The gold in RECM and Calibre

The gold in RECM and Calibre

South Africa’s large, traditional casinos are rapidly losing market share to alternative forms of gambling – a trend that looks set to continue. We consider the changes underway in the local gambling market, highlighting RECM and Calibre’s Goldrush business as ideally positioned to benefit from these market trends.

Shifts in gambling activity
In 1996, the National Gaming Act legally formalised casinos in South Africa (currently 39 in operation) – each enjoying a geographic monopoly. This curtailed competition and ensured that a decent return could be earned on the significant capital required to build and maintain these establishments. For many years since, the rollout of new casinos and increasing household incomes guaranteed good growth in total casino gross gaming revenue (GGR1), as indicated in the left chart below. More recently, however, casino GGR growth has struggled to beat inflation, averaging just 1.4% in the last five years.

The same is not true though for alternative forms of gambling in South Africa, all growing above 10% per annum on average over the past five years (below left) and benefitting from the rollout of new licenses and a consumer that is enjoying the novelty, location, affordability and convenience of new modes of gambling.

Unlike casinos, alternative forms of gambling [limited payout machine (LPM) gambling, Bingo and sports betting] are not restricted to a few large venues and can reach a much greater market by operating in smaller towns, shopping centres and online (in the case of betting). The enhanced proximity to customers and the convenience of these forms of gambling is a key enduring competitive advantage over casinos.

For many years, large casino operators opposed the expansion of gambling licenses for LPM, Bingo and sports betting operators in an attempt to defend their casino monopolies. This dynamic has changed materially in the last five years, with all the large casino operators now having their own alternative gambling businesses. Today, the industry as a whole is supportive of the growth and success of these previously considered “outcast” gambling formats.

1 The revenue of an operator derived from gambling, less winnings paid out to players.

Limited payout machines – unlimited potential
LPMs offer gambling convenience as they are commonly found in easily accessible bars or restaurants. There is usually a limit of five machines per site with a stipulated maximum bet size and prize per spin (R5 and R500 respectively).

LPMs enable a lucrative business model. The route operator (owner/machine operator) installs the machine and splits the net gaming wins 60/40 with the site operator (the bar/restaurant owner). The machines are all monitored centrally by the route operator, with cash collected weekly and the option to switch a machine off remotely if payment is not received.

The biggest challenge for route operators, since LPMS were first introduced in 2003, is the availability of suitable sites. This is the reason why the rollout of LPMs has been much slower than expected, with only 13 989 active machines in 2020 from initial expectations of 50 000. To expedite machine roll-out, provincial gambling boards have now agreed to the rollout of “Type B” LPM licenses, allowing for up to 40 machines per venue. Another massive potential boost to revenues for LPMs is the likely increase of the minimum bet size that has remained at the R5 level for over 15 years.

Following much industry consolidation over the past 10 years, the LPM market is now essentially a three-horse race between Sun Slots (owned by Sun International and Grand Parade Investments), Vukani Gaming (owned by Tsogo Sun Gaming) and Goldrush. The relative size and profitability of these businesses are set out below.

Burgeoning Bingo
Traditional Bingo (where players need to match random numbers to pre-printed cards) has advanced through technology to include electronic Bingo terminals (EBTs). These look, sound and play in a very similar manner to slot machines and link players to one another. Electronic Bingo has largely replaced its traditional counterpart in South Africa.

The significant growth seen locally in recent years is due to new machine and license rollouts. There are currently 9 427 licensed Bingo positions – Gauteng has the largest exposure, followed by the Eastern Cape and then KZN. There are no Bingo licenses in the Western Cape, Northern Cape and Free State at present. EBT operations have essentially created mini casinos (usually situated in shopping centres), offering gamblers a more convenient alternative to travelling to traditional casinos. In addition to the significant growth we expect from further license rollouts and the maturation of existing sites, we see significant opportunity in electronic Bingo should the gaming boards look to issue licenses in the unlicensed provinces.

Industry consolidation over the past 10 years has resulted in Galaxy Bingo (owned by Tsogo Sun Gaming) and Goldrush being the dominant Bingo license operators in South Africa, both similar in size (charted below).

Big on betting
Betting on horse racing has traditionally dominated the betting scene in South Africa, but the rise of sports and other betting options has rapidly outpaced the stagnant horse racing scene. Today, sports betting is three times the size of betting on horse racing (previous right chart above). Bets can either be placed in person at physical retail outlets or via several online platforms, and gamblers can bet on the outcome of many sports fixtures, on a number of games (such as local and international Lottos) and on casino-style live play (eg betting on the outcome of live roulette or other games).

While online gambling is still illegal in South Africa, online betting is permitted. The barriers to entry for online betting are relatively low as a provincial betting licence (comparatively easy to obtain versus a casino, LPM or Bingo license) is all that is required in order to operate and a betting business costs relatively little to set up.

Locally, the industry is dominated by private companies, with the largest being Hollywoodbets and Betway. The listed casino groups have been late to participate in the betting industry and are now investing to catch up: Sun International with its Sunbet brand, Goldrush operating as Gbets and Tsogo Sun Gaming with a majority stake in Bet.co.za. As the chart below indicates, betting is currently a small contributor to revenue and profit for Goldrush.

RECM and Calibre is well positioned in alternative gambling
RECM and Calibre is a JSE-listed investment holding company that has historically managed a diversified portfolio of predominantly unlisted investments. Following a portfolio reorganisation earlier this year, the company is now solely focused on the alternative gaming sector through its 58% holding in Goldrush.

Goldrush has spent the past 10 years consolidating LPM and Bingo licenses around the country and is now one of the leading players in the alternative gambling industry in South Africa. Bingo is by far the largest contributor to group revenue and profit, but a hefty LPM business and nascent betting business are also exciting growth vectors for the group. Goldrush, unlike its listed competitors Sun International and Tsogo Gaming (who only generate between 15% and 20% of revenue from alternative gambling), is solely focused on this high-growth segment of the local gambling market.

With the rollout of Bingo licenses having required significant investment (new machines and the fit-out of suitable sites), we expect strong growth in earnings over the next few years as these sites mature. With the investment phase completed and once the devastating Covid-impacted period is behind them, we expect Goldrush to generate cash flow well ahead of profit, resulting in a large and growing dividend stream for shareholders.

Regulatory clouds on the horizon
The gambling industry is not without its regulatory risks, such as the potential for a smoking ban in casinos and Bingo sites, which could possibly deter some gamblers from these venues (a large proportion of gamblers are smokers). All gaming taxes are levied provincially, but the National Gaming Board is mulling over imposing a national gaming tax. This would negatively affect the margins across all forms of gambling and the industry is, therefore, currently opposing these proposals.

Some eccentricities at RECM and Calibre
An unusual feature of RECM and Calibre is its share structure, whereby two different share classes exist – namely the unlisted ordinary shares and the JSE-listed preference shares. The share classes have identical economic interests, but the listed preference shares do not have any voting rights. Consequently, the ordinary shareholders and founders of RECM and Calibre control the business. While control structures are not unusual on the JSE, it is important to understand that investors are beholden to management with very few of the usual shareholder protections. Mitigating this somewhat, is the fact that management (ordinary shareholders) are very economically aligned with preference shareholders as they are large owners of the business.

Following the ‘Goldrush’
The gambling landscape is evolving rapidly in South Africa and we believe the next 10 years will see significant growth in alternative forms of gambling. Furthermore, it is our view that RECM and Calibre’s current share price does not fully appreciate the future cash flow prospects of the business.

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