Sin stocks

Devil’s in the de­tail

Financial Mail - Investors Monthly - - Front Page - Marc Hasenfuss

SUN IN­TER­NA­TIONAL Share price: R69.22

JSE code: SUI

BUY SHARES OF GAM­ING GI­ANT SUN In­ter­na­tional were lan­guish­ing at a 12-month low at the time of writ­ing. The trick is for Sun to ease a heavy debt bur­den, in­curred af­ter in­vest­ment in South Amer­ica, ad­di­tional ex­po­sure to lim­ited pay­out ma­chines and new de­vel­op­ments and re­vamps in SA.

At the end of De­cem­ber Sun’s debt topped R14.5bn, and di­rec­tors opted to skip the div­i­dend. What was re­as­sur­ing in the most re­cent set of re­sults, how­ever, was that op­er­a­tional cash flow re­mained strong — at around R2.4bn be­fore work­ing cap­i­tal changes — for the six months.

The change of for­tunes could be trig­gered by the re­cent open­ing of the new Time Square casino in Men­lyn, Pre­to­ria. It will be the sec­ond-big­gest casino in SA af­ter Sun’s GrandWest prop­erty in Cape Town, and is ex­pected to be pow­er­ful cash spin­ner. The mar­ket has been prepped to ex­pect an con­tri­bu­tion of around R750m in earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion from it, once all fa­cil­i­ties are open in March next year.

It’s a game changer for Sun, and the con­tri­bu­tions from Time Square will hope­fully co­in­cide with stronger profit from Sun’s Latin Amer­i­can sub­sidiary, Dreams. What might also un­lock value over the medium term is that Sun is opt­ing to sell its smaller casi­nos. This would markedly cull debt without sub­tract­ing too much from op­er­a­tional cash flows.

BRI­TISH AMER­I­CAN TO­BACCO Share price: R917.00

JSE code: BTI

HOLD THIS TO­BACCO GI­ANT LOOKS ca­pa­ble of gen­er­at­ing smoul­der­ing re­turns for many years to come. A re­cent state­ment by chair­man Richard Bur­rows high­lights that BAT’s over­all share in key mar­kets in­creased by 50 ba­sis points.

More im­por­tantly, Bur­rows said that sig­nif­i­cant progress was made in the nextgen­er­a­tion prod­ucts (NGPs) cat­e­gory, with BAT now ranked one of the largest vapour busi­nesses in the world (out­side the US).

Bur­rows reck­oned BAT could dou­ble its mar­ket foot­print in 2017, in­creas­ing its pres­ence from 10 to 20 mar­kets in re­gions such as Asia, East­ern Europe, the Mid­dle East and the Amer­i­cas. The plan is to dou­ble the mar­ket foot­print again in 2018, which un­der­lines longer-term plans for BAT to lead the NGP cat­e­gory world­wide.

It is re­as­sur­ing that the main at­tributes of the busi­ness — solid mar­gins through brand­ing, pric­ing power and strong cash flows — re­main firmly in­tact. One key change that re­in­forces IM’s de­ci­sion to keep a HOLD rec­om­men­da­tion on BAT is the re­cent de­ci­sion to switch to quar­terly div­i­dend pay­ments. It speaks vol­umes about ex­ec­u­tives’ con­fi­dence in con­sis­tent op­er­a­tional cash flows, and is hugely con­ve­nient for in­come-de­pen­dant share­hold­ers. BAT’s pol­icy to pay div­i­dends of 65% of long-term sus­tain­able earn­ings (cal­cu­lated with ref­er­ence to the ad­justed di­luted earn­ings) re­mains in place.

DISTELL Share price: R134.79

JSE code: DST


di­ver­si­fied liquor con­glom­er­ate dropped about 15% in the past six months, with sen­ti­ment leak­ing no­tice­ably af­ter ma­jor share­holder Rem­gro opted not to buy SABMiller’s 26.42% stake in the com­pany.

Much to the sur­prise of most mar­ket watch­ers, the Pub­lic In­vest­ment Corp — which man­ages tril­lions of rands of sav­ings on be­half of state em­ploy­ees — emerged as an in­flu­en­tial share­holder at Distell. It’s hardly a neg­a­tive de­vel­op­ment, but there ap­pears to be a per­cep­tion that cor­po­rate ac­tion might be more spir­ited with Rem­gro as out­right con­trol­ling share­holder.

Distell has been show­ing some op­er­a­tional strain, with a re­newed chal­lenge in its key cider mar­ket from beer, new cider play­ers and oth­ers. African mar­kets have also proved tough of late.

The cheery spot has been Distell’s suc­cess­ful mar­ket­ing of af­ford­able wine brand 4th Street.

IM’s gut feel is that sen­ti­ment will start for­ti­fy­ing for Distell only if plans to build a global liquor busi­ness are ac­cel­er­ated. But in­ter­na­tional liquor niches are not easy to come by at rea­son­able prices.

This might mean a pro­longed pe­riod of in­tro­spec­tion for Distell, punc­tu­ated by smaller “bou­tique” brand ac­qui­si­tions.

In short, there may be a bet­ter time to buy a round of Distell shares.

Pic­tures: iSTOCK

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