Investors not afraid of betting when the odds seem stacked against them might be tempted to have a flutter on the local gaming sector. In particular, they may want to look at the two large casino companies that have lately endured some serious share-price pressure.

The share price of Tsogo Sun, SA’s largest casino group, has drifted down 28% since peaking at a R31 high in August last year. Sun International, which is carrying a heavy debt load after revamping its local casino portfolio and increasing its exposure to the Latin American gaming sector, has seen its share price crumble by more than 50% over three years.

Sun International is trading at levels last seen in 2005, and IM estimates a normalised forward earnings multiple of less than 10 times. Though Tsogo’s share price has, relatively speaking, fared far better than Sun’s, the market rating is still a modest trailing earnings multiple of 10 times. Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, notes that casino companies’ very high fixed costs mean that the onset of low or even negative casino revenue growth can have a huge negative impact on profits. "So far relatively good cost control from both casino groups has resulted in only small declines in operating profit. The challenge for casinos will be to continue to manage costs while top-line growth remains weak."Van Vlaanderen points out that both companies do offset a weaker SA outlook with Tsogo Sun generating around 30% of Ebitda from hotels (SA, Africa and abroad) and Sun International generating a similar proportion of profits from its Latin American ...

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