Redcape float boasts highlights of pokies exploitation

by Michael West | Oct 31, 2018 | Economy & Markets

AFL clubs are getting out, Coles too. Woolies would love to get out, but for Queensland liquor laws. Yet there is a new player bursting onto the pokies scene today with a $100 million book-build ahead of a stock-market float. Michael West reports.

Sydney Swans chairman and merchant banker Andrew Pridham has bundled up 25 pubs and their most cherished assets, 730 poker machines, into a company called Redcape.

Clubs and pubs are wont to hide their pokies riches, play it down and prattle on about community service and food and beverages. Not Redcape. Its prospectus is a marvellous document for evaluating just how exploitative are these machines. It highlights the suburbs to best target too.

According to the prospectus – that fat bit in front of the Share Application Form – the investment highlights are as follows:

Belting the poor. The pubs are concentrated in Sydney’s lower socio-economic areas, where gambling on pokies is higher than it is in wealthier areas.

Fabulous losses. NSW has by far the highest pokies losses in Australia, and Australia the highest in the world.

Great regulation. That is, there is not much regulation at all, at least compared with the other states and with the rest of the world.

Smoking. They still allow smoking in special smoking areas so light up!

Smoke and mirrors. A super tricky stapled security trust structure ensures investors won’t have to leak too much to the taxman.

Pokies: the Rise of the Machines

In order to illustrate the highlights of the Redcape offer, we will quote the prospectus and provide brief comments in bold.

“Redcape’s hotels can be distinguished by a strong NSW gaming customer offer. A number of Redcape properties are listed among the highest ranking venues by EGM gaming revenue in NSW, including the El Cortez Hotel and the Eastwood Hotel, which are the 1st and 4th ranked hotels as at March 2017.”

El Cortez racks up the highest pokie losses of any pub in the nation. Just as Cortez himself massacred the locals of Mexico City back in the day, these latter-day Conquistadors of El Cortez massacre the punters of Canley Vale in Sydney’s West – day and night, for they trade until 4am.

“An investment in the Group is targeted to deliver a FY18F 8.75% per annum pre-tax distribution yield (after management fees).

After lavish fees, and $38 million in transaction costs, a return of five times the rate of inflation is damn fine.

“Investment in a top quality Sydney gaming hotel portfolio: Redcape holds the 2nd largest Sydney gaming hotel portfolio,
operating 21 gaming hotels located across key Sydney markets. Of the 21 Sydney hotels, 19 are located in the top 20 gaming
Local Government Authorities (LGA) (by revenue) in Sydney and 18 rank within the top 200 NSW gaming hotels …”

“Strong revenue growth prospect: Redcape’s gaming hotels are predominately located along key Sydney West and South
West suburbs. Over the last five years, the gaming revenue growth in these suburbs has significantly outperformed other NSW
regions generating in excess of 8.2% per annum. Growth versus the NSW state average of around 6.0% per annum.”

We have deliberately targeted the most vulnerable suburbs in order to make a killing from pokie addicts while capturing a significant foothold in the money-laundering market.

Skipping confession: Archbishop affirms pokies patronage

“The target FY18 pre-tax distribution yield is 8.75% per annum based on a payout ratio of 100% of pre-tax free cash flow, payable quarterly, and is forecast to grow organically by 3.0% to 5.0%.”

Gee, pokies “reforms” must be going well in NSW if the outlook is to double the rate of inflation.

“Gaming revenue provides predictable cash flows: approximately 70% of the gross profit of Redcape’s hotels comes from
Electronic Gaming Machines (EGMs). EGM gaming revenue has historically shown consistent growth and has proven to be
resilient throughout economic cycles and regulatory change.

Addicts can be relied upon to be reliable.

“Hotel operators with EGMs are on average more profitable than those without, due to the strong relative contribution to hotel revenues, low labour requirements, the relatively stable tax regime and strong demand for such forms of entertainment.”

Don’t worry about food and bev, there’s gold in them pokies. The pokies lobby has politicians running scared so tax is “stable”. 

“Total Australian gambling expenditure in FY15 was approximately $22.7 billion, of which NSW was the dominant state which contributed approximately $8.9 billion or 39% of the total Australian gambling expenditure. This is followed by VIC and QLD which contributed approximately 25% and 16%, respectively.

NSW is the best mug punters market in the universe.

“NSW gambling expenditure growth has outperformed the wider Australian market with a compound annual growth rate (“CAGR”) of approximately 6.0% per annum over the five years to 30 June 2015, vs. 4.3% per annum for total Australian gambling .

“The predominant form of gambling in Australia is conducted via EGMs, with NSW representing nearly 50% of total Australian EGM expenditure. Within NSW, EGM expenditure accounts for more than 64% of the state’s total gambling expenditure. This shows that EGMs underpin the profitability of both the Australian and NSW gambling industry.”

Pokies are definitely the best mug punters to exploit and we’ve got those hopeless politicians under the thumb too.

“Sydney hotel gaming revenue growth has been accelerating over the past three years resulting in double digit growth in FY16
(approximately 11.5%). Sydney’s South and West Corridor has outperformed the rest of Sydney with approximately 12.7% gaming revenue growth in FY16 and 8.2% compounded annual growth over a five year period.

“Despite the strong recent gaming hotel performance, the financial forecast underpinning our Redcape investment thesis has
conservatively assumed that gaming growth will immediately normalise to a more conservative 4.25% per annum.”

Double the digits, that’s our philosophy.

“EGM operators must return a minimum payout ratio to players determined by statute or government regulation (the ratio varies between states and territories and ranges between 85% and 92% of the amount staked by the player);

“Hotels in NSW are regulated under the Gaming Machines Act 2001 by the OLGR and the ILGA. A hotel must have an applicable gaming machine entitlement (“GME”) and/or poker machine permit (“PMP”) for each EGM at the venue to be able to operate a gaming machine in NSW. This is subject to a Gaming Machine Threshold (“GMT”) which is held against the hotels license.

“Both GMEs and PMPs are currently escalating in value due to increasing EGM revenue.

So don’t worry about regulation. Player losses are rising strongly anyway.

“Gaming areas vary in size and layout but are often specifically designed as climate controlled, semi-enclosed, smoking
compliant areas, that include a separate bar, foyer and toilet. Redcape’s gaming areas contain up to 30 EGMs in NSW and 40 in QLD which generally reflect the maximum EGM entitlement.”

Light up! Ciggie time!

“Redcape’s management intends to focus on its ongoing operations, such as;
> maintaining/enhancing the service offering to gaming and hotel patrons;
> maximising gaming room productivity;
> maximise operating efficiencies across the gaming hotels.”

Yes, there are other strategic imperatives but, you guessed it, the top three are gouging the mug punters.

“Key assumptions underpinning the five year forecast investment metrics include:
> Revenue and cost assumptions:
– Gaming revenue growth of 4.25% per annum
– Other hotel revenue growth of 1.5% per annum
– Operating expense growth of 3.0% per annum.”

In case you missed it the fourth time, these things spit out the cash. We reckon the pokies will tip in three times the beer profits.

The NSW Clubs Pokies Bonanza

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Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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