Special Report Podcast: Rian du Plessis, CEO of Phumelela
ALEC HOGG: In this Boardroom Talk special podcast the chief executive of Phumelela, Rian du Plessis joins us now. Rian these are financial results for the year to end of July. It’s a strange time - and maybe before we get into the numbers, to be producing results - strange year end. Where does that come from?
RIAN DU PLESSIS: That coincides with horse anniversaries...
ALEC HOGG: So it’s to do with the racing industry then...
RIAN DU PLESSIS: Absolutely.
ALEC HOGG: Increasingly we’re seeing changes of year ends to December and perhaps to June or March - not that many in July but that’s your one. These results - I suppose the important thing is that there is a nice juicy dividend - 6% yield in the current share price.
RIAN DU PLESSIS: Yes, we maintained the dividend. Our profits were up - headline earnings per share was up 5% but we generated strong cash. So we maintained our dividend which is a high dividend yield and as our profits grow, we’ll return to more normal cover, but during recessionary conditions we believe it’s important to look after our shareholders, particularly if we continue to generate strong cash.
ALEC HOGG: How important is the dividend to your BEE shareholders, given that there are often financial structures where they need the dividends to actually finance the purchase of shares.
RIAN DU PLESSIS: No our structures are so deeply in the money that there's no debt remaining to the best of my knowledge. So it’s important to the stakes pot, because the Thoroughbred Trust owns 35% of us and they plough back 80% of their dividend into the stakes pot. So the stakes pot benefits from a healthy dividend.
ALEC HOGG: Tell us a little bit about the stakes pot - that’s the money that is competed for by racehorse owners.
RIAN DU PLESSIS: Yes it’s the prize money for the some 4,000 races that we stage every year.
ALEC HOGG: And what has happened to that recently?
RIAN DU PLESSIS: You’ll see from our results that this year it was down 3% which is disappointing because obviously our owners and trainers are experiencing inflationary cost pressures and increases. But we’ll work as hard as we can and with Phumelela back on a growth path, we would hope and are determined to grow the stakes pot as well.
ALEC HOGG: When you say growth path, is that primarily what’s happening internationally because that share of the business seems to be growing.
RIAN DU PLESSIS: It’s internationally plus the exciting sports bets that we have. Incidentally Soccer 10 which we recently launched - yesterday for a R2.00 bet, you would have won R146,000. Our soccer bets and our rugby bets are growing nicely. We’ve launched a Rugby 5 bet in time and we’re betting on it - in fact our pool closes at 23h00 tonight for this weekend’s World Cup games and it’s beyond our expectations. Betting World is growing very nicely - I don’t know if you noticed that we are buying out the remaining 40% from Gold Circle, so Betting World will be wholly owned and that gives us between 20% and 25% of the fixed odds bookmaker business in South Africa and we see quite a bit of growth for that too.
ALEC HOGG: Take us through the situation with Gold Circle because within the horseracing industry there has been much rumour and conjection, now with the purchasing of Betting World our of the Gold Circle operation, which itself is splitting up - one half possibly going into bed with Phumelela - the other half doing its own thing.
RIAN DU PLESSIS: Well yes, those negotiations are at an advanced stage. The Western Cape is de-merging from KwaZulu Natal. The Western Cape is heavily loss making - it loses about R15million a year and the Western Cape directors and ourselves are of the view that the Western Cape is not viable as a standalone business or standalone tote. So the Western Cape has approached us and where we are at the moment is - assuming that the deal goes through - the Western Cape business will be taken over by the Thoroughbred Trust which is a trust with a non-profit motive and has the greater interests of the sport at heart. So the Western Cape’s business will be taken over by the Trust. The Western Cape members of Gold Circle will be given the opportunity to become members of the Racing Association and the day-to-day running of the racing and betting operations will be outsourced to Phumelela.
ALEC HOGG: So KwaZulu-Natal will then stay on its own. What happens to those very complicated relationships that you have in Phumelela Gold - in other words where Phumelela and Gold Circle worked together on international income for instance?
RIAN DU PLESSIS: Yes they remain in the absence of reaching a different agreement so the Phumelela Gold Enterprises partnership remains in Teletrack and international, etcetera - albeit that KZN would now just have a smaller percentage with the Western Cape not being part of them anymore.
ALEC HOGG: Has that breakdown of the power been agreed to yet, or is that also subject to negotiation?
