not going to be paying dividends out of reserves, but looking forward we’re still confident that we’ll make good profits this year and that there’s no reason that our shareholders should suffer a decrease in dividends.
ALEC HOGG: That’s almost a vote of confidence in the second half…
RIAN DU PLESSIS: Most certainly, yes.
ALEC HOGG: In your prospects you say – what you call your betting handle – and that’s where Phumelela gets its money from primarily – is the amount of money people bet on the tote – has improved markedly.
RIAN DU PLESSIS: Yes – we’ve seen trading of late – we suffered in August from the Gold Cup not taking place, which is a very big betting event as you may know – as a result of the Soccer World Cup it took place in July of the previous year so comparing August with August we were down about 7% which impacted on us for the first six months. We also had Soccer 6 where the PSL didn’t have as many matches in the two comparative periods because in last year, they started their season earlier to accommodate the Soccer World Cup. So those two events hurt us in the first six months. If I look at our businesses overall, we actually did quite well in all aspects with the exception of our tote agents. International really shot the lights out with being 20% up despite a strong rand and the loss of our RUK (Racing UK). Betting World was up 12%, our on-course betting was up 6.4%. Interactive which is telephone and internet betting was up 8.7% and our retail branches were up 2.2%. But disappointingly our agents were down 6.8%.
ALEC HOGG: Who are the agents?
RIAN DU PLESSIS: These are our bookmaker and other agents – there we believe that the decline is mainly as a result of the proliferation of the open bet which is hurting us and its hurting racing – and hopefully in cooperation with the bookmakers, we are looking for ways to stem the tide.
ALEC HOGG: The open bet meaning that people can bet with bookmakers, get tote odds but nothing goes to the tote.
RIAN DU PLESSIS: Yes – clearly the main business of bookmakers is offering fixed odds, but the open bet is simply saying “I’m going to take your tote bet, but I’m not going to put the money on the tote – I’ll pay you what the tote pays” and in some cases even with a small delta say “I’ll pay you with the tote dividend +5%”. But what often happens is that the bookmakers offer a ceiling, so if the tote would pay out let’s call it R5million, the bookmakers would more often than not have a ceiling at R500,000.
ALEC HOGG: Are you making any progress with government in addressing that, or is the law now in favour of the bookmakers?
RIAN DU PLESSIS: The bookmakers won their court case so the bet is legal. The fact is that it’s harming the sport of horseracing and we are in talks with the bookmakers – we’re in talks with government and we’re in talks with the Gambling Boards to look at ways… If we can’t compensate for loss of revenue on the open bet, we’ve got to find the revenue elsewhere and at the moment it costs us about R36million to pay for the National Horseracing Authority (NHA) which is the sports regulator and that full expense is borne by Gold Circle and ourselves with the bookmakers betting at least 40% of the total bets on horseracing comes from the bookmakers, and therefore its patently unfair for the bookmakers to contribute nothing to the NHA.
ALEC HOGG: Could a strategy not be to show government how much tax revenue is being lost and perhaps in that way, to force the hand?
RIAN DU PLESSIS: Well yes, an unhealthy and unhappy tote means an unhealthy and unhappy sport of horseracing and an unhealthy sport of horseracing means that the bookmakers will also not be able to bet on horseracing. So it’s not as simple as saying – C’est la vie – it’s a complex discussion and we are talking to government and we are talking to the bookmakers about it.
ALEC HOGG: There are lots of interesting developments that you do mention in your interim results. Perhaps the first of these is that youre negotiating for a merger with Western Cape Racing. Now people within horseracing know that there’ve been all kinds of ructions going on within Gold Circle – that’s the other horseracing operation where you’ve got KwaZulu Natal and Western Cape that are getting divorced. Perhaps you can explain why youre not talking to KwaZulu Natal but just to Western Cape.
RIAN DU PLESSIS: We’re on record and still believe that a full blown merger and having one horseracing operator is the most sensible thing. KwaZulu Natal does not share our view and we respect their view entirely, so the Western Cape and KwaZulu Natal boards have respectively resolved to get divorced – or to de-merge as it were – and the Western Cape has approached us and in principle we would welcome them to join us. Its preliminary stages but we believe it would serve the best interests of the sport of thoroughbred horseracing to bring the Western Cape in under out fold.
