Odds changing in the local gaming sector?
With Sun International buoyed by Time Square and Tsogo unbundling, the sector seems poised to sail out of the doldrums
The odds could be changing in the local gaming sector, with Sun International strengthening its hand in the key Gauteng market and Tsogo Sun reshuffling its property and casino assets.
This week Sun International released details of an encouraging performance by its new Time Square casino — the flagship development in Pretoria which is critical to the group’s debt reduction plans.
At the same time, Tsogo — which is controlled by Hosken Consolidated Investments — pushed for a value unlock by detailing much-anticipated plans to unbundle and separately list its hotel properties on the JSE.
Sun International shareholders will feel somewhat relieved at the second-half performance of the Time Square precinct in the year to end-December. Time Square got off to a worryingly slow start when it opened in April 2017.
Sun International CEO Anthony Leeming says Time Square has gained market share in the competitive Gauteng casino market, pushing its share to 13.5%.
"Time Square actually recorded market share of over 14% in the second half … and we’ve seen further gains in January."
Revenue from Time Square stretched to almost R1.25bn, making it the fourth-biggest casino in Sun International’s portfolio. Earnings before interest, tax, depreciation and amortisation (ebitda) came in at R305m on a slightly improved margin of 24.2% (last year 22.2%).
In terms of margin, Time Square now operates at a similar margin to that of its bigger Brakpan-based stablemate, Carnival City. Leeming says that while the margin is still too low, there are concerted efforts to push it to about 30%. He estimates this would add an additional R70m-R80m of ebitda. "We don’t think this is far-fetched at all."
The new financial year has also got off to a brisk start, with Sun International reporting gaming growth at Time Square for January and February of 9% and 32% respectively. In the year to end-December, Sun International showed cash flow generated by operations at R4.4bn (previously R3.6bn) with interest repayments at R1.25bn.
Leeming says the debt reduction effort is firmly on track, and believes Sun International could look at resuming dividends in 18 to 24 months.
In June 2018 Sun International raised R1.6bn in a rights offer — an exercise that a number of market watchers believed did not raise enough capital to deal adequately with group debt of over R15bn. At the end of December, Sun International’s borrowings stood at R14.7bn (R15bn in December 2017).
At first glance this may seem to suggest the debt cull is worryingly slow. But it’s worth remembering that borrowings increased in Latin America after a 10-year bond was raised by subsidiary Sun Dreams for the acquisition of a minority’s 20% interest in that company. Debt worries in Latin America are partially placated by the possibility of raising fresh capital for Sun Dreams via a listing on one of the region’s bourses.
A more appropriate gearing measure is that SA debt reduced from R11.4bn at the end of 2017 to R9.2bn, reflecting a combination of strong cash flows and rights offer proceeds.
Sun International is trading within its debt covenant levels. The debt to adjusted ebitda ratio sits at three times (the covenant is 3.5 times), and the interest cover is 3.2 times (covenant: three times).
In terms of firepower, the group has unutilised borrowing facilities of R1.4bn and available cash balances of R938m.
While much of the market focus is on the progress of Time Square, in relation to the debt reduction effort, there is some reassurance that Sun International’s flagship casino, GrandWest in Cape Town, is still spinning solid profits. A breakdown of individual casino performance showed GrandWest increasing revenue 3% to R2.2bn, and ebitda by 2% to R868bn on an enviable margin of 39%.
The group also benefited from a resurgence at its Latin American operations, where revenue, driven mainly by the Monticello casino in Chile, was up 13% to R4.2bn, and ebitda by 11% to R798m.
Sun International’s other trump card is its limited-payout machine (LPM) subsidiary Sun Slots, the star performer in the last financial year with revenue up 10% to R116bn and ebitda up 15% to R287m. Operating profit jumped 34% to R222m.
Tsogo’s restructuring plan could not have come soon enough, with the share stuck in the doldrums for a prolonged period. The proposal will separate out Tsogo Sun Hotels (THL) and leave the group as a pure gaming play, with interests in some of the country’s biggest casinos as well as a formidable collection of electronic bingo terminals, LPMs and sports betting operations.
Aside from its portfolio of hotels across SA, the Seychelles and Abu Dhabi, THL will retain a minority investment in RBH Hospitality Management and the UK-based International Hotel Properties, as well as the 59.2% interest in JSE-listed Hospitality Property Fund.
The proposals represent an alternative to initial plans last year for Tsogo to dispose of its portfolio of seven mixed-use casino properties to Hospitality. This would have meant Tsogo unbundling its entire Hospitality shareholding to Tsogo shareholders.
This proposal was abandoned in November when not enough Tsogo shareholders supported the deal.
However, Tsogo still believes the separation of the gaming and property interests is prudent. The group points out that since acquiring a controlling interest in Hospitality, the hotel division has reached critical mass. With the gaming and hotel divisions operating in distinct markets and servicing different customers, Tsogo says there are limited opportunities to leverage synergies and that the separation provides shareholders with greater investment choice.