The Group’s stated objective is to attain licences for 7 500 LPMs in the short term


Our first Type-B site at the Royal Park Hotel has just completed its first full year of operation and is now performing well.

Overview

The Slots Group consolidated its market-leader status in the major provinces during the financial year. This was complemented by the successful integration of the Grand Gaming Hot Slots (Pty) Ltd (Hot Slots) business and the finalisation of the acquisition of the KZN Slots (Pty) Ltd (KZN Slots) licence. Although the effective date of this acquisition is after year-end, GPI has spent some months managing the business and have been able to effect changes that will make this acquisition and integration seamless from the effective date of 11 August 2014. GPI continued making headway in negotiations with the various gaming boards relating to the introduction of more Type B licences, independent site operators, and relaxation of the rules relating to the sub-minimum allocation of licences per region. Consequently GPI was able to reallocate licences within the regions to areas that perform better. GPI has highlighted several sites for conversion from a Type A to a Type B licence. All of these changes will improve performance and use of the licence allocation.

The Company’s manufacturing and technology betting divisions gained traction during the year and the first batch of locally assembled LPMs was completed in December 2013, while in the second half of the year the trial of just over 50 casino slots commenced across a number of Sun International, Tsogo Sun and Peermont casinos.

Costings of locally assembled LPMs are complete and GPI is confident that these savings will have a positive impact on the operating costs of the Company’s LPM business, and generate revenue through sales to other operators. GPI would have completed the necessary quality assurance checks by the time this report is published after which it will commence local production in earnest.

The online sports betting business, GrandPlay, has commenced operations following its launch in mid-June. GPI is confident that with the chosen technology, advertising and promotional campaigns, and a solid customer support and relationship programme in place GPI will be able to assert itself in the market. The team GPI has employed have significant betting experience and they will entrench this product as a preferred gaming platform.


Key highlights

  • GGR for the Slots Group was up by 26% year on year. LPMs licensed from 1 July 2013 (new machines) contributed 6% of this increase.
  • A total of 121 new sites were licensed resulting in an additional 518 new machines. The total number of LPMs operated by the Group at year-end was 2 637 (including the 486 machines added through the acquisition of Hot Slots in Gauteng and Zimele in Mpumalanga.
  • Successful acquisition of the Hot Slots unit.
  • In Gauteng, a GGR growth of 22.9% resulted in the two licences commanding a GGR market share of 36.2%. (Natural market share is 40%).
  • Similarly Grand Gaming KwaZulu-Natal (Pty) Ltd (Kingdomslots) showed strong revenue growth, which resulted in a 41.3% market share with a natural market share of 25% in the Province.
  • The Western Cape continued showing steady revenue growth with Grand Gaming Western Cape (Pty) Ltd (Grandslots) maintaining daily average machine GGR of R1 008 and a 55.6% market share against a natural market share of 50% The GGR represents the revenue generated by a slot machine and comprises the amount of cash played through the LPM, less payouts to players.
  • First LPM kits assembled locally.
  • Activation of our GrandPlay online sports betting website.

The regulatory environment

Some of the regulatory challenges experienced in gaming include:

  • Lengthy testing and approval process of all gaming software and hardware
  • Sports betting marketing constraints (not enforced uniformly across all provinces)
  • Regional machine allocations per province that limit growth
  • Lack of new RFPs allowing the roll out of more licences in established markets

Operating context

The South African gaming sector comprises approximately 23 000 active casino slot machines and around 10 000 active LPMs. The LPM sector still offers significant scope not only for replacement stock, but also as a larger number of licensed sites are activated (at year-end 9 761 LPMs were active in South Africa out of an approved 18 500 compared to 8 021 at year-end last year).

Conservatively, around 2 500 casino slots are purchased each year to refresh the relevant operators’ existing offering and to replace old and redundant stock. The LPM sector on the other hand has grown organically by approximately 1 200 machines per year, and replaces old and redundant stock by an estimated 1 000 LPMs per year. Therefore, yearly production is approximately 2 500 casino slots and 2 200 LPMs. At present there are about a dozen casino slots suppliers in South Africa and half that many for LPMs.

