Keith Collister, Gleaner writer
GEORGE
A MERE four months after shepherding the gaming company, Supreme Ventures, to its listing on the Kingston exchange, NCB Capital Markets is listing the stock as one to hold rather than buy, having projected that Supreme's profit will be well below what was being projected when it went public in February.
Not only are the analysts being tentative about the lottery company, but its share price has taken a thumping on the exchange, trading at a new of $1.85 on Wednesday, before recovering to $1.88 - but still a far cry from the $4.81 at which the public offer closed on February 28. But, according to Supreme's chief executive, Brian George, the weakness in his company's share price is more than about profitability. It has as much to do, he says, with "the overall collapse in both Jamaica's and Trinidad's stock market".
But market players would have been watching Supreme's recently released six-month account, for the period ending April 30, the first figures reported since the company's listing at the end of February. Those numbers show after-tax profits of $113.3 million on a $178.1 million increase in gross revenues, to $7.957 billion for the six months, representing the first half of its financial year. This translates to earnings per share for the six-month period of 4.3 cents.
Whilst profit is sharply up from the $13.62 million for the comparable six months in the last financial year, this performance would appear, on an annualised basis, to be likely to be below the projection in Supreme's prospectus of $438.8 million in profits, on $17.46 billion in sales. If achieved, this would translate to earnings per share of 17 cents. NCB Capital Markets now projects the company's future earnings per share to be 11 cents.
PRIVATE PLACEMENT DYNAMICS
Perhaps significantly, Supreme's initial public offer price was itself a 30 per cent premium on the private placement price of $3.70 in Supreme's draft information memorandum dated July 11, 2005. The private placement was fully subscribed by 50 Jamaican and 35 Trinidadian shareholders. But as an NCB Capital Markets briefing document to the private placement shareholders pointed out October - well ahead of Supreme's listing - equity market fundamentals were already deteriorating, with falling stock prices and price earnings ratios.
PRIVATE PLACEMENT STRUCTURE
Another factor pointed to by Mr. George, was the whole issue of how the private placement was structured. Normally private placements have a much longer holding period, so that the investors share the risk with the company as though you were partners in a business. However, he argues that if they had extended the holding period, it is likely that they wouldn't have been able to raise the money.
"It seems that the investment community tends to be a short-term community, and companies with a medium to long-term horizon tend not to be as attractive," Mr George said.
In his view, Supreme Ventures "didn't have the track record to attract institutional, longer term investors". As a result, Supreme has a "disproportionate holding of short term investors with large blocks".
This, Mr George said, has to be the case as, in U.S. dollar terms, roughly US$30 million was raised from the initial 85 private placement shareholders, while of the roughly US$10 million floated in the public offering in January, half was picked up by the lead broker and underwriter NCB Capital Markets. The remaining US$5 million was spread between Supreme's more than 3,000 shareholders. Mr. George believes some of those large blocks are now coming onto a weak stock market, affecting the price.
SUPREME'S PERFORMANCE RELATIVE TO PROJECTIONS
According to Mr. George, Supreme is the first company in recent times to come to the market on the basis of projections. Asked about the accuracy of a key component of the projections, the growth in revenue and profit of Video Lottery Terminals (VLT), Mr. George conceded, with hindsight, he suggested, that they were aggressive but, over time, achievable.
"The projections on VLTs were aggressive in retrospect, not because the market can't deliver those revenues, but because the market said we are not yet ready for that," he said.
From day one, according to Mr. George, Supreme has emphasised technology, leapfrogging what was available in the Jamaican market with innovations, such as the first all wireless network and live draws. However, the market acceptance of video games has not been the same as North America, with Jamaicans preferring more mechanical, real type games. In his view, local players are wedded to their existing games, rejecting some of the technology or themes popular in the U.S. The bottom line is that Supreme "made assumptions about people's response to change that proved not to be true". In addition, their recent World Cup events have shown that there is still a surprising lack of awareness amongst their potential customer base of opportunities for recreational gaming, typified by the customer's response "I didn't know this was here".
CHALLENGES APPARENT
At the time of the Initial Public Offering (IPO), some of these 'start up' challenges were already becoming more apparent, which accounted for the downward revision of Supreme's projections relative to those in the private placement. According to the Board of Director's report included in Supreme's six month unaudited financial statements "Both the pre-tax and after-tax results fell short of expectations due to the below par performance of Prime Sports, arising from significantly lower than anticipated revenue and profit contribution from the Acropolis facility in particular. Arising out of these challenges, we have embarked on a "get well plan" for the Acropolis". According to Mr. George, this will improve the drop "money left in the machine at the end of the day" and restaurant revenues.
In short, Mr. George believes the underperformance relative to the IPO projections for the current financial year has been dominated by the Acropolis, as the other locations such as the Hilton Villagio etc have been performing well. He adds that Supreme have not changed their financial projections for the current year as they still believe in their business model, although, as he puts it, "You recognise the challenges of the market".
With respect to the financial projections for 2007, Mr. George estimates that the 33% reduction in service fees to their technology provider Gtech, which kicks in after the first quarter, will result in more than a couple of hundred million automatically falling to the bottom line.
WALL MART BUSINESS MODEL
Mr. George argues that Jamaica and Trinidad are the only two markets that have a game like 'Cash Pot', which represents 77 per cent of overall lottery revenues, and has an unusually high pay out of 72 per cent, verses the 50-52 per cent of normal lottery business. In essence, Supreme has gone for volume in Jamaica, represented by a high expenditure per person rather than margins. Whilst their business has high cash flow, since they started business they have paid out $37 billion in prizes, and over $2 billion to the CHASE Fund (Cultural, Health, Arts, Sports and Education Fund) not including other taxes.
Supreme derives significant revenues and more importantly profits from commissions on telephone pin codes, a business it "opportunistically" entered. It also has a Hospitality segment e.g. Coral Cliff in Montego Bay is a hotel, restaurant, spa and gym as well as gaming facility, and a Financial Services segment, consisting of the No. 1 Moneygram agent in Jamaica and six Cambio licences.
PROSPECTS FOR GROWTH
Whilst Supreme has ongoing local expansion plans for Maypen and Sav la Mar, projected VLT growth over the next two years may be "more difficult to achieve". They are still working on their overseas expansion plans e.g. Trinidad, Caribbean Lottery, Powerball and Central America (all these weren't in their IPO projections), but Mr. George said he preferred to "Speak to achievements not optimism" at this time. He adds "Since the introduction of Kingfish, it may be coincidental, but we have seen a decline in lottery sales in those communities that have been most impacted by Kingfish". One key issue, according to an NCB capital markets report on Supreme dated January 2006, is illegal gambling, which they estimate accounts for 40 per cent of the overall market. Mr. George believes that the lottery business never recovered completely after the imposition of the September 2003 tax. This tax made the illegal operators significantly more competitive at that time, and this market share has never been fully recovered.