ALEC HOGG: So then you would have Gold Circle still being your partner, but that would then just be KwaZulu Natal?
RIAN DU PLESSIS: Yes.
ALEC HOGG: And how would that change all your – you have different proportions of assets when you operate in your international operations for instance. It sounds like a real unscrambling of the egg that’s required.
RIAN DU PLESSIS: Yes, to a certain degree, but I don’t think it’s entirely that complex. It’s not entirely that complex – our partnership at the moment is 59-49 in our favour and clearly that would increase – to exactly where that would end up, I don’t know. Indications are that we would end up with about 75% of the partnership. But it’s important to emphasise that a healthy KwaZulu Natal is important to us, and it’s important to the sport of horseracing. As an owner you will know that if you have a good horse you want to race it in KwaZulu Natal, you want to race it in Western Cape and you want to race it up in Gauteng as well, so to drive regionalism in horseracing, we’re not so sure that we believe that is sensible, and to a degree it creates cost inefficiencies which we can ill afford at this time of our lives in the sport.
ALEC HOGG: Just getting back to the vibrancy in the betting handle lately, you did an “all to come bet” – not that I participate too often, but I certainly do watch the tote pools there and they seem to have grown enormously as a result of this innovation.
RIAN DU PLESSIS: Yes – the place pool has actually grown by as much as 80% – the win pool (I don’t have the number to hand) but it has grown as well. But if you look at our growth overall it’s not entirely new money because that would then have reflected in our handle, so it has taken away from the Big three in the Daily Double but we do believe it’s a bet of convenience. It’s really convenient for our punters in our retail outlets who are now able to come in and place a bet on non-consecutive races, place the bet and go back to the office. Before they would have to come and collect their winnings to place the next bet which is really inefficient, particularly for the working punter.
ALEC HOGG: So here in South Africa things look stable with the interesting idea with the potential merger with the Western Cape. Internationally you did have the problem with the termination of the Racing UK rights. How has that hurt you in this period?
RIAN DU PLESSIS: RUK was our single biggest profit contributor from abroad, so it was a big blow and when I spoke to you this time last year we had lots of plans but we were worried people – determined but worried. And I’m really sitting here saying that we’re very pleased – we’ve struck strategic relationships with Tabcorp in Australia and Italy. Turkey has started taking our racing on Tuesday nights as well, so no – we have more than filled the hole – we’re up 20% – so we’ve made really good progress internationally.
ALEC HOGG: Necessity being the mother of invention…
RIAN DU PLESSIS: Absolutely.
ALEC HOGG: And over the past few months, the speculation of a new owner of the UK tote has been quite extreme with Phumelela often being mentioned as one of the parties that could be favoured for this. What’s the update there?
RIAN DU PLESSIS: There are two horses left in that race and unfortunately we’re not – we fell out in the first round and we fell out not as much on price as on the terms and conditions that we made for our bid. Being a racing operator, our bid was racing friendly and we put in a condition that our purchase would be conditional upon us concluding a mutually acceptable seven year agreement with the 60 racecourses in the UK and we were informed – not specifically that that condition, but we surmised that that condition was felt by the vendor, the government and their advisers as being too onerous and I’m pleased to say to you that with the announcements that we made yesterday, where the racecourses are saying “well if the tote is sold to anybody but them, they’re going to throw them off course and do a deal internationally to host their pools – watch this space. Submitting a racing friendly bid was the right thing to do.
ALEC HOGG: Fascinating, and perhaps very prescient. Just looking at the rest of the financial year – as I mentioned earlier you paid that 68 cent per share dividend since 2008 – you’ve managed to hold the dividend despite the headline earnings being down a touch in this six month period. Are shareholders going to be assured of another 68 cents this year?
RIAN DU PLESSIS: We’ll do our best – we are striving to not have a decline in earnings per share by year end. We’ve seen betting handle tick up slightly of late and international is doing really well – despite where the rand is at the moment – so we’re going to look at flat earnings per share or even an increase, and if so it would justify holding the dividend.
ALEC HOGG: And any transaction with Western Cape Racing, were it to happen, is not going to affect that position…
RIAN DU PLESSIS: Well I can’t see – we’ll move as fast as we can but it’s going to be tough to implement anything before the end of July.
