Bad day at the races sees Phumelela share price shedding 11 percent as trading conditions worsen for local operations. Photo: Supplied
CAPE TOWN – Phumelela Gaming & Leisure Group is undertaking further measures to right size the struggling group as it heads into a legal battle to stave off changes to the Gauteng gambling regulations, which could deprive it of R75 million in income a year.

The group, which reported its results on Friday for the six months ended January 31, recorded mixed results, with a strong international performance, off-set by a disappointing local result.

The group’s equity accounted profits increased by 8percent to R88.6m, headline earnings were down 18percent to R68m, headline earnings a share down 17percent to 68.02cents, attributable profit to ordinary equity holders was down 17percent to R70m, and attributable earnings a share to ordinary equity holders were down 16percent to 70.05c, while net asset value a share was 990.58c and the net debt-to-equity ratio increased to 32percent.

John Stuart, the chief executive of Phumelela, said the group as a consumer-facing business with a large retail footprint was affected locally by negative macro factors. “As a result of a stagnant economy, trading conditions deteriorated considerably for our local operations,” said Stuart.

Phumelela, in the likely absence of a meaningful improvement in the domestic economy, has decided to right-size the group and, further to the voluntary severance programme in the previous year, had identified additional areas in which to adjust, and detailed action plans modelled for beneficial financial impact were being implemented.

“This has been a challenging six months and all the executives have been tasked with cost reduction targets. This will specifically aid in counteracting our current reduced level of profitability and limited balance sheet flexibility,” said Stuart.

However, horse racing continued to face unpredictability in the regulatory and licensing space, causing unnecessary financial consequences and inhibiting forward planning.

Phumelela warned on Friday that amendments to the Gauteng gambling regulations would hit the group.

“The payment of this tax to Phumelela was agreed to between the Gauteng government and the racing industry when the industry was corporatised in the 1990s and it was intended to ensure the sustainability of the industry.

The betting tax received by Phumelela in Gauteng constitutes 90percent of the betting tax received by it in South Africa and amounts to approximately R75m per year.

“The MEC has elected to amend Regulation 276, which will have the effect of depriving Phumelela of its portion of the betting tax and directing it towards the board. This amendment will have a material adverse effect on Phumelela and on racing in general,” it said on Friday.

Phumelela said it had submitted detailed representations in respect of the proposed amendments, supported by an economic report analysing the economic effects of the amendments.

It said it had been advised that the amendment to Regulation 276 “stands to be reviewed and set aside on, inter alia, the bases that it is a breach of the agreement between the government and Phumelela, unlawful, irrational and unconstitutional.” Accordingly, on March 29, 2019, Phumelela instituted an application to have the amendment of Regulation 276 reviewed and set aside; and an urgent application to suspend the implementation of the amended Regulation 276 pending the outcome of the review application.

The urgent application had been enrolled for April 9.

Stuart said that management was engaging with key stakeholders in the horse racing industry. “We remain open to any realistic and constructive ideas that may benefit the horse racing industry and the shareholders of Phumelela,” said Stuart.

The group said it would continue to pursue its strategic objectives, which included being the standard bearer for thoroughbred South African horse racing and offering punters an exciting gaming experience through its betting operations.

Chantal Marx, the head of research at FNB Securities, said South Africa continued to expect an anaemic growth outlook as consumers would likely feel the pinch from several instituted tax measures following the Budget review.

International business, driven by Premier Gateway International on the Isle of Man, and local online betting exchange Interbet, both returned strong results, while locally Betting World and Superbets suffered lower profitability during the period following a tough December, which presented unusually high results favouring customers, in particular soccer bets.

Stuart added that the group’s Superworld joint venture comprising Betting World and Superbets, which contributed a 75percent share of earnings, had been progressing well and was now profitable.

The group's JSE counter dropped 10.97percent on Friday to close at R8.85.