In 2014, significant events crystallised in GPI’s strategy and demonstrated the potential the Group has to grow as an empowered company with significant cash, exciting assets and a strong management team.
The past 12 months at GPI have been characterised by change and progress. In 2014, significant events crystallised in GPI’s strategy and demonstrated the potential the Group has to grow as an empowered company with significant cash, exciting assets and a strong management team.
Our relationship with Sun International precipitated the sale of almost all of GPI’s gaming assets in June. The Western Cape casino assets were the Company’s first investments, so it was not without some hesitation that the decision was made. However, this transaction realised the best value for all our stakeholders. The realisation of these assets, projected to be concluded by year-end, has unlocked the discount applied by the market and has realised significant value for GPI.
GPI has demonstrated that it is dynamic in its approach to new investment opportunities. The Group is committed to ensuring that it has a clear strategy in place to guide its thinking and against which GPI can measure its decisions. Recent events have brought the need for a formal strategy to the fore and the Group has spent a great deal of time discussing with various stakeholders what can be expected from GPI in future.
The Group’s key competitive strengths – its BBBEE credentials, its strong financial position, its entrepreneurial spirit and sound management – position it well to continue with its goal of building up a diverse portfolio of assets. In particular, the Group remains focused on the food industry and on assets where our unique value proposition can command attractive pricing and demonstrate added value. The Group’s ultimate objective is to position GPI as the BBBEE investment partner of choice in South Africa.
It is GPI’s intention to invest in, and sometimes with, the management teams of our investment entities. However, GPI also finds itself exposed to start-up businesses, especially in the gaming sector. GPI approach these opportunities and, where it sees value, uses its experience to develop and nurture them until it is appropriate to realise value. Therefore, the Group’s portfolio will contain a mix of minority and controlled holdings, with the intention to always hold a stake that is significant enough to add influence. All GPI’s investment decision-making will be benchmarked against aggressive financial performance indicators, which GPI sets as hurdles for the investment to achieve.
GPI is also aware of the growth potential in the rest of Africa and how it compares with the modest growth prospects in the South African economy. GPI is prepared to consider expansion, in a responsible and conservative basis, into jurisdictions that can participate in this growth, provide income from hard currencies, and where the risks are mitigated through a combination of factors. This strategy will be executed by assisting our own existing and future assets to expand into Africa or to buy into companies that have exposure to foreign income.
The sale of the Group’s gaming assets was prompted by our assessment that their sale would extract more value from them and coincided with a shift in focus towards BURGER KING® and its associated activities.
- increase in share price to R5.92 per share
- 18 BURGER KING® stores rolled out
- 50% increase in Group revenue
It is difficult to pinpoint only a few highlights in a year that has seen so many, but the ones that clearly stand out as transformative transactions for GPI are: the sale of the casino assets (which remains subject to regulatory approval), the accelerated roll-out of BURGER KING®, and the sale of a controlling share of GPI’s Slots business.
The excitement and interest around BURGER KING® has opened doors for the Company and raised its profile. The sale of the physical gaming assets was prompted by an assessment that their sale will extract more value from them and coincided with a shift in focus towards BURGER KING® and its associated activities. BURGER KING® is a world-renowned asset and GPI intends to maximise its involvement with the brand through expansion, acquisition of complementary businesses, specifically within the supply chain to BURGER KING® and investment in operational best practices.
GPI’s assets are largely exposed to consumer behaviour and, consequently, to macro-economic factors beyond its control – the weakness of the rand, high inflation, labour issues and increasing interest rates all combined South African economy. Despite this, I am pleased to report that our gaming assets and BURGER KING® have proven especially resilient, producing strong performances during the financial year. Our experience is that GPI can mitigate external challenges by investing in world-class brands operated by leading management teams, who have extensive knowledge of their product and international experience to call upon, when local challenges present themselves.
Our casino assets performed best in their peer group and our Slots business also performed well. BURGER KING® is still in a “honeymoon” phase and GPI is aware that it cannot expect these revenue numbers from its stores indefinitely. As expected, the food costs also exceed industry norms, but GPI has addressed this and expect to see these normalise in the short term. In many ways, GPI is fortunate to be establishing essentially two businesses during tough economic times – namely, BURGER KING® and Slots – as this instils discipline and forces the Company to be efficient with its resources.
The casino assets delivered results that are in line with their performance record. GrandWest and Sibaya Casino rank as the two best casinos in the Sun stable and delivered robust performances for the year. Their growth in revenue of 8.2% and 5.3% respectively was remarkable, given the current trading environment and GPI was able to receive dividends of R113.0 million and R10.3 million respectively from these two assets. The management at Golden Valley Casino embarked on several strategies to reverse the loss-making trend, but they operate in a very difficult environment and, despite an increase in revenue of 12.2% to R144.1 million, their EBITDA was down 6.3%, to R26.7 million, which resulted in a net profit after tax of R1.1 million before exceptional items.
The Slots business performed well, exceeding the previous year’s GGR by 26%. The EBITDA performance exceeded the terms of the sale agreement with Sun International by 8%, which is significant in terms of our sale price. GPI restructured the Slots Group at the beginning of the year, which has yielded the required outcome in that management is now individually responsible for their respective unit’s performance. At year-end the Slots Group had 5 LPM licences across four provinces allowing it to roll out up to 5 000 LPMs.
GPI believes that the Slots Group has surpassed its critical mass and future increases in revenue will exceed the relative increase in overheads. Therefore, the acquisition of KZN Slots (Pty) Ltd (KZN Slots) will contribute positively to the Group’s earnings from the effective date, 11 August 2014.
