Tsogo Sun Gaming : Reviewed Financial Results for the year ended 31 March 2022

REVIEWED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2022

Tsogo Sun Gaming Limited (Incorporated in the Republic of South Africa)

(Registration number 1989/002108/06) Share code: TSG ISIN: ZAE000273116 JSE Alpha code: TSGI

("Tsogo Sun Gaming" or "the company" or "the group")

www.tsogosungaming.com

Six months comparison

for the year ended 31 March 2022

Commentary

REVIEW OF OPERATIONS

Debt and covenants

Despite over two years of various restrictions and closures affecting the business as a result of the COVID-19 pandemic, the group was within its original net leverage covenants for the 12 months ended 31 March 2022. The net debt to adjusted EBITDA ratio for the year, as measured for covenant purposes, amounted to 2.89 times, the required covenant being less than 3.0 times.

The additional conditions that were imposed as a result of the covenant resets fell away from 1 April 2022, including the requirement of reporting to the group's lenders on a monthly basis, the requirement of submitting a business plan if a material part of the business were to be locked down for 30 days cumulatively, the limitations around permitted acquisitions and the imposition of a further quarterly margin ratchet.

The declaration of dividends has been placed back within the control of the Board of Directors, subject to the group assessing the projected financial position for the subsequent two measuring periods as per the group's original common terms agreement.

With the focus for the year under review being on cash generation and a return to being within covenants, the group managed to reduce its net interest-bearing debt and guarantees significantly by R1.9 billion from R10.9 billion at 31 March 2021 to R9.0 billion at 31 March 2022.

The group's medium-term target is to reduce its net debt levels to lower than a 2.0 times multiple of adjusted EBITDA, thereby reducing risk and funding costs further.

At the date of this report, the directors are not aware of any circumstances whereby the group should not be able to achieve the original covenant requirements for September 2022.

The R2.9 billion three-year debt tranche, which is due for repayment in November 2022, was reduced to R2.2 billion on 28 February 2022 due to a voluntary prepayment of R0.7 billion, and a further voluntary prepayment of R0.5 billion is scheduled for 31 May 2022, which will further reduce the November 2022 tranche to R1.7 billion. The group has liquidity of approximately R2.5 billion in available facilities.

Financial

The total income generated for the 2022 financial year was R8.9 billion (up 57% compared to the prior year), EBITDA was R3.1 billion (up 80%) and adjusted EBITDA (after IFRS 16 adjustments) was R3.0 billion (up 83%, but still some 22% below pre-COVID-19 levels).

Net finance costs (excluding leases) for the year amounted to R735 million, a significant decrease from R911 million, for the prior year. R3.5 billion interest rate swap hedges remain in place.

Commentary continued

Headline earnings achieved for the year was R1.15 billion compared to a R32 million headline loss in the prior year. This equates to an adjusted EBITDA to headline earnings conversion ratio of 38% (-2% for the 2021 and 33% for the 2020 financial years).

Included in headline earnings is the release of a net deferred tax liability of R44 million as a result of the change in the corporate taxation rate from 1 April 2022. Also included, is the negative impact of a complete closure from 28 June 2021 to 25 July 2021 as a result of the COVID-19 pandemic, partially offset by R111 million of business interruption insurance proceeds.

A remarkable EBITDA margin of 35% was achieved for the 2022 financial year.

Casinos

Management continued to focus on operational efficiencies during the reporting period, with some initiatives still ongoing. It is inevitable that certain costs will increase in the new financial year, inter alia, salary costs, the return to pension contributions following the expiry of the pension fund holiday in April 2022, insurance premiums, utility costs and various other. The visibility of where the operating cost base will settle should hopefully be clearer by the 2023 financial year end.

The casino division has adapted well in coping with the restrictive environment, but the uncertainty of restrictions on the industry has not been completely eliminated as yet.

The lifting of the curfew and the relaxation of social distancing measures presents the casinos with an opportunity to drive performance in line with demand, which has not reached pre-COVID-19 levels as yet.

Other income streams, comprising mainly food and beverage, rooms, Theme Park, tenanting, dividends and cinemas, showed some good signs of recovery during the second half of the year, but overall these income streams have been affected more severely than net gaming win.

The casino division, being the largest division in the Tsogo Sun Gaming stable, has proven its resilience over the past two years despite lockdowns, trading and other restrictions, riots, flooding, load shedding and a fragile economy. It is however clear that without the cost savings achieved since July 2019, the casinos would have experienced a much harder landing.

During the 2023 financial year, the Gold Reef City precinct eventing space will be improved to play a more significant role in the Gauteng hospitality market. This should positively contribute to the results in the following financial year. Subject to certain conditions precedent, the group will also be incorporating 15 of its 17 hotels into its own management and operational structure, and the remaining two hotels will be disposed of. Managing our own assets should improve efficiency.

Bingo

With the lifting of the curfew and less strenuous social distancing requirements, the bingo division is finally clawing back some of the losses suffered over the past two years. The trading of the division is continuing to improve, but is still below pre-COVID-19 levels.

Limited Pay Out Machines ("LPMs")

The LPM division achieved record EBITDA of more than R500 million for the financial year despite the restrictive regulations, including curfews and alcohol bans affecting restaurants and bars. This strong performance has continued subsequent to the year end.

We are positive about the potential upside; however, the lead times for the purchase and delivery of machines and parts and the ongoing regulatory red tape regarding the rollout of LPMs may constrain the growth which could be achieved in the short term.

Commentary continued

DIGITAL, ONLINE AND TECHNOLOGY

Developments within the digital, online and technology space are progressing well. We envisage having more visibility in the market in this regard later in the 2023 financial year, and particularly in the 2024 financial year.

It is clear that betting on online casino games is proliferating, and the Western Cape Gambling and Racing Board is in the process of implementing betting on online slot products by betting operators. Exponential growth of the online betting market on casino type games should be expected for the foreseeable future.

CAPITAL EXPENDITURE, INVESTMENTS AND SALE OF ASSETS

Capital expenditure ("capex") and investments cash outflow for the 2022 financial year amounted to R267 million.

An approximate amount of R550 million has been budgeted for capex projects for the 2023 financial year of which R120 million has been contracted for. The budgeted capex comprises mostly gaming equipment, general maintenance capex and trial solar projects. Refurbishments at the various casino precincts remain limited to small- scale improvements.

Furthermore, R240 million has been set aside for the 2023 financial year for concluded acquisitions which are subject to regulatory approvals. In addition, a net amount of R257 million has been allocated towards the potential incorporation of the 15 hotels of the group into its own management and operational structure, and the potential disposal of the remaining two hotels.

Assets realised during the financial year amounted to R30 million. Additional non-core assets, comprising mainly surplus land, are held for sale and will be disposed at acceptable prices.

REGULATORY

There were no significant changes to the regulatory risks facing the industry.

The health department has published proposed regulations in terms of the National Health Act relating to the surveillance and control of notifiable medical conditions (such as COVID-19) for comment which if promulgated could impact operations in future.

DIVIDEND

The Board of Directors has decided to postpone the decision of the possible declaration of a final dividend in respect of the year ended 31 March 2022, until the Board meeting to be held in August 2022.

PROSPECTS

The 2023 financial year may still be impacted by government's response to the pandemic. In the aftermath of the pandemic, the July 2021 riots and the recent flooding in KwaZulu-Natal, the return to a new normal will reveal how discretionary spend has been impacted.