Sun International dividends put off
• Group hopes to resume payouts within two and a half years after first tackling debt
Heavily geared gaming group Sun International is hoping to resume dividends within two-andhalf years after borrowings are culled to more comfortable levels. The share price of Sun, which last paid a dividend in September 2016, was up strongly after the release of the results for the six months to June and finished the day 7.1% higher at R57.30.
Heavily geared gaming group Sun International is hoping to resume dividends within two and a half years after borrowings are culled to more comfortable levels.
Shares in Sun International, which last paid a dividend in mid-September 2016, were up strongly after the release of the results for the six months to June and finished the day 7.1% higher at R57.30, the biggest one-day rise in more than two years.
The results showed borrowings at R15bn, which is more than double the group’s R7.3bn market capitalisation on the JSE.
Despite their sizeable borrowings, gaming groups have traditionally been dependable dividend payers, due to strong operational cash flows.
Sun International CEO Anthony Leeming said the group’s balance sheet was resilient and could handle further economic downturns. He said the group was aiming to cut debt to 2.5 times earnings before interest, tax, depreciation and amortisation (ebitda).
“We think dividends are about two and a half years off.” Leeming noted a recent rights issue of R1.6bn would save R75m in interest paid in the second half of the financial year.
The interim period saw the group fork out a hefty R600m in net interest. SA debt reduced from R11.4bn at the end of December 2017 to R9.7bn. Debt in the Latin American operations, however, increased after the raising of a 10-year bond to increase the stake in the Sun Dreams subsidiary.
Leeming said the group’s balance sheet remained resilient and operations, which include GrandWest casino in Cape Town, continued to generate strong cash flows. The interim results showed cash generated by operations at R2bn and net cash flows of R1.6bn. A chunk of Sun International’s debt stems from the new Time Square casino near Pretoria, which cost more than R4bn to develop.
The group has faced widespread criticism that it over-capitalised on Time Square, which has underperformed since opening in April 2017. In the interim, Time Square generated revenue of R582m and ebitda of R130m. This meant a margin of 22%, significantly below the group’s larger casino complexes such as GrandWest, Carnival City (Gauteng) and Sibaya in Durban.
Casino sources predicted Time Square’s revenue would reach about R1.2bn for the full financial year.
Leeming said though Time Square had experienced a significant increase in activity, casino income for April 2018 to June 2018 remained in line with the corresponding period in 2017.
He said this was partly due to low win percentages and high income experienced in April 2017 (when the casino opened).
But Leeming noted that despite the low win, casino income in July and August was up 32% and 33%, respectively.
He disclosed that Time Square’s market share was pegged at 13% — though this had picked up in recent months.
“We are encouraged by the positive feedback we have received on the hotel and Time Square in general and are confident that it will continue to gain market share and grow income and ebitda.”
The bottom line, however, is that the group’s share of losses from Time Square ballooned to R182m (previously R63m).
Leeming said ensuring Time Square serviced its interest bill was critical. “We need Time Square to produce ebitda of R450m-R500m to service the interest bill, which should be in the next two years.”
Lentus Asset Management chief investment officer Nic Norman-Smith said the glimmer of hope in the interim results was the slightly improved trading at Time Square. He said it was not the best time to bring such a large development to market. “Time Square is a massive investment … the last thing Sun want is a protracted downturn in consumer spending.”