CAPE TOWN – The share prices of the JSE’s two biggest casino and hotel groups surged last week after the further loosening of level 3 lockdown restrictions, but have they peaked?
Sun International’s share price traded 1.57 percent higher at R17.50 on Friday morning, a win of 44 percent compared with the closing price on the previous Friday.
The price is already 118 percent higher than the 52-week low, and one might be tempted to think that the price might have hit a ceiling, and has been fully valued by the market.
But consider that the share price was trading at R40.38 on January 2, and that the price:earnings ratio is a lowly 2.86.
Tsogo Sun’s share was 0.54 percent up at R3.75 Friday morning, representing a 48 percent gain over the week, and currently trading on a price earnings ratio of only 4.43.
To my mind the only reason why these share prices did not rise more last week is because there can be little doubt that these companies have suffered a severe financial shock after being closed for almost three months of Covid-19 lockdown, while still having to pay staff, municipal rates and expenses and other services such as security.
President Cyril Ramaphosa announced unexpectedly on Wednesday that restaurants and casinos could do business during Level 3 of lockdown, but there are no dates given yet for when these establishments will be allowed to open.
Sun International plans to stagger the reopening of its hotels and casinos – including Sun City, Boardwalk, Carnival City, The Maslow Sandton, Wild Coast Sun, GrandWest and The Table Bay Hotel – from when the date is announced.
The two groups employ about 20 000 people, and Sun International has already decided to close two casinos, the Carousel in North West and the Naledi in the Free State.
From the anecdotal and some of the data that crosses my desk, it has become apparent that South Africa’s consumers have responded favourably to favoured business reopenings, but the strength of their buying power quickly dries up.
That said, consumers have been deprived of formal entertainment for months, and one is tempted to reflect back to the Roaring Twenties in the US, known for the emergence of consumerism and decadence in that country, and also a period that followed two global disasters: Spanish Flu and World War I.
However, the rapid economic growth in the US in those years was driven by a convergence of trends: the blooming of the age of mass production, new technology, easy credit and rising employment.
And while it is true that the world currently faces a convergence of new technology, from computing to medical and in transport, these remain longer-term changes, and employment growth prospects in South Africa look particularly bleak, right now. Social distancing restrictions too will be around for some time.
In addition, global market sentiment remains negative due to fears of a second resurgence of Covid-19, continuing unexpectedly high unemployment in the US, and unstable US/China relations.
Growth in local gambling revenues might remain muted for the foreseeable future, and further rationalisation at these two companies might be required.
Spur Corporation is another listed company where its operations have effectively been closed through the lockdown, and which will reopen following Wednesday’s announcement.
Although slightly more expensive, the share might be a better option for risk-averse investors.
The price was 0.73 percent higher at R19.05 Friday morning, 9 percent higher than R17.40 the previous Friday. The price is much where it was after it slumped in March, along with the global sell-off. The price-earnings ratio is around 9.
Since May 10, about 155 of its 559 franchised Spur Steak Ranch, RocoMamas, Panarottis Pizza and John Dory’s Fish Grill & Sushi restaurants have been selling food by delivery only.
Spur said last month the strength of its ungeared balance sheet was such that it would not need to access external funding for at least six months. However, the pace of store reopenings will depend on franchisee rental negotiations.
Big discounts were given to franchisees through the lockdown. Staggered reopenings seem likely.
However, in this environment, brand strengths, such as Spur Steak Ranches providing a fun, relatively low-priced family outing, should ensure a steady recovery.
Meanwhile, the share price of Taste Holdings, which is liquidating its Domino’s Pizza chain to focus on its NMJ, Arthur Kaplan and World’s Finest Watches luxury stores, gained 50 percent on Friday morning to 3 cents.
The share has been see-sawing between 2 and 3c since the start of April. The liquidation of the US’s Domino’s chain in South Africa is testament to how tough the fast-food business is. In 2016, Taste converted its St Elmos and Scooters outlets into Domino’s outlets, and opened two Starbucks coffee shops.
Taste shareholders vote on June 26 to change the name to Luxe Holdings and for a 10-for-one share consolidation.
The share price of global food service group Bid Corporation was up 1.42 percent to R286.35 on Friday morning, trading at a not expensive price earnings ratio of around 20.
Its sales, overall, are recovering globally along with the easing of lockdown restrictions and reached 67 percent of comparable 2019 sales in the week to June 14, according to a statement released last week.
Food service sales in China even exceeded that of the 2019 comparable period, while emerging market sales, including in South Africa, China, Turkey and other countries, remained subdued. There is ample balance sheet headroom of about R17.4 billion.
Interestingly, the group does not believe that post Covid-19 there will be “a fundamental shift in consumer behaviour of eating-out-from-home”.