There is an old market adage that suggests investors "back the jockey and not the horse". There is some irony in that adage as it applies perfectly to Phumelela Gaming & Leisure — which certainly seems to have stronger legs at this point in the race than its more illustrious countermates like Sun International and Tsogo Sun.
When Phumelela listed in 2002 (at 50c/share!) the business was centred mainly on horse racing and associated tote betting. As things stand today Phumelela — thanks mainly to CEO Riaan du Plessis being able to jockey well for position in lucrative niches — is a powerhouse in tote sports betting, with lucrative slices of the fixed odds market via Betting World outlets as well as the limited payout machine market. Phumelela has also saddled up in a number of key international markets.
The core horse racing business is a substantial drag on Phumelela. In the year to end-July the horse racing segment recorded a R99m loss at pretax profit level. By contrast, tote sports betting chipped in R143m, fixed odds betting R70m and limited payout machines R20m.
A simple calculation will show that Phumelela’s pretax profit would have come in at R233m without the drag from horse racing — which, for the record, made a R66m loss in the previous financial year. In short, horse racing is hobbling bottom-line growth — which may have been a more urgent problem if Du Plessis had not been so successful in diversification efforts.
However, he is adamant that horse racing remains part of Phumelela’s DNA, and there is a belief this segment can trot out profits once there is a more equitable contribution in the funding of the sport. Phumelela is battling what it terms "flagrant piracy" of the group’s intellectual property by certain bookmakers who allegedly make illegal use of the Tellytrack live feed of local and international horse racing. Du Plessis raised an alternative scenario of Phumelela unbundling its betting operations, even offering a breakdown financial scenario of such a development. This, however, is probably not on the cards, at least not in the short term. Meanwhile, I don’t think punters can disregard Du Plessis’s intentions to continue broadening the gaming offering at Phumelela — even if there is plenty on the company’s plate.
The recent acquisition of 50% of sports betting specialist Supabets (which holds a commanding position in soccer betting) should allow synergies to spur growth at its Betting World outlets. I would not bet against more footholds being established internationally. International operations contributed R163m to pretax profits — well ahead of the R110m notched up last year. In particular, Phumelela’s 50% investment in Premier Gateway International (located on the Isle of Man) as well as the export of live broadcast of SA horse racing, and a first-time contribution of Arena Racing Company, all contributed to the result. A stronger rand may rein in profit growth in the first half of the 2017 financial year, but there may be a kicker because from May this year "win, place and swinger" bets by local punters have been commingled into Hong Kong’s tote pools — one of the largest betting pots in the world.
Du Plessis’s successes in securing gaming revenue streams are such that I’d be amazed if a large international betting or gaming specialist has not yet contemplated having a flutter on Phumelela.