Fatter balance sheet in leaner times
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…