Casual readers may be forgiven for thinking that Jamaican-based Supreme Ventures Ltd is simply that country's lottery operator. In fact, Trinidadian-based investors have a significant stake in that company.
This ownership is held via Zodiac Investments and Holdings Ltd; this is a Trinidad registered company, which holds a 49.95 per cent stake in Intralot Caribbean Ventures Ltd. Intralot Caribbean, which is registered in St Lucia, is the legal owner of 49.9 per cent of Supreme Ventures Ltd. Consequently, Zodiac is the indirect owner of 24.95 per cent of SVL.
Zodiac associate, Nicholas Mouttet resigned from the board of SVL on August 4, 2015, and was replaced by Robert Nader.
According to SVL's press release, Nader is the president and managing partner of Gaming & Entertainment Management-Illinois, LLC (dba GEM) and ARES/ICE-Jamaica. GEM is a licenced terminal operator in Illinois, USA with approximately 20,000 active video lottery gaming terminals in a route system. ARES is active in the Caribbean with a similar route system of terminals.
Helped by lower finance costs and an improved operational performance, SVL delivered a net profit increase of almost 63 per cent for the six-month period to June 2015.
Let us now review its half-year results for that period in some greater detail.
Changes in financial position
Total assets declined from the December 2014 figure of J$5.9 billion to J$5.04 billion as at June 30, 2015.
Long-term assets fell marginally to J$2.88 billion from J$2.91 billion last December. The bulk of this decline was recorded under disposals or write-offs of video lottery terminals, which consumed almost J$77 million. The end of period balance moved to J$89.3 million from J$137.4 million as at last December.Two line items recorded increases over the six-month period; long-term receivables moved from J$406 million to J$484 million while deferred tax assets advanced to J$140 million from J$98 million.
Current assets fell to J$2.16 billion from J$2.99 billion.
All components recorded declines. Inventories contracted to J$37.6 million from J$101.7 million. Meanwhile, trade and other receivables closed at J$589.4 million from the year-end balance of J$664.5 million.
In addition, cash and cash equivalents ended at J$1.53 billion, reflecting a decline of nearly J$700 million from the J$2.23 billion balance last December. Partly accounting for this decline was the almost 200 per cent increase in dividends paid in the half-year; this disbursement moved from less than J$400 million in the 2014 period to J$1.19 billion in the current half-year.
Non-current liabilities declined to zero from less than J$8 million as at December 2014.
Current liabilities also trended downward, moving from J$1.85 billion to J$1.48 billion as at June 2015. The major decline was recorded under prize liabilities, which fell to J$143.2 million from J$599.1 million last December.
On the other hand, and in line with its higher profits, income tax payable rose to J$213.3 million from J$33.2 million last year-end.
Shareholders' equity
Stockholders' equity contracted to J$3.56 billion from J$4.05 billion.
The major change was in the retained earnings component, which fell to J$1.53 billion from J$2.02 billion. This reduction was consistent as the current dividends to shareholders of J$1.19 billion surpassed the current period's profit of J$705 million.
With 2,637,254,926 shares outstanding, each share had a book value of J$1.35 (December 2014: J$1.53).
Revenues and profits
Half-year revenues rose by 9.9 per cent to J$22.18 billion from 2014 half-year of J$20.19 billion. The major contributors to this increase were lottery and pin code revenues.
Direct expenses rose by 8.3 per cent to J$19.74 billion from J$18.23 billion. This lower rate of change helped SVL produce a gross profit of J$2.43 billion; this result represented an improvement of 24.5 per cent over the J$1.95 billion reported from the 2014 period.
Operating expenses, at J$1.47 billion, were 6 per cent higher than the J$1.39 billion incurred for the six months to June 2014.
These changes allowed SVL to register profit from operations of J$961.6 million; this represented an improvement of J$394.2 million or 69.5 per cent over the 2014 figure of J$567.4 million.
In line with its lower cash balances, interest income declined to J$35 million from J$40.6 million in the 2014 period.
