Devil’s in the detail
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
SELL THE SHARE PRICE OF THIS WELL
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.