Province

LPM

allocation

Licensed

LPMs

Licences

awarded

%

Active

LPMs

Gauteng

10 000

5 000

50.00

1 910

Mpumalanga

4 000

2 000

50.00

667

North West

3 000

1 500

50.00

584

KwaZulu-Natal

9 000

4 000

44.40

2 283

Eastern Cape

6 000

2 000

33.30

1 368

Limpopo

3 000

1 000

33.30

980

Free State

4 000

1 000

25.00

262

Western Cape

9 000

2 000

22.20

1 707

Northern Cape

2 000

Total: June 2014

50 000

18 500

37.00

9 761

Total: June 2013

50 000

18 500

37.00

8 021






These estimations present a significant opportunity for GPI’s local gaming manufacturing operation. Notwithstanding the size of the market and the savings GPI expects from its local production, its commitment to maintaining a high BBBEE rating will ensure its competitive edge in that our locally procured products will ensure higher procurement spend points for its customers’ BBBEE ratings.

In addition to these opportunities, there is a further manufacturing opportunity within the bingo sector. As at year-end, four provinces have awarded Bingo licences that include the operation of electronic bingo terminals (EBTs). At the time of going to print approximately 2 500 active EBTs are being serviced by three suppliers. GPI has engaged with a possible partner to distribute and manufacture EBTs locally.

Financial performance

Grandslots

2014

2013

%

change

Total revenue (Rm)

328.94

284.29

16%

Profit after tax (Rm)

48.56

33.19

55%

Percentage contribution to Slots Group revenue

55%

60%


Percentage contribution to Slots Group profit

95%

96%






Kingdomslots




Total revenue (Rm)

174.67

143.71

22%

Profit after tax (Rm)

17.81

7.50

157%

Percentage contribution to Slots Group revenue

29%

31%


Percentage contribution to Slots Group profit

35%

22%






Grand Gaming Gauteng




Total revenue (Rm)

56.48

41.21

37%

Profit after tax (Rm)

(12.40)

(0.03)

3100%

Percentage contribution to Slots Group revenue

9%

9%


Percentage contribution to Slots Group profit

(24%)

0%






Grand Gaming Hot Slots




Total revenue (Rm)

32.75

NA

NA

Profit after tax (Rm)

(1.52)

NA

NA

Percentage contribution to Slots Group revenue

5%

NA


Percentage contribution to Slots Group profit

(3%)

NA






Grand Gaming Mpumalanga




Total revenue (Rm)

4.48

Profit after tax (Rm)

(3.0)

(0.13)

1437%

Percentage contribution to Slots Group revenue

1%

0%


Percentage contribution to Slots Group profit

(6%)

0%






Opportunities and risks

Opportunity

Risks/Challenges

GPI response

Sale of GPI Slots stake

  • Conditions precedent in the sale agreement not being met
  • The value of the Slots business would have been fully demonstrated.

LPM expansion

  • No new request for proposals are currently being issued
  • Acquire remaining route operator licences.
  • Exploit Type B and Independent Site Operator (ISO) opportunities where these licences are being issued.

Invest in top performing machine brands

  • Relying on limited suppliers to generate the bulk of the Group’s GGR
  • Find alternative products that will produce the optimum machine mix.

Slots manufacturing

  • Accessing an already mature market with existing long-term supplier relationships
  • Leverage BBBEE status and value proposition to operators and ensure strong product performance and customer support.

Electronic bingo

  • Legislation is still ‘grey’ as to the legality of EBTs
  • Legislation may be amended and EBTs in their current ‘slots’ guise are forced to be withdrawn from the market
  • Pursue provinces that have approved EBTs (Gauteng, Eastern Cape, Mpumalanga and North West)

Sports betting

  • Software service provider loses their gaming licence
  • Onerous activation process that requires all customers to be FICAed prior to engaging in any online sports betting
  • Varying implementation by provincial regulators of advertising and marketing rules does not mean a ‘level playing field’
  • Continually manage the relationship with our service provider to ensure that any possible risk is mitigated well in advance.
  • Engage with the local regulator to assess their concerns and seek to reach an amicable solution.
  • Adhere to current Western Cape guidelines but engage with the regulator in assisting the Company with being competitive nationally.

Online gambling

  • GPI is not successful in its bid to win licence if and when a RFP is issued by the National Gambling Board
  • Secure as much intelligence as possible on existing legislative frameworks and continue engaging with regulators and legislators regarding commentary on draft bills and legislation.
  • International experts secured to assist in analysing best practice and proposing practical solutions.



