Betting on turnaround — and Time Square

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.