Gold reef resorts maintains growth trend with solid results
17 March 2008

Recording nine years of uninterrupted growth Gold Reef Resorts today announced solid results for the year to December 2007. Revenue growth of 14,8% to R1,7 billion reflected the pleasing trading performances of the group’s existing casinos and included the first month of trading at newly-opened Silverstar Casino. Net gaming win was up 14,5%. Early in the year the group secured direct black shareholding of more than 25,1% when BEE partners in the underlying casinos swapped their stakes for shares at group level.

Adjusted headline earnings per share (Adjusted HEPS) for the year increased 18,3% to 150,7 cents compared to headline earnings per share (HEPS) of 127,4 cents at the same time in 2006. (In order to illustrate comparative year-on-year growth, Gold Reef adjusted HEPS and Earnings Before Interest, Tax, Depreciation, Amortisation & Rentals (EBITDAR) to eliminate once-off costs that occurred during the year.) Adjusted EBITDAR of R760 million, up by 21,9%, represented an improved 43,6% margin on revenue.

The group has declared a dividend of 65 cents a share for 2007, higher than the 55 cents a share in 2006. In addition, positive cash flow motivated Gold Reef to declare a special dividend of 35 cents a share to bring the total dividend to R1 a share. The special dividend will not result in additional Secondary Tax on Companies (“STC”) for Gold Reef as the company will utilise excess STC credits.

CEO Steven Joffe says the year saw Gold Reef expand as well as optimise value at existing properties. “Two new casinos, Silverstar Casino and Queens Casino, were opened in December and Gold Reef City Casino and Goldfields Casino were significantly refurbished.”

Financial Director Jarrod Friedman explains that once-off costs were eliminated when calculating Adjusted HEPS and Adjusted EBITDAR in order to provide a meaningful comparison to 2006. These included various costs of the BEE transaction and preopening costs at Silverstar Casino and Queens Casino, as well as costs associated with the offer by the BidCo consortium to acquire the group, which failed. He adds that the strong EBITDAR margin is largely attributable to strict cost control. However he says that “while management will further intensify its focus on cost discipline in 2008, the margin may not be sustainable at current levels due to the adverse impact on revenue of the economic slowdown in South Africa.”

By exchanging the shareholdings of its BEE partners in certain of its casinos for shares in the holding company, Gold Reef secured 100% ownership of Gold Reef City, Silverstar Casino, Golden Horse Casino and Goldfields Casino and 70,4% in Mykonos Casino, as well as 100% of the casino management contracts for Gold Reef City Casino and Goldfields Casino. While the transaction initially diluted earnings, Friedman is positive that increased income from casino management activities as well as trading at Silverstar Casino, which began in December 2007, will boost earnings over the long-term.

Joffe says he is satisfied with the initial contribution of Silverstar Casino. “The new casino floor opened on 11 December 2007, although it is still too early to properly assess performance as the other facilities are not yet open.” Silverstar Casino currently features 756 slots and 26 tables and is set to include a five star hotel, restaurants and entertainment and conference facilities by April 2008. An upmarket spa is due to open in the second half of the year. “Once all facilities are fully operational we expect Silverstar Casino to boost our market share in the lucrative Gauteng region, reducing reliance on Gold Reef City,” says Joffe. Gauteng is the largest regional gaming market in South Africa.

At year-end R759 million had been spent on the Silverstar development from the total allocation of R1,1 billion, with the project still within budget. Joffe also points out that the opening of the casino saw Gold Reef continue job creation with around 500 new employees brought onboard.

Flagship Gold Reef City (including the casino and Theme Park) grew revenue by 12,4% to R1 billion and increased EBITDAR by 21,3% to R417 million. “The casino experienced a more challenging second six months due to interest rate hikes, a general downturn in economic conditions and disruption as a result of the refurbishment,” says Joffe. The Theme Park’s contribution to revenue of R74,1 million, up 27%, reflected a steady increase in visitors. Capital expenditure at the casino and the Theme Park to December 2007 amounted to R235,1 million.

Goldfields Casino posted a 15,7% increase in revenue to R108,8 million and EBITDAR higher by 10,6% to R50 million, capitalising on the conversion from a temporary to a permanent casino during the year. Revenue at Golden Horse Casino in Pietermaritzburg grew by 12,7% to R225,9 million and EBITDAR by 18,8% to R109 million, with the newly-renovated Salon Privé attracting more patrons.

Mykonos Casino in the Western Cape posted revenue of R116,6 million, a 10,8% growth on the previous year, with EBITDAR up 13,9% to R53,5 million. Joffe says: “Growth at the casino was inhibited by capacity constraints. We will be assessing expansion plans in 2008 bearing in mind the expiry of licence exclusivity for Mykonos Casino in 2010.” The Garden Route Casino benefited from the adjacent golf course which has begun to attract higher-spend patrons to the casino. This contributed to an increase in revenue of 12,6% to R166,8 million and an increase in EBITDAR of 16,6% to R83,7 million.

The new Queens Casino in the Eastern Cape opened for trade on 21 December 2007. The casino features 180 slots and 6 tables with all facilities due for completion in the first quarter of 2008. Capital expenditure at year-end totalled R92,5 million out of the total anticipated budget of R125 million.

Subsequent to year-end the BidCo offer to purchase the group failed after approvals of regional gaming boards were not obtained by the extended February 2008 deadline. Gold Reef continues to await the reasons for the adverse ruling in respect of the BidCo offer handed down by the Securities Regulation Panel.

Looking ahead Joffe says growth in 2008 will be more challenging in light of the country’s economic slowdown. However, he says inclusion of a full year’s trading of the two new casinos and improvements at Gold Reef City and Goldfields Casino should drive growth. Gold Reef is also involved in an application for the Vaal River Casino in Sasolburg, which is currently in planning stage with the Free State Gambling and Racing Board. “Further, measures have been taken at all casinos and at the Theme Park to ensure power outages will have a minimum impact on operations,” says Joffe.

Friedman concludes: “Gearing is at acceptable levels and adequate hedging against interest rate increases is in place. The business is strongly cash generative and is expected to remain so, bolstering the group’s ability to withstand a downturn in the economy.”

Gold Reef is currently trading under cautionary as the group has been approached by Tsogo Sun to discuss a possible offer for Gold Reef. The announcement points out that there can be no certainty at this stage that an offer will be made.

Gold Reef shares closed yesterday at R26,75, putting the company on a P:E of 17,8.

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