Page 10 - Integrated Annual Report

8
INTEGRATED ANNUAL REPORT 2021
HOSKEN CONSOLIDATED INVESTMENTS LIMITED
LETTER TO SHAREHOLDERS(CONTINUED)
Encouragingly for the future of Deneb is the fact that this year’s results include some R48m of losses associated primarily with the restructuring costs of closing the Jacobs plant of Gold Reef, the contraction of Romatex Home Textiles into Cape Town as well a substantial loss in Seartec, all of which are not anticipated to be repeated going forward. On the other hand, they also include substantial savings of interest expenses on the reduced level of debt which will persist into the future.
Overall Deneb recorded a comprehensive profit of some R134m which is a very substantial turn-around from last year’s R124m loss. Last year’s results included losses of R127m from discontinued businesses. This year its losses from such operations were contained to R5m demonstrating both the dramatic curtailment of its exposure to loss-making businesses as well as the improvement of its continuing operations.
The company paid dividends of R15m to HCI during the year to March 2021 and a final dividend of some R26m to us after year end. We hope this will strengthen going forward.
Karoshoek:
Karoshoek continues to operate efficiently and within the framework of the model. It passed the important milestone of its Long-Term Performance Test, operating at 97% of capacity for the year ending March 2021. Its revenue was likewise at 98% of that modelled and it is paying out dividends of around R39m a year, in line with our hopes and expectations. By all measures this has been a very successful project and ought to provide the group with strong and growing cash flows for many years to come.
Businesses that have struggled under COVID-19 conditions:
Some of our subsidiaries, particularly those which involved large property developments, accumulated fairly high levels of their own debt. The possibility of their revenue being seriously inhibited was generally not anticipated either by themselves or their financiers beyond provision for insurance against business interruption.
The scale and duration of this interruption and the invariable reluctance of insurers to meet COVID-19 claims by their customers, placed these businesses in the same stressed position in which HCI found itself, where they were obliged by their debt holders to stop all dividends and focus all their energies on servicing their own debt.
We evaluate the progress of these businesses through the pandemic firstly by whether they are forced to do anything value destructive to the long-term interests of shareholders in meeting their commitments to debt holders. Our expectation of ourselves is that we run our businesses in a manner where they can survive great storms. Unquestionably this has been a major test of that assumption.
Secondly, we focus on when they might reasonably and prudently be expected to resume dividend payments to HCI.
Gaming (Tsogo Sun Gaming):
The key to HCI’s past has been its ability to build new businesses from the cash it earned from existing businesses. Front and centre of that strategy has been a reliance on the cash dividended to us from our gaming operations. Surviving the two-year hiatus that COVID-19 appears to be imposing on such dividends has been the central challenge HCI has had to weather.
TSG entered COVID-19 with R11,4b in debt. The initial three months total lockdown set it back a further R700m. Since then, it has paid down R1,2b in nine months from operating income, aside from servicing interest on its debt. Repeating that performance during the first half of FY 2022 should allow all to feel comfortable that it is well on the way to resuming dividends.
Equally importantly however, has been for it to restructure its business for the long term and to regain the EBITDA margin it had allowed to be eroded for many years. It is with real appreciation we congratulate management on its efforts in this regard. There has been a restructure of costs and services in every business it operates, from the theme park at Gold Reef through the operational structure of every casino as well as the overhead of its corporate services.
TSG will be a stronger, more driven business for many years as a result of these efforts. Together with a reduced normalized debt it will allow TSG to resume its pivotal role in our holding company sooner rather than later.
Hotels (Tsogo Sun Hotels):
International tourism and interprovincial domestic travel have been decimated by COVID-19 and are unlikely to recover fully until vaccines have been effectively distributed to large numbers of people in the country.
Nevertheless, TSH has managed to reduce its cash losses to a relatively small number monthly on the current level of travel and our hope is there will still be a sufficient growth in the number of people staying in hotels to stop even this over the next few months.
We chose to dispose of our stake in the luxury 30 suite Maia hotel rather than have a rights issue to meet the pressures of cash losses in the business. Happily, we succeeded in doing so at a relatively full value and the proceeds of this sale have been as great as all cash losses to date. The business is not expected to lose a significant amount of cash in the year ahead unless a sustained third wave sets the process of domestic travel slowly returning awry again. At some point we hope TSH will also succeed in recovering a contribution from its business interruption insurance claims.