Our response to the third National Lottery licence request for proposal (RFP) was a focal point for the financial year. GPI undertook this venture with a clear vision that GPI had the appropriate knowledge, industry experience, resources and business partners, to allow the Company to submit a competitive bid. The winning bidder should be announced before the end of September.
In June, GPI launched GrandPlay, its sports betting offering. GPI is pleased with the launch, though it anticipates that the building of this business will take time, as GPI build our database of players. GPI hope to bring it to a breakeven point within 12 months and continues looking for synergy within its other assets to facilitate future growth. The experience acquired in the operation of this business, coupled with the Lottery bid, stands the Company in good stead in anticipation of future online gaming licence applications.
BURGER KING® has surpassed our expectations, yet GPI is aware that hype around a brand does not make it a good business by default. The accelerated growth, GPI has already opened 18 stores, was deliberate and it is supported by strong management and supply chain in every aspect of the business. I congratulate the BURGER KING® management for delivering more than expected in trying circumstances. The launch in South Africa has been the most successful in BURGER KING® International’s history and GPI is confident that this foundation will enable the growth of the brand throughout the continent. GPI expects that BURGER KING® will break even by the end of the 2015 financial year although it will still contribute meaningfully to the Group’s financial performance. GPI is happy with its potential and the profile it has brought to GPI.
During the financial year, GPI entered into a joint venture with a local, family-owned business, called Excellent Meat. The company has been approved to supply BURGER KING® with burger patties and it has established a dedicated plant for this purpose. Excellent Meat delivered R4 million in revenue for the period and has already proven that it is important in the delivery of quality product and is integral to BURGER KING®‘s success. Our partners in this venture have been fantastic and GPI looks forward to growing a mutually-beneficial relationship with them going forward.
GPI currently faces three major challenges, which it engages with on a daily basis: keeping our focus on our intended strategy, maintaining our BBBEE status and devising a suitable succession plan for the Executive Chairman.
Firstly, on the issue of maintaining strategic focus, GPI will look at opportunities that make immediate sense from a financial perspective. GPI prefers to add value to its investments through existing skills and relationships, as opposed to remaining operationally passive. GPI intends to develop its business around the food and gaming sectors and, from there, into other selected industries. So as not to pass up on any lucrative opportunities that are either non-core or too small to warrant a direct investment, GPI is considering using a partnership model or fund structure appropriate for this type of investment, which would allow the Company to co-invest with industry or private equity experts. This would afford the Company the opportunity of an interest in these high-growth assets, while facilitating empowerment and growth within an efficient structure that requires minimal management time. The performance of the fund would still need to meet all the criteria GPI has set as its investment benchmarks.
Secondly, our level 2 BBBEE status is imperative to our business model, where it is required for certain gaming licences and where GPI can add value to target companies, and is an aspect of the business that is core to our philosophy. GPI intends to honour the objective of empowerment legislation in South Africa by maximising the opportunities its BBBEE status affords the Company and delivering superior returns to its stakeholders, many of whom have been with the Company since its inception in 1996.
Thirdly, GPI has embarked on a succession planning strategy by enabling senior executives to take full ownership of their respective divisions. GPI has been led by Hassan Adams since inception and GPI acknowledges that his leadership strength, foresight and deal-making ability will be difficult to replace. GPI is working to develop people who can take over these responsibilities in such a way that the transition will be seamless when GPI feels it is appropriate for the Chairman to exit his executive role.
From an investor point of view, management believes that it is an attractive option. GPI has minimum benchmarks on returns, which outweigh the returns implied by this net asset value (NAV) and GPI has a proven track record of conservative and appropriate asset allocation, providing substantial room for growth.
Shareholders can expect more of the same and management will position itself to focus on key existing assets over the short term, while looking for opportunities that can grow the business into the future. Our recent announcements provide an indication of where GPI is heading. The acquisition of 65% of Mac Brothers represents a controlling investment in the BURGER KING® supply chain and the subscription for 10% of Spur (still subject to conditions precedents) demonstrates the intention to invest in quality assets by leveraging our strengths, adding value to an existing business and, ultimately, benefiting our shareholders. Due to the low current gearing levels our hurdle return rate is not at its optimal level; GPI is formulating a funding policy that will look to optimise the hurdle return rate.
The next 12 months will see us focus on consolidating our position in the Gaming and QSR arena.
To date, our dividend policy has been to pass on any dividends received from SunWest, after allowing for central costs and some debt servicing, to our shareholders. The Company is now entering a growth phase and will need to adapt the expectation around dividends going forward. GPI has always said that it is a dividend-active company and that philosophy has not changed. However, GPI has assessed its financial resource requirements for growth in the medium term, particularly in light of the cash that is expected to be generated from the sale of the Sun International assets and has therefore decided not to pay a dividend.
This year was an active year for GPI, which saw much change and growth. Without the unwavering support and expertise of our financial advisors, Leaf Capital, and our legal advisors, Bernardt Vukic Potash & Gets (BVPG), GPI would not have had the success it has experienced. I thank them for their hard work and the spirit in which it has been conducted.
Our management team and employees have excelled again and I am grateful for their dedication, long hours and sacrifice, which enables the Company to continue managing the existing businesses while considering new opportunities. Thanks to the Board of GPI for their direction and the faith they have in the executive team. GPI remains confident of delivering on the expectations that have been set.
Chief Executive Officer