Net foreign exchange gains rose to J$3.7 million from J$1.1 million.
Finance costs fell to J$2.9 million from J$9.9 million in the first half of 2014. SVL has now reduced its debts to a nominal figure of J$7.2 million.
After including other gains of J$17.9 million (2014: zero), pre-tax profit registered at J$1.02 billion; this was 69.5 per cent greater than the comparative 2014 result of J$599.2 million.
Tax allocation rose from J$166.3 million to the current period's J$310.3 million. This resulted in SVL reporting an after-tax profit of J$705 million versus J$432.9 million for the first six months of 2014, reflecting a 62.9 per cent improvement.
This result translated into EPS of J$0.27 (2014: J$0.16).
Segment results
The two major segments that generate the most profit are lottery and pin codes.
Lottery revenues rose by 7.7 per cent while its profit contribution soared by 45.2 per cent. The robust improvement in profit can be attributed to a reconfiguration of the Cash Pot game; previously, this game design allowed payments in excess of the designed liability of 72.22 per cent. During this period, the highest jackpot payment of J$395 million (almost TT$22 million) was hit on May 27, 2015.
Pin code revenues advanced by 33 per cent but its profit contribution declined by almost 35 per cent. Since November 1, 2014, this activity has been conducted by its subsidiary, Big 'A' Track 2003 Ltd. The lower profitability may be attributable to one-off transitional costs.
The sports betting segment initiated a rebranding and upgrading exercise which is expected to allow it to improve its contribution to the bottom line.
Dividends, share price and prospects
In the first half of 2015 SVL paid dividends totalling J$0.45. On March 20, a dividend of J$0.27 was disbursed and this was followed on May 27 by a payment of J$0.18.
On September 2, 2015, shareholders received a dividend of J$0.10. A board meeting, scheduled for November 5, 2015, will also consider the payment of another dividend, probably an amount of J$0.10 in early December.It seems very likely that the total dividend for calendar 2015 could then be J$0.65.
SVL's share price closed at J$1.82 on January 5, 2015. From that base, the price rose steadily, barring occasional pull-backs. On May 11, 2015, it closed at J$3.93 and then peaked at J$4.09 on September 7, 2015. It was recently traded at J$3.65.
Using a projected calendar dividend of J$0.65, the recent price of J$3.65 gives investors an extremely high yield of 17.8 per cent.
Can this level of dividends be sustained? In the short-term, the answer is probably yes.
Even if we project a full year EPS of J$0.60, the likely dividend pay-out will probably exceed its current earnings; this can easily be funded by using some of its retained earnings.
We might further project a year-end share price of J$4.00. If that price were attained, then the capital appreciation for the year would be J$2.18. Combining this appreciation with the anticipated dividend of J$0.65 we get a total gain of J$2.83 over the one-year period.
When that gain is related to the opening price of J$1.82, we would derive an annual gain (dividend and capital appreciation) of 155.5 per cent. For external investors, even if the currency might have depreciated marginally, that is a very respectable one-year return!
For a company that has no debt, has built up substantial retained earnings and essentially operates on a cash basis, this strategy can work for a long time. This arrangement keeps investors interested and helps support the share price.
Any future major capital projects can probably be easily funded by its international partners and significant shareholders, Intralot/Zodiac (49.9 per cent owner) and GTECH (0.603 per cent owner), at favourable rates and terms.
SVL's operations might remind us of how the local companies Witco and Unilever function.
Pending litigation
SVL continues to be a defendant in two cases brought against it by some of its founders. These matters involve the forward sale of shares in SVL and the claimants are Epsilon Global Equities and Talisman Capital Alternative Investment Fund joined with EGE Ltd.
Both matters were previously settled in the company's favour in the Jamaican courts; they were subsequently moved to and re-tried in the Florida (USA) courts, where SVL also won dismissals. Currently, both matters are under appeal and final decisions (expected in SVL's favour) should be forthcoming before the end of the year.