Key stakeholders

The manufacturing and LPM divisions are reliant on five key stakeholders:

  • Our contracts manufacturing service provider, Grand Tellumat.
  • Our international gaming manufacturing partners.
  • Local gaming operators, our customers.
  • Punters, the ultimate end-users of our products.
  • Gaming boards that create the regulatory environment in which GPI operates.

Managing these relationships is essential to the success of our local manufacturing endeavours and Slots operations. To date the assistance and support from all stakeholders has ensured unhindered access to the product and the relevant consumers. The continuous challenge is to exceed the operators’ expectations in terms of support and the consumers’ expectations in terms of entertainment value for money.

GrandPlay, our sports betting operation is heavily reliant on three key stakeholders:

  • The data feed service provider, Bet Radar, that supplies our ongoing sports odds for both pre-match and ‘in-Play’ betting.
  • Our software service provider, BetTech, that manages our website system.
  • The employees that manage the odds to ensure GPI is competitive and commercially viable.

Despite its relative infancy, the GrandPlay team has managed to facilitate a relatively smooth entry into the market and the current challenge is to position it as a formidable competitor in the industry.

Corporate social investment

GPI Slots distributed R2.5 million towards various social causes in KwaZulu-Natal and the Western Cape over the past year. The funds are collected by the Grand Gaming Corporate Social Investment (CSI) committee as part of the 5% of pre-tax profit from Grandslots and from 0.2% of GGR in KwaZulu-Natal. The registered organisations GPI identified and funded as part of our CSI programme are as follows:

Region

Beneficiary

Western Cape

Little Fighters Cancer Trust


Rape Crises Heidelberg


Melkbos Care Centre


Zakheni Arts Therapy Foundation


Tafelberg School


Iris House Children’s Hospice


Home of Hope


Educo Africa


Epilepsy South Africa


Little Lambs


Shawco


Tehillah Community Collaborative


Ubomi


Elim Home


Quad Para Association of Western Cape


Anna Foundation


Think Twice


Loeriehof


South African Education and Environment Project

KwaZulu-Natal

Vulamehlo Health Resource


Bobbi Bear


Choc Durban


Issy Geshen Home for the Aged


KZN Blind and Deaf



Sustainability overview

One of our goals is to create jobs in the communities GPI operates in. In addition, GPI monitors certain areas of spend that contribute towards enterprise development, taxes and the national responsible gambling programmes.

Grand Gaming Gauteng

2014

2013

2012

2011

Energy used (kWh)

122 820

71 854

68 159

Gaming Taxes paid (R million)

6.9

5.2

3.5

Responsible Gaming (R million)

0.038

0.021

0.005

Capital expenditure (R million)

19.1

2.4

3.7

4.4






Grandslots





Energy used (kWh)

246 989

298 385

371 228

275 832

Taxes paid (R million)

107.6

82.9

75.2

61.5

Social investment (R million)

2.3

2.0

1.6

1.4

Responsible Gaming (R million)

0.3

0.2

0.2

0.2

Capital expenditure (R million)

47.79

5.5

4.4

8.3






Kingdomslots





Energy used (kWh)

299 245

273 608

240 433

231 921

Gaming Taxes paid (R million)

22.9

21.4

20.3

27.5

Social investment (R million)

0.3

0.2

0.4

Responsible gaming (R million)

0.1

0.1

0.1

0.1

Capital expenditure (R million)

40.8

4.8

3.0

4.8






Grand Gaming Hot Slots

2014

(6 months)

2013

2012

2011

Energy used (kWh)

55 968

Gaming Taxes paid (R million)

4.7

Responsible gaming (R million)

0.05

Capital expenditure (R million)

7.1






Grand Gaming Mpumalanga

2014

2013

2012

2011

Energy used (kWh)

3 468

Gaming Taxes paid (R million)

0.4

Responsible gaming (R million)

0.0006

Capital expenditure (R million)

12.5






Outlook

2015 targets: Manufacturing and Sports betting

  • Our intention is to commence with local manufacture and assembly of LPMs with an estimated production of 300 to 400 LPM cabinets by the end of the 2015 calendar year.
  • The costing and initial trial assembly of casino slot machines are scheduled to commence in the second half of the new financial year.
  • GrandPlay is expected to secure an initial database in excess of 5 000 customers during its first year of operation through strategic marketing initiatives and proactive customer engagement and reactivation.

