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GPI’s core investments delivered solid results and showed their resilience against the backdrop of an ailing economy.

Introduction

GPI’s core investments delivered solid results and showed their resilience against the backdrop of an ailing economy. Headline earnings increased by 234% to R49.4 million, due to improved results from SunWest and GPI Slots. this translates into headline earning per share of 10.53 cents; an improvement of 232% on last year’s 3.17 cents.

Investment activity

The year was characterised by a significant amount of investment activity which included the following:

The Group disposed of 25.1% of its holding in GPI Slots for R215.9 million. the disposal reduced the Group’s holding in GPI Slots to 74.9% and resulted in a loss of control of the investment. A gain of R611.4 million was recognised in the profits from discontinued operations when the investment was deconsolidated.

The Group also disposed of its 24.9% holding in Dolcoast, which has an indirect interests in Sibaya Casino and its 5.7% holding in National Manco for R130.0 million and R1.4 million respectively.

The Group acquired 10.0% of Spur Corporation Ltd for R294.7 million, the remaining 77.8% of Mac Brothers Catering Equipment for R66.6 million, 51.0% of Grand Tellumat Manufacturing (GTM) for R21.8 million and four properties for a combined value of R102.1 million.

Capital structure

The Group used the proceeds received from the various investment disposals made during the year to fund acquisitions. However, the quantum of the investments required an increase in the Group’s capital structure by issuing new GPI shares and increasing debt funding.

Stated capital

GPI issued 4.4 million new shares for R29 million, which increased the total number of shares in issue at 30 June 2015 to 448.8 million shares.

Debt

The Group increased its overall external debt funding by R565.7 million, which includes the following significant facilities:

Funding type Amount
(R’m)
Utilisation
Preference shares 222.3 Acquisition of 10.0% of Spur Corporation Ltd
Term loans 50.0 Acquisition of properties
Short-term facilities 277.0 Burger King expansion and part payment of other acquisitions made during the year
 

These facilities contributed to an increase in finance costs of R39.0 million when compared to last year. The gearing ratio at 30 June 2015 increased to 34.5%, which is at the upper end of the Board’s target debt to equity range. The business will therefore focus on reducing the gearing ratio to historic levels.

The short-term facilities were raised as bridge funding and are in the process of being restructured to match the term of the funding to the expected returns from the underlying investments.

Earnings

The comparative period results have been restated as if the investments in SunWest and Worcester Casino were never disclosed as held-for-sale, as required by IFRS, as they no longer met the definition of held-for-sale. The Group’s headline earnings for the year increased by R34.6 million to R49.4 million.

The table below details the contribution made by each of the investments to the Group’s headline earnings:

Group YEAR-ON-YEAR MOVEMENT
Continuing operations 2015
R’’000s
Restated
2014
R’’000s
R’m %
Gaming
SunWest 116 674 104 789 11 885 11%
GPI Slots – 30.0% for 6 montds 9 671 –- 9 671 –-
Grand Sport (8 064) (422) (7 642) 1811%
Food
BURGER KING® (55 068) (39 860) (15 208) 38%
Mac Brothers Catering Equipment (2 038) –- (2 038) –-
Spur (5 886) –- (5 886) –-
Excellent Meat Burger Plant (767) (448) (319) 71%
Diversified
GTM (3 746) –- (3 746) –-
Group costs
Grand Technology (7 343) (4 103) (3 240) 79%
GPI Properties (18 617) (6 932) (11 685) 169%
Central costs (72 464) (43 710) (28 754) 66%
Headline earnings from continuing operations (47 648) 9 314 (56 962) (612%)
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Review of investments’ operations

SunWest

SunWest remains the largest contributor to Group headline earnings, with R116.7 million for the year, an increase of 11.3% on last year. SunWest performed exceptionally well in a tough economic environment and exceeded the Group’s expectations by increasing profit after tax to R515.3 million. GrandWest Casino’s profit of R533.9 million, which increased by 9.1% since last year, contributed the majority of SunWest’s net profit after tax.

The Table Bay Hotel reported a loss after tax of R18.6 million, which is 26.8% lower than the previous year’s loss of R25.4 million. SunWest continued to provide the Group with a solid return on investment and increased its dividend paid to shareholders by 15.6% to R520.0 million. The Group’s share of the dividend for the year was R130.5 million (25.1%).

GPI Slots

GPI Slots’ contribution to Group headline earnings was R101.7 million, split between R92.0 million recognised in the profit or loss from discontinued operations and R9.7 million recognised in the profit or loss from continuing operations. The amount recognised under continued operations comprises the following:

  • R71.0 million, which represents 100% of GPI Slots’ earnings for the six months to 30 December 2014 (the period that GPI controlled the investment); and
  • R21.0 million reversal of the deferred tax liability.

The contribution to earnings from continuing operations of R9.7 million represents 30.0% of GPI Slots’ earnings for the six-month period between 31 December 2014 and 30 June 2015, when the investment was held as a jointly controlled entity. The 30.0% holding is the portion of the investment that the Group has not committed to dispose.

GPI Slots grew total revenue by 33.2% to R798.0 million and profit after tax increased by 50.0% to R77.0 million. This was driven by organic growth in its existing businesses, as well as the acquisition of 100% of KZN Slots on 8 August 2014 for R78.5 million. KZN Slots is licenced to operate up to 1 000 LPMs in KwaZulu-Natal and had 623 active LPMs on the date of acquisition.

