Bet­ting on turn­around — and Time Square

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

In early 2015 the share price of gam­ing and leisure gi­ant Sun In­ter­na­tional was trad­ing above R130, and its ro­bust mar­ket rating re­flected the mar­ket’s con­tention that casino op­er­a­tions were ca­pa­ble of spin­ning good cash flows even in leaner times.

At the time of writ­ing Sun’s share price was drift­ing close to the R50 mark.

Sun’s un­do­ing has less to do with the state of the lo­cal econ­omy, which has crimped dis­cre­tionary spend­ing, than it has to do with Sun’s debt bur­den.

In fact, Sun’s core casino op­er­a­tions in SA are far­ing as well as can be ex­pected in the

tighter trad­ing con­di­tions. GrandWest can still claim to be SA’s best casino op­er­a­tion with the ebitda mar­gin hold­ing close to 40%. The other “big ur­ban” casi­nos — Sibaya (Dur­ban) and Car­ni­val City (Gaut­eng) — are also far­ing sat­is­fac­to­rily.

SunSlots, the lim­ited-pay­out ma­chine busi­ness, has also proved a re­li­able cash gen­er­a­tor. This “mini-casino” is now ef­fec­tively op­er­at­ing as a mid­sized casino with rev­enue and prof­its al­ready well ahead of Car­ni­val City.

Sun’s prob­lem lies in its high lev­els of bor­row­ings. Casino com­pa­nies on the JSE (once there were four when

Peer­mont and Gold Reef Casi­nos & Re­sorts were still listed) have tra­di­tion­ally car­ried debt lev­els markedly higher than other listed coun­ters.

There was al­ways a high de­gree of com­fort with this be­cause casi­nos gen­er­ated such strong cash flows — enough to ser­vice in­ter­est, fund main­te­nance and cap­i­tal ex­pen­di­ture, and pay gen­er­ous div­i­dends.

Sun started stretch­ing its debt lev­els when it pur­sued (what turned out to be) medi­ocre op­por­tu­ni­ties in Latin Amer­ica. The crunch came when it de­cided to shift its Morula casino li­cence near Pre­to­ria to the more vi­brant Men­lyn Main hub, and de­velop the new Time Square casino at a cost of more than R4bn.

While Time Square is one of the big­gest de­vel­op­ments in SA and looks an ex­cep­tional as­set, the tim­ing of the launch co­in­cided with the de­cel­er­a­tion in the lo­cal econ­omy.

In the year to end-De­cem­ber Time Square man­aged R305m in ebitda at a mar­gin of 24% against Sibaya’s R430m at a mar­gin of 33%.

While this com­par­a­tive fig­ures may not gen­er­ate much en­thu­si­asm for Time Square, there are signs that the megaprop­erty could be a very good as­set over the longer term.

There’s no doubt Time Square is dis­rupt­ing the Gaut­eng casino mar­ket — al­beit not quite at the rate ini­tially ex­pected by Sun. Its mar­ket share for the 2018 fi­nan­cial year was 13.5%, though a 14.2% mar­ket share was claimed for the sec­ond half. It seems this mo­men­tum is con­tin­u­ing, with Time Square see­ing en­cour­ag­ing rev­enue gains in the new fi­nan­cial year, with the an­nual re­port show­ing 9% growth in Jan­uary and 32% in Fe­bru­ary.

What is heart­en­ing is the stoic man­ner in which CEO An­thony Leem­ing is han­dling the turn­around ef­fort. With a R1.6bn rights is­sue un­der the belt, Sun has enough breath­ing space to al­low Time Square to confirm its po­ten­tial.

IM reck­ons Sun, with a bet­ter hand in Latin Amer­ica and an ace up its sleeve in Time Square, could be a smart longterm bet at th­ese lev­els.

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