jockeying with lawmakers
Phumelela gaming and leisure Ltd (PHM) has been through the worst this past year.
Unfavourable changes in legislation and drop in betting revenues have contributed to the company making a loss of R96 million for the financial year ended 31 July 2019.
This is in contrast to a R152 million profit in 2018.
On 28 March 2019, the Gauteng MEC for Economic Development, Environment, Agriculture and Rural Development published amendments to the Gauteng Gambling Regulations.
The amendments will result in Phumelela no longer receiving a share of the betting taxes collected on horse racing.
Prior to the amendment…
Phumelela would collect 6% of a punters' winnings on bets on horseracing in the form of a betting tax.
This tax was paid over to the Gauteng Gambling who in turn were obliged to pay half of this tax to Phumelela.
The amount received by Phumelela was approximately R75m per year.
A look through the balance sheet shows that the company holds the following investments
· 50% of Premier Gateway International Limited (registered in the Isle of man)
· 50% Supabets SA Holdings Proprietary Limited (operating as SupaBets locally)
· 50% of Uptonvale Services Proprietary Limited (operating as InterBet)
The above-mentioned companies are all profitable.
Accounting rules allow a company that holds at least 20% (significant influence) in another company to record a part of that company’s profits in its own books based on its shareholding.
Example: Prosus controls 30.99% of Tencent holdings. Prosus records 30.99% of Tencent profits as part of its own profits.
The investments in Premier Gateway, Supabets and Uptonvale Services have contributed R168 million to the 2019 profits of Phumelela.
The not so healthy assets
The core business of operating horseracing and betting is a low-margins game.
Profitability is highly sensitive to increases in operating overheads and costs.
The core business has made a loss of R275 million in 2019.
From the prior year:
Betting income reduced by R137 million,
Operating expenses have increased by R102 million,
Bad debts increased by R25 million after writing-off a Zimbabwean debtor in the aftermath of the meltdown and
The loss of the betting taxes on horse racing.
From the 2019 annual report
The company plans to improve the financial performance of the core business by
Cutting down on operating cost,
lobbying with the Gauteng MEC to return the share of the betting levy and
Lobbying with government and the National Gambling Board to force “open bet” bookmakers to contribute a fair share to the costs of administering horse racing or ban the practice all together.
On the liabilities side
The company had R300 million debt on 31 July 2019 and paid interest of R35 million in the 2019 financial year.
Additional R50 million debt was obtained after year-end.
Should the above-mentioned plans to improve financial performance fail;
the logical route would be to wind-up the core business, pay off debts and exist as a holding company.
The dividends received on the investments in Premier Gateway, Supabets and Uptonvale Services amounted to R148 million (2018: R130 million) and should be enough to cover the loan repayments and returns to shareholders.
On a closing note
Phumelela has a market capitalization of R205 million*
*correct at close on 4 December 2019.
The investments in Premier Gateway, Supabets and Uptonvale Services alone returned profits of R168 million, making the company look undervalued.
The above conclusion is based on a rough look of the 2019 annual report,
Parties interested in Phumelela should perform further detailed analysis.
5 Dec 2019.