Phantom Shares: A Tale of Two Tsogos

• South Africa
• Adapt IT, Brait, Ethos Capital Partners, Huge Group, Mr Price, Tsogo Sun Gaming, Tsogo Sun Gaming, Tsogo Sun Hotels
• November 29, 2021

Phantom Shares is my weekly summary of the more interesting stories and themes from the prior week on the JSE. It is first published in the Daily Maverick 168 newspaper on a Saturday and then in Business Maverick each Monday. It is reproduced here with the permission of Daily Maverick.

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A tale of two Tsogos

In mid-2019, Tsogo split into two. Tsogo Sun Gaming (JSE:TSG) holds the casino assets (Montecasino, Gold Reef City and many others) and Tsogo Sun Hotels (JSE:TGO) holds hotel assets that aren’t linked to the casino resorts (Southern Sun hotels etc.) – this allowed investors to pick their fighter instead of having to hold blended exposure.

Neither business has done well through the pandemic, of course. The tourism and hospitality industry was decimated and is still struggling. For example, Tsogo Sun Hotels is running at around half of the system-wide room sales of the pre-Covid period. The lockdowns and civil unrest caused havoc this year, evidenced by just 55,280 room sales in July vs. 167,967 in October.

Tsogo Sun Hotels is still loss-making, with an interim headline loss of 11 cents per share. It’s a massive improvement on the loss of 39.1 cents last year. Lenders have been supportive and the group is managing its covenants well.

Tsogo Sun Gaming is profitable, with headline earnings per share of 30.9 cents. Despite the operations being shut from 28 June 2021 to 25 July 2021, the EBITDA margin over the six months to September 2021 was 33% and in line with the pre-Covid period. As with its namesake in the hotel sector, Tsogo Sun Gaming’s balance sheet is on the right path and lenders are supportive under the circumstances.

With the latest variant now in play and almost inevitable restrictions and lockdowns, both took a beating in the market on Friday. Even after the sell-off, they have both approximately doubled in price this year. Investors are still in the red since the split in mid-2019, proving once more that success in the markets is all about timing.

Mr Price hit the sweet spot with consumers during the pandemic

Mr Price’s share price is trading at similar levels to mid-2019, a remarkable result under the circumstances. The interim results to September 2021 show a business that is growing sales strongly and winning market share.

Consumer preferences have been favourable for Mr Price, with a shift to value on one end (Apparel segment including the recently-acquired Power Fashion) and strong demand for homeware on the other as people worked remotely (Home segment including Yuppiechef, a deal which closed on 1 August 2021).

Online sales now contribute 2.9% of group sales, a level we are consistently seeing across various South African retailers. The jury is out on whether the strong growth in online will continue in a post-pandemic world, with my personal belief being that online shopping still has an enormous runway in this country.

Mr Price must share that view, or the company would never have acquired Yuppiechef. With a group cash balance of R3.9 billion, I’m sure that Mr Price’s next acquisition can’t be too far away.

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A busy week for Ethos

Ethos Capital Partners is a listed entity linked to Ethos Private Equity. It announced two transactions this week, one of which is a rescue boat sent out for Brait and the other is the acquisition of a business called Crossfin that operates in the attractive fintech and payments industry.

Brait has had a terrible time on the market, with the share price over five years showing similar returns to Steinhoff, except there is no fraud to blame for it. The New Look acquisition in the UK was a disaster and Virgin Active has been punished by the pandemic.

The company needs to raise capital again. R3 billion, to be exact. Thanks to big-hitters on the shareholder register (like Christo Wiese), it wasn’t difficult to obtain sufficient underwriting and irrevocable commitments to guarantee that the money will be raised. Brait will issue exchangeable bonds, instruments that pay a coupon to investors and are convertible into Brait shares.

Ethos Capital Partners will be putting R294 million into Brait as part of a strategy to recapitalise the balance sheet (again) and improve the operations (again).

The Crossfin deal is a much happier story, with Ethos putting R178 million towards the R1.5 billion deal. Crossfin operates payment and lending businesses and is acquiring Sybrin, a name that EOH shareholders would recognise.

Huge comedy

Finally, in one of the most extraordinary SENS announcements I’ve ever seen, Huge Group proudly informed the market that it will now report as though it is an investment holding company.

This is based on the failed attempt to acquire Adapt IT (which was an embarrassment) and the experience of the directors in mergers and acquisitions. In other news, I’m going to identify as an Olympic sprinter.

Jokes aside, investors need to pay attention here. The company will apply fair value accounting going forward, so there can be major swings in profitability depending on how the directors value the businesses in the group. Huge is down more than 20% year-to-date, so the market has spoken in 2021.

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