Fat­ter bal­ance sheet in leaner times

Finweek English Edition - - Companies & Markets - …FROM THE AN­NUAL RE­PORT MARC HASEN­FUSS

SUN IN­TER­NA­TIONAL THE STAND-OUT PARA­GRAPH in the Sun In­ter­na­tional an­nual re­port de­tails a hefty R2,6bn in­crease in the gam­ing gi­ant’s bor­row­ings to more than R6bn. The in­crease is mainly due to Sun In­ter­na­tional’s pro rata share buy­back – com­pleted in mid-2007 – when the group ac­quired 16m shares at an av­er­age price of R145,35/share.

It’s un­fair – even cruel – to point out that for the same price (around R2,3bn) Sun In­ter­na­tional could have to­day bought back 27m shares at cur­rent prices (8500c at the time of writ­ing). But there’s no dis­put­ing the share buy­back ex­er­cise – with the ben­e­fit of hind­sight – was a costly ex­er­cise that may well im­pinge on Sun In­ter­na­tional’s in­come state­ment in its 2009 fi­nan­cial year. Un­der nor­mal cir­cum­stances an in­crease in gear­ing for Sun In­ter­na­tional – which gen­er­ated net cash of R2,8bn in the year to end-June 2008 – wouldn’t be a ma­jor worry.

Its an­nual re­port shows Sun In­ter­na­tional has bor­row­ing fa­cil­i­ties of R7,1bn – mean­ing there’s still around R1bn spare ca­pac­ity. It also notes ad­di­tional fa­cil­i­ties are in place for Sun In­ter­na­tional’s Chile project and fund­ing needed for its Nige­rian project is be­ing ne­go­ti­ated. Direc­tors re­as­sure fa­cil­i­ties and cash flows from op­er­a­tions are in ex­cess of the group’s fund­ing re­quire­ments, which in­clude cap­i­tal ex­pen­di­ture of R1bn needed for Chile and R1,2bn for Nige­ria.

The ques­tion, of course, is whether Sun In­ter­na­tional can still gen­er­ate great cash flows as SA’s econ­omy feels the shock­waves from in­ter­na­tional eco­nomic tur­moil. The an­nual re­port al­ready shows its EBITDA/in­ter­est cover ra­tio drop­ping to less than six times from well over 10 times in fi­nan­cial 2006 and 2007.

The release of Sun In­ter­na­tional’s an­nual re­port for­tu­nately co­in­cided with the release of a busi­ness up­date to share­hold­ers. The group’s EBITDA for the first quar­ter to end-Septem­ber was down 1% to R623m, with its trad­ing mar­gin slip­ping to 33,5% (from 35%).

The per­for­mance seems sat­is­fac­tory un­der the cir­cum­stances. But you won­der how Sun In­ter­na­tional will hold up in what looks like a far trick­ier quar­ter – where there seems a dis­tinct pos­si­bil­ity that hol­i­day spending over De­cem­ber may be sig­nif­i­cantly cur­tailed. The busi­ness up­date re­it­er­ates that trad­ing con­di­tions for the group’s SA casi­nos will re­main chal­leng­ing for the re­main­der of its first half.

You might then be tempted to look for a dou­ble mean­ing in the sen­ti­ments ex­pressed by chair­man Buddy Haw­ton about prospects in his an­nual re­view. Haw­ton notes: “It re­mains the in­ten­tion of the group to con­tinue in­creas­ing the div­i­dends payable to share­hold­ers at a rate ahead of earn­ings per share growth.” Hope­fully, that state­ment will stand even if Sun In­ter­na­tional doesn’t reg­is­ter earn­ings growth in fi­nan­cial 2009. But then again, that share buy­back will help…

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