GPI Slots had 3 396 active LPMs at 30 June 2015 (2014: 2 637 LPMs), which has resulted in an increase of Gross Gaming Revenue market share to 48.72% (2014: 32.85%), thereby strengthening its position as the market leader – a major achievement for the Group. During the year, GPI Slots repaid R37.5 million of its shareholder loan from surplus cash generated.

Worcester Casino

Tough trading conditions persisted in the Worcester region where Golden Valley is situated, and as a result, the company recognised a R2.9 million loss for the year. As the Group impaired the carrying value of its investment in Golden Valley in previous financial years, it does not recognise losses made by the investment.

As a result, Golden Valley did not make a contribution to the Group’s headline earnings for the year. Despite not contributing to headline earnings, the investment holds strategic value for the Group, particularly in light of the discussions around relocating a second Western Cape casino licence to the Cape Metropole.

Grand Sport

Grand Sport contributed a loss of R8.1 million to Group headline earnings, which is higher than the R0.4 million loss contributed last year. Grand Sport had its first full year of trading and the loss is in line with the Group’s expectations of a greenfield investment. The business is poised for growth and several initiatives have been planned for the forthcoming year to grow the brand.

BURGER KING®

BURGER KING® contributed a loss of R55.1 million to Group headline earnings, which is 38.2% higher than the R39.9 million loss contributed last year. The past two years have been the initial start-up and expansion phase for BURGER KING® and the results are in line with management expectations.

BURGER KING® opened a further 26 stores during the year, taking the total number at 30 June 2015 to 44 (2014: 18 stores). BURGER KING® achieved significant operational milestones by localising 92% of its food inputs, which has substantially derisked the business from currency fluctuations and stock losses and has increased the food margin. The store operating costs were brought in line with targets, which allowed BURGER KING® to report a store operating profit of R3.7 million in the last three months of the year between 1 April 2015 and 30 June 2015.

Excellent Meat Burger Plant

Excellent Meat contributed a loss of R0.8 million to Group headline earnings. Excellent Meat is a burger patty production plant that was established to cater for all BURGER KING®’s burger patty requirements. The growth of the business will be linked to that of BURGER KING® and several opportunities are being explored to sell products to other BURGER KING® franchisees internationally.

Mac Brothers Catering Equipment

Mac Brothers Catering Equipment contributed a loss of R2.0 million to Group headline earnings. It did not contribute to last year’s headline earnings as the initial investment was made at the end of the previous financial year.

30.2% of Mac Brothers Catering Equipment’s revenue relates to the sale of equipment to BURGER KING®, the margin on which has been eliminated against BURGER KING®’s cost of fixed assets in the Group results, causing Mac Brothers Catering Equipment to report a loss at Group level.

Mac Brothers Catering Equipment was negatively affected by persistent load shedding at its production facilities, resulting in higher operating costs after the installation of a generator. The business aims to diversify its customer mix to be less reliant on sales to BURGER KING® in the future – this will have a positive impact on Group results.

Spur Corporation

The Group’s investment in Spur contributed a loss of R5.9 million to Group headline earnings. The loss represents the amount by which the interest expense on the investment’s funding structure exceeded the dividends received from Spur during the year. The Group received R6.7 million from Spur as an interim dividend. The interest expense and dividends received will be aligned in future, when both final and interim dividends are received annually.

Grand Tellumat Manufacturing

GTM is a new investment for the Group and contributed a R3.7 million loss to Group headline earnings. GTM reported a loss of R7.4 million for the 10 months it traded during the financial year, which was predominantly incurred during the first eight months of operation. As a result of the interventions of the Group, GTM management turned their focus to attracting new customers. Good progress was made and the company accordingly reported a profit of R2.0 million during the last quarter of the financial year.

GPI Properties

GPI Properties contributed a loss of R18.6 million to Group headline earnings, which is an increase from the loss of R6.9 million contributed last year. The majority of the properties owned by GPI Properties are leased to Group companies and, as a result, the rental income earned from these companies has been eliminated from the Group headline earnings. Therefore, the loss contributed represents the Group’s property costs net of any revenue generated from third-party tenants.

Grand Technology

The Group treats Grand Technology as a shared cost centre with effectively all of its revenue earned from Group companies. The Group revenue is eliminated from the Group headline earnings and, therefore, Grand Technology contributed a loss of R7.3 million for the year, which represents the Group’s annual IT costs.

The Group’s central costs represent the head office costs and costs associated with the investment activities of the Group, such as transaction costs. Group headline earnings were reduced by the R72.5 million in central costs, which is 65.8% higher than last year’s costs of R43.7 million. The increase is due to one-off transaction fees incurred on the various acquisitions, disposals that took place and as a result of the additional interest incurred on the short-term facilities. As indicated above, the short-term facilities are currently being renegotiated to reallocate the facility against the Group’s investment in SunWest and to align the terms of the facility to the expected returns from SunWest.

Dividends

A 20.0 cents ordinary dividend per share was declared in respect of the profits relating to the 2014 financial year. The Group’s strategy is to remain a dividend-active company. However, given the timing and intensity of corporate activity during the year, the possibility of declaring a dividend relating to 2015 profits will be considered once future cash flows are determined with more certainty.