21 Feb 2005

GRAND Parade Investments (GPI), the empowerment group with an interest in Sun International’s Grand West casino complex, endured a few tough start-up years.

But shareholders will be in a more forgiving mood lately with GPI doubling its dividends to 8c/share to its 700 000 mainly Cape flats shareholders in the year to end June 2004.

GPI’s dividend flow from its investment in SunWest (the holding company for Grand West) for the period amounted to an impressive R17.6m. GPI currently holds about 1, 14m ‘0’ shares and 1.54m ‘N’ shares in SunWest.

Profit attributable to shareholders was a substantial R14.3m (last year: R8.5m). If there is any nit-picking then shareholders might carp that GPI did not deliver on chairman Peter Swartz’s prediction that earnings in the 2004 financial year would be doubled.

GPI’s strong showing is essentially in line with the buoyant South African and increased consumer confidence and consumer spending that ushered in free spending punters and thrill seekers to Grand West.

Swartz noted interest rates are at an all time low and our casino operations have definitely benefited from this.

Other casino groups like Gold Reef casino and Peermont Global as well as other Sun International casinos have performed strongly during the recent period. But there’s no doubt Grand West is something special, and the complex is the most profitable casino complex in South Africa by quite a margin.

Swartz says the latest results - reflected in the annual financial statements of Sun International – showed GrandWest to be the No. 1 in the group with revenues in excess of R1bn. Of all the casino’s countrywide, GrandWest is estimated to have contributed in levies and taxes up to one third of the total.

Swartz only had clipped comment on prospects for GPI. He indicated that the 2005 financial year to date reflected positive financial results “as management was constantly seeking more efficient ways and means to running the business”. He expected earnings to improve even further in the coming financial year – this time not making any bold predictions around earnings for the year ahead.

Of course, anyone watching the fortunes of Sun International on the stock exchange can safely presume another year of strong profit growth by GPI. Sun International’s share price has rocketed in the last three months as investors chase the strong cash flows associated with casinos.

Talking of cash flows, there is not much mention of the soft loan from BoE that allowed GPI to acquire a bigger shareholding in SunWest. The group’s income statement shows that over R13m flowed out in finance costs in 2004, although this was more than offset by operating profits of R42m.

Cash on GPI’s balance sheet is now more than R10m.

While prudent punters would be hoping every free cent of cash flow be diverted into paying back the BoE loan, it seems GPI directors were confident enough to make the group’s first acquisition.

Some may argue that with an asset like Grand West in the portfolio who needs other investments. But Swart argued that: while GrandWest Casino was undoubtedly the most profitable casino complex in the country, the board resolved to continue in investing in (other) gaming opportunities.

Consequently GPI – via 100% owned subsidiary GPI Slots - acquired a 25% interest in Thuo Gaming Western Cape (Pty) Ltd (which will trade as GrandSlots). Basically Thuo Gaming owns the rights to operate 1 000 limited pay-out machines in the Western Cape.

In November 2004 the first two gaming operations went live, but the levels of profitability remain to be seen. Swartz reckoned GrandSlots would be profitable by March 2006.

Basically GPI committed to investing R7.8m on a loan account to Thuo. The loan account should be repaid over time and earns interest at commercial terms.

While GPI has taken the acquisition trail it is worth pondering whether any other contenders – craving gaming exposure – has lined up the Cape empowerment company with hostile intentions.

The net value of GPI’s SunWest holding is estimated at around R70m – which means GPI shares are worth about 104c/share (last year 85c/share).

What if some entity – with an appropriate empowerment partner in tow - pitched an attractive offer to GPI shareholders?