Sun International: still an ace short of a royal flush
Sun International is whittling away at its debt and is growing margins, but the shareholder jackpot is still a way off
Judging by share price movements before and after the release of gaming and leisure group Sun International’s* interim results, it seems the market might be refiguring the odds on the group’s R4bn bet on Time Square Casino in Pretoria.
Near the end of August, Sun’s shares had drifted below R37, but they stretched as high as R45 following the release of the six-month numbers to end-June.
Sun certainly is not out of the woods in terms of its debt load, which required a pressure-easing R1.6bn rights issue recently. Almost R500m of profits was chewed up by interest in the interim period.
Total debt has been whittled down to R13.9bn from R14.7bn, with Sun’s net cash flow in the period topping R2.3bn. The bulk of that debt — R8.8bn to be exact — is attached to Sun’s SA operations, of which the Time Square development, which opened in April 2017, alone carries R5.1bn.
Initially, there was considerable fretting that Sun had overcapitalised by establishing the sprawling Time Square in the competitive Gauteng gaming market, where the group already has a casino in the form of Carnival City in Brakpan.
The premise was that cash flows from Time Square were unlikely to service the additional borrowings incurred on the development. The development, unfortunately, also coincided with an intensified squeeze on consumer spending.
The fact that Sun has needed to hold back on dividends does suggest that previous management was probably overoptimistic about Time Square.
Anthony Leeming, the former CFO appointed CEO in 2016, has dealt stoically and methodically with Sun’s predicament.
Last year a good number of punters were wagering on Leeming having to raise another tranche of fresh capital to reinforce Sun’s balance sheet. Those voices are more muted now, and more optimistic punters might argue that Sun’s fortunes are slowly turning.
The interim numbers show Time Square notching up income of R671m and adjusted earnings before interest, tax, depreciation, amortisation and rentals (ebitdar) of R203m.
Time Square’s ebitdar margin is not half bad at 30%, well ahead of Carnival City’s 25%. Hopefully, the margin can be shifted up further, perhaps close to the 35% achieved by Sun’s Durban-based Sibaya Casino, which is of a similar size to Time Square in revenue terms.
Probably most encouraging is the fact that margins were built up, as was market share — to 14.6% from the 13.5% reported at financial year-end 2018.
In fact, market share topped 17% for the five weeks after the close of the interim period, which should help income growth in the second half. "If we can hold onto our market share gains it will bode well," says Leeming.
Paul Whitburn, a portfolio manager at Rozendal Capital, says while market share gains by Time Square are positive, Sun will still be challenged to eke out attractive returns on the large sum of capital invested. He says initial expectations were for Time Square to generate as much as R800m in ebitdar. "They definitely won’t be getting there in the next year or two. But Time Square is clearly hurting the other casinos in Gauteng, and it will be interesting to see if the market share gains continue or whether Time Square’s disruptive influence settles down."
The encouraging signs of traction at Time Square are not the only good news at Sun. Alternative gaming group Sun Slots — where Sun is set to up its 70% stake to 100% — continues to spin cash.
Sun Slots generated revenue of R637m and ebitdar of R157m. This reflects a margin of nearly 25%, roughly the equivalent of what was achieved by Carnival City and markedly better than the margins at smaller properties like the Boardwalk (Port Elizabeth), Flamingo (Kimberley) and Golden Valley (Worcester).
Sports betting operator SunBet also hit its straps, earning R20m off revenue of R69m.
And Sun’s bigger casino properties are holding their own. GrandWest, which still has a monopoly in the Cape Town market, is running close to a 40% margin — showing R398m in ebitdar from revenue of just over R1bn.
Sibaya increased revenue 6% to R667m and ebitdar 9% to R234m.
Surprisingly, the smaller urban casinos, which include Meropa (Polokwane), Windmill (Bloemfontein), Flamingo and Golden Valley, collectively showed only a slight decrease in income.
If the chips are stacked up at Sun, it could be argued that the group has a handful of assets capable of sustained strong cash flow at decent margins.
Sun’s strongest hand would be GrandWest, Time Square, Sibaya, Sun Slots (including SunBet) and the soon-to-be-listed casino operations in Latin America.
The FM again has to ponder whether restructuring Sun into a more concentrated collection around its five strongest assets would make sense.
Obviously it’s easier said than done, but there must be some attraction in bundling the smaller or less profitable (to include Carnival City and Sun City in the mix) casino and hotel properties into a separate entity. Such an entity would generate fairly solid cash flows — given that the collective ebitdar would sit north of R400m — making it a very interesting prospect to the market. Obviously some individual properties, like Sun City, might appeal to buyers on a standalone basis.
Whitburn agrees there is merit in Sun holding a smaller hand of top-performing casinos, but reckons assets like Sun City — which requires serious capital spend every year — may not be easily marketable. "While some smaller casinos do well on a return on invested capital basis, who will buy them … and at what price?"
Gut feel is that Leeming won’t need to rush into any drastic action just yet. Debt is being chipped away, and Sun still remains well within its debt covenants. In terms of balance sheet flexibility, Leeming notes that Sun still has unutilised borrowing facilities of R1.3bn and available cash balances of R429m from continuing operations.
That doesn’t mean a resumption of dividends anytime soon, especially as Sun needs to fund the buyout of minority shareholdings in Sun Slots and Sibaya.
With no spark in economic activity likely, it is difficult to see Sun’s shares rallying with too much vigour in the short term. The FM reckons investors might do well to watch for weakness, looking to snap up shares if Sun happens to drift under R40 again.
* The writer holds shares in Sun International