RIAN DU PLESSIS: Pretty much, the split has been agreed.
ALEC HOGG: So its full steam ahead it seems, perhaps trying to do a little bit of a turnaround in the Western Cape - you say it has been losing money - why was that.
RIAN DU PLESSIS: Numerous reasons I guess. It depends on which days you race, how much betting you will generate and there is something in the racing fixtures I guess. For us looking at it, the revenues from betting on sports are disappointingly low, so what Phumelela would be doing would be promoting sports betting very heavily, and I believe there is room to grow the retail footprint - more Tote outlets - and add these additional bets and try to trade out of trouble. I do believe that we would need some help from either government or the gambling boards to overcome the problem in the short term because we do have to spend quite a bit of capex on Kenilworth, etcetera. So we are in discussions with the Western Cape government and we’ve also made approaches to national government for assistance.
ALEC HOGG: You’ve mentioned that Phumelela is now a growth company in your opinion - when are shareholders going to see that on the bottom line because you’ve been bumping along for a while now.
RIAN DU PLESSIS: Yes, 5% growth is no great shakes but in the context of not only the world economy but where horseracing is elsewhere in the world we’re quite proud of what we’ve achieved. We think there's a lot of growth left in the international market. We only had two months of the SIS contract in the 2011 financial year...
ALEC HOGG: What is that about?
RIAN DU PLESSIS: It’s the contract where we sell our media and data rights to SIS and they onward sell it to 10,000 bookmakers in the UK for display in their retail betting shops.
ALEC HOGG: So that takes South African racing there and you get a revenue share from doing so...
RIAN DU PLESSIS: Yes - we get a fixed fee and the fixed fee that SIS is paying us on a five year deal is almost double what we used to own.
ALEC HOGG: So that’s good news going into the future - only two months in this year - good - and the other areas of growth?
RIAN DU PLESSIS: We should benefit from a weaker rand already, we are seeing new territories coming in - Turkey has started taking our racing, we’re hopeful that France will take our racing regularly now - France being the third biggest tote in the world. There are quite a few things on the go on the international side. On the local side we aim to grow Betting World’s footprint aggressively and its business as well. And then on the tote side, we aim to introduce more sports bets - more sports bets and more exotics.
ALEC HOGG: So when you have a look back in a year’s time we have this conversation, are you anticipating that the earnings growth will be a bit better than the 5% you put on the table?
RIAN DU PLESSIS: It’s early days, but we’d be disappointed if it’s only 5%.
ALEC HOGG: There are some big developments on the Gambling Review Board side - perhaps you can take us through whats going on there?
RIAN DU PLESSIS: Yes, the submissions from interested parties had to be in by 16 October and we submitted ours, and the public hearings in parliament are scheduled for 26 and 28 October.
ALEC HOGG: How is this going to affect Phumelela going forward?
RIAN DU PLESSIS: Look our submission really - the most important part of that is a request for a levelling of the playing field. Simply put between us and Gold Circle, it costs us about R608million a year to put forward the sport - that’s now 4,000 races and 440 race meetings, etcetera - including the prize money and the costs of funding the NHA Etcetera - that’s about R608million - now bookmakers take about 46% of the bets on those races, and the tote 54%. But bookmakers only contribute 14% to the funding of the sport. Now clearly unless I’m missing something that’s iniquitous and I’m saying that even having bought or in the process of buying out the minorities Gold Circle out of Betting World and making ourselves the biggest bookmaker in the country - we’re not bookmaker unfriendly - it’s simply iniquitous for the tote to bear such a disproportionate share of the costs of funding the sport and it needs to be addressed by parliament.
ALEC HOGG: So the idea would be presumably from your side, that the tote would have a greater benefit going into the future.
RIAN DU PLESSIS: Yes, we’re hopeful of that, and we’re hopeful also that at least that our licence condition which forces us to supply the picture of South African horseracing to bookmakers, without being entitled to make a profit. Our licence condition stipulates that we’re only entitled to recover reasonable costs. And if you look at what soccer gets for their intellectual property rights - R2billion from Multichoice and for us to get R11million from bookmakers - for goodness sake, for 364 days a year’s racing, including 60% being international racing.
ALEC HOGG: Looks like there could be quite a battle coming.
RIAN DU PLESSIS: We wouldn’t want it to be a battle. We should have sensible discussions around a table...
Responsibility is for the investor to take.