PHM – Why I will be following my rights

durbanjuly

Gambling is as old as time itself. Many people like to take a punt on uncertain outcomes, believing that they have some superior insight, or to be entertained, or hoping that they are just plain lucky. We have several (legal) ways to gamble in South Africa:

  1. The National Lottery

This is popular and profitable, but it is also a state monopoly and private individuals can therefore not participate.

  1. Casinos

Two big companies have locked down the Southern Africa casino market: Sun International and Tsogo Sun. Unfortunately for these businesses, I believe their future is uncertain. The reason is simply that my generation, the Millenials, does not go to casinos. We just don’t. Walk around Montecasino on a Friday night and I dare you to find any customers in the casino that are not either tourists or over 40. The youth simply does not view this a means of entertainment.

  1. Online casinos

The rise of poker has made these very popular and profitable. However, these businesses are headquartered in tax efficient island jurisdictions and JSE investors therefore have no access to these.

  1. Sport betting

Everyone has an opinion about their favorite sports team, and many are willing to put their money where their mouth is. Not surprisingly this is the fastest growing form of gambling and much more attractive to young people then casinos.

Phumelela Gaming and Leisure (PHM) is a big player in Southern Africa in the sports betting market. They offer fixed odds and totebetting through various outlets on sports such as rugby and football. Their primary focus, however, remains the hosting of horse races, the marketing, screening and distribution of these races and facilitation of betting on these races. They operate 8 race tracks in South Africa (including the iconic Turffontein and Kenilworth race courses) where 440 races are held annually on 364 days per year. This content is distributed all over the world and interested international fans diligently follow the South African horse racing scene.

PHM is profitable and good value at the current share price, offering a steady and rising dividend, with a current yield of 4.7%. They are in the process of undertaking a rights issue to fund the acquisition of 50% of Supabets. This deal has been more than a year in the making and in my opinion will add significant value to the company. I am following my rights and will support the deal for the following reasons:

  • Supabets will more than double the retail outlet footprint for PHM. They will be able to offer Supabets content in their existing outlets, whilst rolling out horse racing content into all Supabets outlets. The synergies are excellent.
  • The acquisition PE is 9.25 Earnings, whilst PHM trades at a PE of 13, meaning that the transaction will be immediately earnings enhancing.
  • By acquiring only 50% of the company, the founders and current owners remain interested in the business. The risk of “skeletons in the closet” appearing after the deal is also much lower.
  • The future of media and entertainment is increasingly moving towards live events and content generation. This is confirmed for instance in the mega-deal where At&T is paying in excess of $100bn for Time Warner, mostly to get access to content. Horse races at iconic race tracks are unique and sought-after content and live flagship horse races will become increasingly appealing.
  • Sport is the only reason many of my friends and I subscribe to Dstv. It is the future of entertainment of content and also the future of betting and gambling. I am convinced it will increasingly take market share from the casinos. Supabets and PHM are dominant in the Southern African market.
  • CEO WA du Plessis has just bought 100,000 shares on market at R2.2m, in time for the rights issue. In total directors and management hold 14% of the business, Markus Jooste (of Steinhoff fame) holds 3%
  • The Thoroughbred Racehorsing Trust is a non-profit organisation established to maintain and encourage horse racing in SA and own 35% of the company. They will ensure that the management continues to encourage horse racing, which I am confident will be PHM’s unique content differentiator from other sports betting businesses.

1 thought on “PHM – Why I will be following my rights

  1. Pingback: Overview of Posts | Business Musings

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