2015 targets: Slots Group

  • The Slots Group will have secured its sixth route operator licence early in 2015 and will optimise the business through various economies of scale.
  • Maintaining dominance in a mature market such as the Western Cape and in a semi-mature market such as KwaZulu-Natal will be a key goal in 2015, while gaining new market share in Gauteng and Mpumalanga operations will also be a priority.
  • In addition, the Slots Group plans to achieve the following key performance indicators in 2015:
    • 36% growth in the number of LPMs
    • 38% increase on GGR, a R219 million growth
    • 23% EBITDA margin or R168 million
    • R123 million of profit before tax
    • 11% net profit after tax or R93 million

Longer term

  • Securing a seventh route operator will further cement GPI Slots’ position as a leading LPM operator in South Africa.

Key data

Geographic footprint

LPMs

Below is an overview of how LPMs are spread out in South Africa:

NATIONAL LPM FOOTPRINT

GRANDSLOTS

2014 Q4

FY2013 Q4

YTD

2014

YTD

2013

GGR market share

54.91%

55.47%

55.57%

56.12%

LPM market share

53.72%

52.78%



Active LPMs

917

854



Competitor active LPMs

790

764



Average/GGR/machine/day (GPI Slots)

1 023.97

920.35

1 008.88

878.84

Competitor average/GGR/machine/day

951.88

833.71

916.49

803.63

Percentage held

8.06%

8.15%

8.08%

8.36%






KINGDOMSLOTS

2014 Q4

FY2013 Q4

YTD

2014

YTD

2013

GGR market share

41.63%

39.32%

41.31%

40.05%

LPM market share

36.53%

39.38%



Active LPMs

834

836



Competitor active LPMs

1 449

1 287



Average/GGR/machine/day (GPI Slots)

591.07

491.48

559.04

496.48

Competitor average/GGR/machine/day

481.96

480.47

480.80

444.71

Percentage held

8.14%

8.34%

8.15%

8.58%






GRAND GAMING GAUTENG





GGR market share

18.02%

16.02%

17.17%

15.76%

LPM market share

20.94%

16.50%



Active LPMs

400

229



Competitor active LPMs

1 510

1 159



Average/GGR/machine/day (GPI Slots)

438.33

512.48

453.81

464.99

Competitor average/GGR/machine/day

515.63

533.57

519.90

501.03

Percentage held

8.23%

8.73%

8.33%

8.71%






GRAND GAMING HOT SLOTS





GGR market share

18.68%

20.08%

18.98%

20.66%

LPM market share

21.26%

25.43%



Active LPMs

406

353



Competitor active LPMs

1 504

1 035



Average/GGR/machine/day (GPI Slots)

435.76

415.00

429.95

398.10

Competitor average/GGR/machine/day

517.20

569.77

529.50

528.48

Percentage held

7.88%

8.64%

7.93%

9.39%






GRAND GAMING: GAUTENG AND HOT SLOTS





GGR market share

36.69%

36.10%

36.16%

36.42%

LPM market share

42.20%

41.93%



Active LPMs

806

582



Competitor active LPMs

1 104

806



Average/GGR/machine/day (GPI Slots)

437.02

453.26

440.96

424.53

Competitor average/GGR/machine/day

545.11

586.20

554.37

546.99

Percentage held

8.05%

8.64%

8.12%

9.08%






GRAND GAMING: MPUMALANGA





GGR market share

4.20%

0.00%

3.85%

0.00%

LPM market share

11.99%

0.00%



Active LPMs

80

0



Competitor active LPMs

587

595



Average/GGR/machine/day (GPI Slots)

171.07

0.00

204.63

0.00

Competitor average/GGR/machine/day

526.18

491.91

495.20

492.32

Percentage held

10.35%

0.00%

10.35%

0.00%






GPI SLOTS

2014 Q4

FY2013 Q4

YTD

2014

YTD

2013

GGR market share (GPI Slots)

43.40%

41.99%

43.07%

42.54%

LPM market share (GPI Slots)

40.16%

39.69%



Active LPMs (GPI Slots)

2 637

2 272



Competitor active LPMs

3 930

3 452



Average/GGR/machine/day (GPI Slots)

682.80

644.11

677.33

629.28

Competitor average/GGR/machine/day

601.96

584.92

592.14

555.26

Percentage held (GPI Slots)

8.09%

8.28%

8.12%

8.54%