Monday, 1 January 2018

Federal Group: What will the New Year bring?

As the clock ticks over to start what is bound to be a watershed year for the Federal Group, few will take as much interest as the Group’s bankers. Rebecca White’s undertaking to remove pokies from community pubs and clubs after 2023 should she be successful at the March 2018 election will precipitate a major overhaul.

Back in 2016 Federal Group was treading water. The most recent financials reveal there was no improvement in the 2017 year. Specifically:

·       Turnover was the same at $512 million.

·       Expenses increased slightly causing net operating cash to continue its downward slide from $51 million to $46 million. That’s the lowest figure since 2001, sixteen years ago.

·       Net profit before tax fell from $28 million to $20 million.

·       Net profit after tax fell to $14 million.

·       As per usual shareholders drew out most of the after tax profits. Dividends of $11 million were paid in 2017. Since pokies in pubs started in 1997 shareholders have withdrawn $250 million in dividends.

·       Capital hungry tourism businesses can’t keep up that level of dividend payments without borrowings. Another $4.5 million was needed. Capex spending was $31 million, about $20 million more than the inadequate annual spend of the last few years. The fit out of MACg01was probably the reason for this increase.

Last year it was noted all the Group’s bank borrowings were listed as current liabilities implying longer term arrangements were to be renegotiated in the 2017 year. However as at June 2017 bank borrowings are still listed as current liabilities having increased by $4.5 during the years to $128 million. A longer term payment arrangement is yet to be finalised?

The only other borrowing apart from EGM lease liabilities, which hover around $45 million, is $8.6 million owing to an unrelated party, believed to have provided finance to buy the Newstead pub in 2015. It’s a telltale sign when a company’s principal bankers pass up an opportunity to lend more?

The Federal Group entered into an agreement in April 2017 to buy Odyssey Gaming a pokie monitoring company which Tabcorp was forced to divest by ACCC following the merger of Tabcorp and Tatts. The Federal Group completed the purchase of Odyssey just two weeks ago, about the time Ms White dropped her bombshell.

It is not known how much Federal Group paid for Odyssey or how it was financed?

The 2017 financials did include an ‘asset held for resale’ of $16 million. It is believed this is property used by Federal Group’s transport arm Cope Transport.  The sale of this property may well have been needed to raise funds to complete the Odyssey purchase.  Federal’s bankers would have been reluctant to let Federal’s borrowings increase too much given there has been quite a concerted effort to reduce them from around $200 million back in 2011. Especially given the future of pokies post 2023 was uncertain at the time and even more so now.

But the sale of another property which needs to be leased back will only add to the annual rent commitments of the Federal Group. When companies have operating leases, rental agreements say, future liabilities are not included on the balance sheet as are bank borrowings for instance, but rather are disclosed in a note. Note 26 in Federal’s financials disclose that it has operating lease commitments of $16.5 million per year.  The latest increase of about $2.8 million for annual rental commitments in the 2017 financials could well relate to the newly leased MACq01 complex. The Mercury recently revealed owners, Vos Group, hope to realise a price of $60 million when the building is placed on the market subject to a 49 year lease to the Federal Group. There would need to be a rental return of at least $3 million to achieve that sale price.

The current annual operating lease commitment of $16.5 million compares to only $2.7 million in 2007. It’s quite a significant increase. This does not include annual commitments for finance leases principally EGMs which are approximately $14 million.

Federal Group now owns 12 pokie pubs, the last three costing $45 million combined.  Without electronic bandits post 2023 they will be worth a fraction of their current value .

So too will the 9/11 bottleshop chain if Dan Murphy’s Hobart store(s) make their expected inroads.

Federal Group and its bankers will no doubt be spending a fair bit of time together as they nut out what to do about their future arrangements??

Just to recap the problems:

·       Declining gaming turnover, over half which may disappear post 2023?

·       Increasing annual rental commitments?

·       Diminishing net operating cash surplus?

·       The difficulty of upgrading the two casinos which are prime accommodation venues with 450 rooms in total if community pokies go and the resultant lower operating cash flows are the only source of funds? Will banks lend more?

·       How to finance the Port Arthur project that’s been on the drawing board for 10 years? When Saffire was built it only needed six months of the Group’s cash flows, principally from pokies, to complete the task.

·       How to pay dividends to demanding shareholders?

·       How to service existing loans if pokies go from the streets? Will banks play hard ball?

·       What effect will revised security valuations of Vantage pubs and/or 9/11 bottleshops have on the level of borrowings? Without pokies are regional pubs part of the mix?

·       Which assets will be sold? What’s the family succession plan? There hasn’t been a new face on the Board for 23 years? The Group’s net operating cash flow has been falling for 10 years and is back to 2001 levels before poker machines found a niche market in the suburbs and towns?

If Ms White gets her way with the electorate in March 2018, the Federal Group won’t have many bargaining chips left? So it’ll be a do or die effort by Federal and its supporters over the next couple of months to ensure that doesn’t happen.

Of course Federal will be worse off if pokies go from the streets. Network Gaming currently gets 80% of player losses.

But the public campaign will focus on the suffering of venues that currently get 20% and may suffer short term problems with pokie removal, rather than looking at how they and other local businesses can attract some of the 80% currently accruing to the Federal Group. The Group doesn’t hang on to all of the 80%. It has to remit GST to the Feds, gaming taxes to the State and EGM lease payments to financiers, but it hangs on to enough to be able to fund the purchase of twelve pokie pubs, nineteen bottleshops and pay $250 million in dividends to largely absentee shareholders who have pocketed the equivalent of a Tattslotto win every week for the last twenty years in what must rank as the biggest heist in the history of Tasmania.

What changes will the New Year bring?

1 comment:

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