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Cape Town - Limited payout machines (LPMs), widely viewed as the least profitable platform in the local gaming sector, are starting to show potential for attractive payouts for investors.
Two listed empowerment companies - Hosken Consolidated Investments (HCI) and Grand Parade Investments (GPI) - are two of the main players in the LPM sector via Vukani (trading as V-Slots) and Thuo Gaming (trading as GrandSlots) respectively.
Both HCI and GPI hold interests in urban casinos, which in recent years have overshadowed their interests in LPMs.
Indeed, the profit contributions from HCI's interest in Tsogo (as well as Gold Reef and the Caledon/Newcastle casinos) and GPI's interest in various Sun International casinos completely dwarf the amount of profit realised through LPMs.
While casinos catch the obsessive spending of high rollers and desperate punters as well as the associated entertainment spend, LPMs ply their trade in pubs and eateries with patrons playing R5 bets to win a maximum of R500. Suitable sites are notoriously difficult to find, and a good chunk of the revenue stream has to be split with the owner of the premises.
If that's the case, why bother with LPMs? That seems to be what the market is asking, judging by the muted response to GPI's recent announcement that it had paid R170m to buy out Thuo's controlling shareholder, the Australian gaming giant Tatts Group.
The truth, though, is that LPMs - after a fitful start due to rollout hitches - are showing potential as reliable cash flow generators. LPMs may not be significant (yet) in the lives of HCI and GPI, but they certainly don't strain the balance sheet or detract from bottom line.
More importantly, the cash flow, while not as powerful as the cash pumped from casinos, does not need to be diverted into reinvestment into buildings, facilities and other infrastructure. LPMs are certainly not capital intensive, which means the bulk of profits generated can be banked for shareholders.
Being situated mainly in suburban pubs and eateries also offers another advantage in catching the gaming spend of regular patrons that might not want to trek to casinos - which, considering parking fees and other extras, often ends up being a costly night out.
Indeed, the numbers quoted in HCI and GPI's financials refute any notion that LPMs mostly stand idle while patrons guzzle beer and watch sport.
Vukani begins Gauteng rollout at last
In the half-year to end-September, Vukani generated gross profits of R31m and pre-tax profits of R13m. These interim figures could conservatively be annualised to show gross profits of R65m and pre-tax profits of close to R30m.
In the year to end-June, GPI reported pre-tax profits of about R4.6m from its 25% stake in Thuo Gaming Western Cape. GPI has since acquired 90% of Thuo, which means it can probably look forward to a profit contribution (without including Thuo's fledgling KwaZulu-Natal operations) of at least R20m in the year ahead.
Vukani, which already has 2 985 installed machines across several provinces, has recently begun a long-awaited rollout in Gauteng. The effect of this lucrative market on Vukani's revenues could be pronounced over the next few years.
Although Thuo lost out on the Gauteng market, the group's progress under GPI's control should be worth watching. GPI chairperson Hassen Adams has already signalled an intention to build GPI's operational capacity around Thuo - which may even entail some corporate action in a bid to secure further market share.
For investors interested in a flutter on LPMs, there's really no direct route into this game. GPI probably offers a more meaningful exposure to LPMs - but only because its casino interests are not as big (relatively speaking) as those of HCI.
Of course, one has to wonder whether HCI could look at ways of shifting its LPM interests out of the shadow of its sprawling casino interests. It's probably too early to consider a separate listing for Vukani, but once the countrywide rollout is completed this business could well attract the interest of a number of serious investors.
Industry insiders also believe companies like Vukani and Thuo could shift their attentions to electronic bingo terminals (EBTs), which are increasingly being touted as the next big thing in the gaming sector.
- Fin24.com
