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PHANTOM SHARES

The Finance Ghost: Tsogo Sun stutters while Mr Price surges ahead

(Photo: Gallo Images / Papi Morake)

A tale of two Tsogos: In mid-2019, Tsogo split into two. Tsogo Sun Gaming (JSE:TSG) holds the casino assets (Montecasino, Gold Reef City and many others) and Tsogo Sun Hotels (JSE:TGO) holds hotel assets that aren’t linked to the casino resorts (Southern Sun hotels, etc). This allowed investors to pick their fighter instead of having to hold blended exposure.

Neither business has done well through the pandemic, of course. The tourism and hospitality industry was decimated and is still struggling. For example, Tsogo Sun Hotels is running at around half of the system-wide room sales of the pre-Covid-19 period. The lockdowns and civil unrest caused havoc this year, evidenced by just 55,280 room sales in July versus 167,967 in October.

Tsogo Sun Hotels is still loss-making, with an interim headline loss of 11 cents per share. It’s a massive improvement on the loss of 39.1 cents last year. Lenders have been supportive and the group is managing its covenants well.

Tsogo Sun Gaming is profitable, with headline earnings per share of 30.9 cents. Despite the operations being shut from 28 June 2021 to 25 July 2021, the earnings before interest, tax, depreciation and amortisation margin over the six months to September 2021 were 33% and in line with the pre-Covid-19 period. As with its namesake in the hotel sector, Tsogo Sun Gaming’s balance sheet is on the right path.

With the latest variant now in play and almost inevitable restrictions and lockdowns, both took a beating in the market on Friday. Even after the sell-off, they have both approximately doubled in price this year. Investors are still in the red since the split in mid-2019, proving once more that success in the markets is all about timing.

Mr Price hit the sweet spot with consumers during the pandemic

Mr Price’s share price is trading at similar levels to mid-2019, a remarkable result under the circumstances. The interim results to September 2021 show a business that is growing sales strongly and winning market share.

Consumer preferences have been favourable for Mr Price, with a shift to value on one end (Apparel segment including the recently acquired Power Fashion) and strong demand for homeware on the other as people worked remotely (Home segment including Yuppiechef, a deal that closed on 1 August 2021).

Online sales now contribute 2.9% of group sales, a level we are consistently seeing across various SA retailers The jury is out on whether the strong growth in online will continue in a post-pandemic world, with my personal belief being that online shopping still has an enormous runway in SA.

Mr Price must share that view, or the company would never have acquired Yuppiechef. With a group cash balance of R3.9-billion, I’m sure that Mr Price’s next acquisition can’t be too far away.

A busy week for Ethos

Ethos Capital Partners is a listed entity linked to Ethos Private Equity. It announced two transactions this week, one of which is a rescue boat sent out for Brait and the other is the acquisition of a business called Crossfin that operates in the attractive fintech and payments industry.

Brait has had a terrible time on the market, with the share price over five years showing similar returns to Steinhoff, except there is no fraud to blame for it. The New Look acquisition in the UK was a disaster and Virgin Active has been punished by the pandemic.

The company needs to raise capital again. R3-billion, to be exact. Thanks to big-hitters on the shareholder register (like Christo Wiese), it wasn’t difficult to obtain sufficient underwriting and irrevocable commitments to guarantee that the money would be raised. Brait will issue exchangeable bonds, instruments that pay a coupon to investors and are convertible into Brait shares.

Ethos Capital Partners will be putting R294-million into Brait as part of a strategy to recapitalise the balance sheet (again) and improve the operations (again).

The Crossfin deal is a much happier story, with Ethos putting R178-million towards the R1.5-billion deal. Crossfin operates payment and lending businesses and is acquiring Sybrin, a name that EOH shareholders will recognise.

Huge comedy

Finally, in one of the most extraordinary Stock Exchange News Service announcements I’ve ever seen, Huge Group proudly informed the market that it will now report as though it is an investment holding company. This is based on the failed attempt to acquire Adapt IT (which was an embarrassment) and the experience of the directors in mergers and acquisitions. In other news, I’m going to identify as an Olympic sprinter.

Jokes aside, investors need to pay attention here. The company will apply fair value accounting going forward, so there can be major swings in profitability depending on how the directors value the businesses in the group. Huge is down more than 20% year-to-date, so the market has spoken in 2021. DM168

After years in investment banking, The Finance Ghost mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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