Gamble on Sun International
Gaming and leisure giant Sun International’s share price — at a 12-month low at the time of writing — suggests the market is still a little hesitant to bet on a big payout over the longer term.
But these are the lengthening odds that can pay out handsomely in the long term for those poker-faced investors who back the addictive appeal of casinos to keep punters coming back even in a harsh economic climate.
The local casino sector certainly has its challenges. There is considerably less discretionary spending sloshing around than three years ago, which means the entertainment side of the casino business can suffer a decline in footfall. At the same time traditional casinos are facing increased competition from limited payout machine operators and, probably more worryingly, electronic bingo terminals (which can be regarded as mini-casinos).
On top of that Sun International has suffered two setbacks in its strategic endeavours in the highly concentrated South African casino market.
An attempt to diplomatically “divvy up” the Western Cape casino market with rival Tsogo Sun — a development that would have precluded costly hostilities should Cape Town be allowed to host a second casino licence — was thwarted by the competition authorities.
More recently these authorities frowned on a proposed takeover of rival Peermont — a deal that would considerably strengthen Sun International’s hand in the competitive Gauteng market.
Sun International is still fighting to find approval for the Peermont deal, but there is a potential fallout if the deal flounders. If the companies walk away from the proposed deal, Sun International owes Peermont — which was initially vehemently opposed to Sun International shifting its moribund Morula Sun casino to a more vibrant Menlyn — a considerable “break fee” reckoned to be between R700m and R900m.
At current levels Sun International’s share price appears to have factored in the bad news. But the big question is whether the share will continue to trundle along at these depressed levels. Or will there be a trigger action that prompts the market to re-evaluate the odds on Sun International resuming winning form?
The overriding sense of gloom for the gaming and leisure sector appears to be clouding the good work done by new Sun International boss Graeme Stephens. He has cut through the corporate clutter that perhaps harked back generations, most notably a R230m restructuring exercise that reduced head counts by 1,500 and should spur annual savings of R250m.
Stephens has also given Sun International a cleaner corporate structure, offloading control of several African properties to the international hotel operator Minor International.
This allows Sun to retain the valuable cash flows earned for managing the casino operations attached to certain African hotels, but at the same time to reduce its maintenance and upgrading expenditure on the properties.
In terms of corporate restructuring, far more intriguing was Sun International’s decision to load its fledgling Latin American casino interests (in Chile, Panama and Colombia) into rival casino group Dreams, which owns several properties in Chile and has a foothold in Peru.
Sun International will hold 55% of the enlarged business but the management responsibility will be in the hands of the Dreams team. The deal greatly enhances Sun International’s global ambitions as the merged entity has the critical mass needed to expand and fund new projects and acquisitions.
The combined business should be capable of generating Ebitda (earnings before interest, tax, depreciation and amortisation) of more than US$100m in the year to end December 2015 from its 13 Latin American gaming licences — adding a meaningful rand hedge element to Sun International’s earnings.
The initial thrust in Dreams will be a dominant position in the Latin American gaming market, but with no management responsibility on that continent. Sun International is free to scout for selected opportunities elsewhere in the world as well as bolster and build positions in alternative gaming formats like limited payout machines, electronic bingo, online casinos and sports betting.
One possible value-unlocking initiative could also transpire if the Peermont deal is clinched. Part of the effort to appease competition authorities are strong indications that Sun International would look at disposing of smaller casino operations in the combined Sun International/Peermont entity.
There are several options available to the company. Individual casinos — bear in mind that the profit margins can vary greatly — can be sold off, which would in a small way help alleviate concerns about the concentration of ownership in the local casino industry.
Otherwise Sun International could bundle together a portfolio of smaller properties that could be sold off or unbundled into a separate listing linked to new empowerment ownership.
Definitely worth a flutter.
Sun International is free to scout for selected opportunities elsewhere in the world
Share: JSE share code: Share price: Average volume traded: SUN INTERNATIONAL SUI R78 7m/month