Sun expects dividends to shine again

Resort hotel and casino destination chain Sun International, now carrying a lighter debt load after a large rights issue, reckons dividends could be resumed within two years.

This week, Sun completed its R1.6bn rights issue, an exercise that saw a hefty oversubscription from shareholders. Total applications were close to R3bn.

There has been debate about whether Sun, which had a total debt burden of about R15bn, was raising enough capital in the rights issue.

The group forked out more than R1bn in interest in the year to end-December.

Sun has traditionally been a strong cash generator, but a major operational worry is the underwhelming trading at Sun’s new Time Square casino in Menlyn. To compound matters, casino groups might soon have to contend with a looming smoking ban, which could hinder gaming activities.

Sun CEO Anthony Lemming said the rights issue would bring debt levels down to about three times ebitda (earnings before interest, tax, depreciation and amortisation). “We think we are still a little overgeared at these levels. But if we have another good year of cash flows, the debt levels will drop to around two times ebitda,” Lemming said.

He said he believed if debtreduction plans remained on track Sun might be able to consider resuming dividends within two years.

“The rights issue gives management the time and headroom needed to focus on the business and strategy execution.”

But Electus Fund Managers equity analyst Damon Buss said Sun was unnecessarily slow in

R1.6bn the infusion of fresh capital from Sun’s oversubscribed rights issue

undertaking the rights offer, believing Time Square would produce enough cash to de-gear the group and not breach debt covenants. This was always a risky bet as rival Tsogo Sun had issued much lower forecasts for Time Square, he said.

Buss also reckoned R1.6bn was not enough of an infusion of fresh capital when considering the underperformance of Time Square, weak gaming growth and the capital requirements in terms of maintaining casino properties.

Asked about current trading at the Time Square casino, Lemming said footfalls had improved and trading levels had shown an improvement.

“There’s still a long way to go at Time Square … but the property is cash positive on a pre-funding basis,” he said.

Time Square was mooted as a game changer for Sun, which is underrepresented in the Gauteng casino sector.

But the R4bn development has not yet snagged as much market share from rival casino groups Tsogo Sun and Peermont Global as was initially predicted by Sun.

R1bn the amount the group paid in interest