Chief Executive Officer’s review

Growth

The value of a business is the present value of the cash flows that can be generated by the assets owned or controlled. Accordingly, the only true measure of growth for our business over time is its growth in free cash flow.

As anticipated our free cash flow declined marginally by 6% from R1.9 billion to R1.8 billion for the year ended March 2014 mainly due to increased maintenance capital expenditure. The coming year may see a decline in free cash flow as we incur additional interest on our development and acquisition spend and complete some major maintenance capital expenditure projects offset by the anticipated growth in cash generated. We are, however, comfortable that these investments will yield acceptable returns in the future.

Organic growth

The macro-economic environment remains subdued and this is not expected to change radically in the short to medium term. The past year has shown limited recovery in both the casino and hotel markets. Overall gaming win growth of 4.5% was impacted by poor slots performance. Overall owned occupancies at 63.6% declined by some 1.1pp, due to a lack of transient business and are still well below normal long-term levels of around 68%. A focus on rate opportunities, annual price increases and the acquisition of Southern Sun Ikoyi saw average room rates increase by 15% and consequently Revpar grew by 13% to R570.

In the longer term a recovery in consumer and business confidence, driving growth in leisure spend and corporate travel respectively, remains the largest growth opportunity for the group. We stated last year that, with our unparalleled asset base, Tsogo Sun stands to benefit significantly from the high levels of operational gearing in the industries it operates in and should see a significant increase in operating cash flows if organic revenue growth, even marginally above inflationary levels, can be sustainably achieved. We maintain this position and continue to build on this asset base where possible.

The group’s financial results for the 2014 financial year reflect an income growth of 9%, translating to a growth in Ebitdar of 8%, assisted by the acquisitions implemented in the prior and current year. Operating, finance and taxation costs are strictly monitored and benchmarked across the group, and maintenance capital expenditure, as discussed above, is vital to maintaining and improving the group’s asset base.

Inorganic growth

Inorganic growth is pursued through a combination of expanding our existing facilities, new developments and acquisitions. The group invested capital in significant projects during the year as follows:

• acquired an additional 10% effective interest in the Suncoast Casino with the resultant shareholding being 100%;
• completed the R206 million expansion of the Emnotweni Casino;
• commenced construction of the US$30 million expansion of Southern Sun Maputo which was completed during August 2014;
• completed the acquisition of a 75.5% stake in Ikoyi Hotels Limited in Lagos, Nigeria in June 2013 for US$70 million; and
• commenced construction on the R560 million expansion and redevelopment of the Silverstar Casino and the R630 million refurbishment and expansion of the Gold Reef City Casino and Theme Park.

The group closed a number of acquisitions subsequent to year end as follows:

• acquired an additional 10% interest in Cullinan and Cullinan acquired various hotel assets with the net investment by the group of R762 million;
• acquired a 25% interest in RedefineBDL Hotel Group Limited for R145 million;
• acquired 40% equity interest in each of SunWest International Proprietary Limited and Worcester Casino Proprietary Limited for an aggregate R2 185 million subject to the approvals of the provincial Gambling and the Competition Authorities; and
• repurchased 133.6 million Tsogo Sun ordinary shares for R2.8 billion.

The group continues to pursue additional opportunities with the most significant being as follows:

• a R1.5 billion to R1.8 billion expansion of the Suncoast Casino comprising additional casino space including 900 machines and 16 tables and a new privé, destination retail and additional restaurants, multifunction venue, multi-storey parkade and resort swimming pools. The expansion was approved by the KwaZulu-Natal Gambling Board on 11 March 2014, and all City Council and MEC approvals were received by 19 August 2014;
• the Mpumalanga Gambling Board has withdrawn a request for proposal for the fourth licence in the province for the second time and the group will be pursuing a legal challenge in this regard; and
• the potential to bid for the relocation of one of the smaller casinos in the Western Cape to the Cape Metropole remains an opportunity for the group.

South Africa and the rest of the African continent continue to offer good investment opportunities and these are being pursued. These opportunities are evaluated by the group with a strong focus on ensuring that we are capable of operating them successfully, that they are priced for value and that they do not impinge on our sustainability.

Provided the macro-economy does not go into free fall and that regulatory changes are well considered by the relevant authorities, we remain confident of generating significant value for our stakeholders going forward.

Marcel von Aulock
Chief Executive Officer

29 August 2014