Inorganic growth

Inorganic growth will be a combination of capacity increases in existing businesses, greenfield developments in new markets and acquisitions within the group’s core competence. In all situations, a discipline around due diligence and feasibility is critical to ensuring the success of growth projects.

The propensity for growth projects to absorb both financial and human resources must be carefully evaluated within the group’s capacity tolerances as these can impact some of the pillars of sustainability.

Key performance indicators

  2015   2014  
Investment activity expenditure   R2 045 million   R1 643 million  

2015 performance

Tsogo Sun has continued to allocate capital in terms of its stated growth strategy and accordingly has invested R2.0 billion during the year as follows:

In addition to the capital invested in the growth strategy, the group managed the exit of SABMiller from its long-term 39.6% shareholding in the group, including a specific repurchase of 133.6 million Tsogo Sun ordinary shares for R2.8 billion on 28 August 2014. The shares were acquired at a price of R20.96 per share representing an 18.6% discount to the final book build price achieved on the sale of the SABMiller investment of R25.75 per share.

The group opened the 353-room Southern Sun Abu Dhabi under management contract in the United Arab Emirates on 30 April 2014 and concluded a management agreement for a 150-room hotel in Tete Mozambique to be opened in the first quarter of 2016.

Investment activity expenditure

  31 March 
2015  
Rm  		 31 March 
2014 
Rm  
Silverstar redevelopment   321   160  
Southern Sun Maputo expansion   207   111  
Gold Reef City redevelopment   142   22  
Suncoast redevelopment   141   8  
Emnotweni expansion   18   154  
Sun1 expansions   16   –  
Hemingways expansion   6   50  
Blackrock expansion   3   33  
Mpumalanga fourth licence bid   1   5  
Other   6   13  
Expansion capex   861   556  
Liberty hotels   762   –  
Redefine BDL hotels   145   –  
Pivot office minorities   144   –  
Garden Court Polokwane   80   –  
Garden Route minorities   51   –  
Southern Sun Ikoyi equity(1)  –   505  
Suncoast minorities   1   406  
Southern Sun Hyde Park   –   67  
Monte Circle and Signature Square land   –   45  
Cinemas   –   20  
Garden Route Hotel   –   6  
Other   –   14  
Acquisitions and minorities   1 183   1 063  
Loans and investments   1   24  
Investment activity expenditure   2 045   1 643  
(1) The total investment in Southern Sun Ikoyi is R702 million including take on debt of R197 million included in acquired with acquisitions in the increase in net interest-bearing debt in the cash flow

Looking ahead

The group remains highly cash generative and continues to pursue significant opportunities to invest capital in its growth strategy.

Our medium-term growth strategy focuses on opportunities that are expected to yield greater return on investment and effort at lower levels of risk.

In gaming, the focus remains on capacity increases in our existing properties, particularly in specific markets where changing demographics are driving growth. With only one of the national licences that is not allocated an attractive proposition, we remain acquisitive for existing licences, but only at the right price. African expansion would only become attractive as regional economies develop a more robust middle market and enable regulatory environments. Expansion outside South Africa remains unattractive due to the additional risk of operating in diverse regulatory environments and the limited economies of scale that can be achieved.

In hotels we remain opportunistic in South Africa and will acquire properties if they are well located, align with our business model and are realistically priced. Although occupancies are improving they are not yet at long-term averages and there should not be significant hotel stock being added to the market at this stage of the cycle. We would, however, actively seek opportunities to land bank, build or lease in superior locations or nodes that are expected to grow more strongly in the future. In other jurisdictions we continue to evaluate opportunities to manage, lease or own hotel properties in markets where we believe we have a competitive advantage and will mostly focus on the territories we already operate in.

The transaction entered into with Sun International Limited and Grand Parade Investments Limited for the acquisition of a 40% equity interest in each of SunWest International Proprietary Limited and Worcester Casino Proprietary Limited for an aggregate R2 185 million has been cancelled. The revised implementation date of 31 August 2015 could not be achieved.

The Mpumalanga Gaming Board withdrew the second request for proposal for the fourth casino licence. The group is pursuing a legal challenge in this regard, following the submission of a bid proposal in response to the request.

The group has announced a new 500-room hotel complex in the Cape Town city centre, with the opening scheduled for the third quarter of 2017.

The group is considering creating an entertainment and hospitality-focused Real Estate Investment Trust (‘REIT’), into which it would transfer its extensive owned hotel, retail and office property portfolio. Evaluation of this opportunity continues and no firm decision has been made in this regard.

The ability to continue to pursue these and other opportunities in line with the group’s investment strategy will depend on the final outcome and impact of the variety of potential regulatory changes considered by government and will require the successful interaction with various regulatory bodies including gaming boards, city councils, provincial authorities and national departments. The group continues to constructively engage with the various spheres of government in this regard.