Proactive management will help Sun rise again

Sun International has operations in Africa and Latin America, so the interim results (for the six months to June 2020) gives a good indication of the impact of Covid-19 on the leisure sector, domestically and globally. Group income fell 56% to R3.7bn with an operating loss of R706m, as operations across the portfolio suffered from closures for almost half the period.

In times like these, shareholders need proactive management teams and Sun International’s team proved to be just that by reviewing and slashing costs and more actively managing working capital.

The group’s operating cost profile in its interim results presentation shows how costs in the SA business were slashed to R184m in April, R131m in May and R108m in June, from R439m for March. A similar drop to its Latin American (Latam) business.

Cost initiatives include savings on labour, head office costs and in marketing and technology. It will also unfortunately need to embark on a retrenchment process affecting 2,300 workers, which could save an estimated R280m.

An easing in Covid restrictions and interprovincial travel will enable the group to ramp up the opening of its casinos and hotels. Revenue should increase and variable costs will rise — but some cost-cutting initiatives are likely to remain.

The group is taking steps to reduce debt and create liquidity and the recent successful R1.2bn rights issue, together with the sale of the remaining equity in its Latam business, Sun Dreams, will help.

Sun International was in a dispute with its Latin American partner Pacifico after failing to close a deal where Pacifico was to acquire 14.94% of Sun Dreams. Subject to conditions, Pacifico will acquire Sun Latam’s remaining 50% of Sun Dreams. So Pacifico will acquire Sun Latam’s 64.94% equity interest in Sun Dreams for $160m, and future earn-outs.

Sun International will use about R637m of the sales proceeds to settle offshore debt in Sun Chile with the rest (bar $15m in escrow in Chile for settlement of any future tax claims) repatriated to SA to increase liquidity, to reduce ingroup debt.

Lenders have also given the group breathing space, with measures including the suspension of debt repayments, waiver of covenant measures and debt rescheduling.

The business was already

investing in alternative gaming, such as sports betting and online gambling, prior to Covid-19. Though small in the revenue mix, an acceleration of this strategy could provide growth.

IM reckons that unless there’s a second hard lockdown, the worst is behind Sun. This is reflected in monthly revenue from gaming; in July only 39% of the revenue for the prior year, but 56% in August. With a lifting of restrictions, as well as the re-opening of destinations such as Sun City, trading will likely improve … albeit from a low base.

Though Sun management has acted proactively, debt levels are still too high and many risks remain.

A serious non-Covid related risk is a potential change to GrandWest’s exclusivity zone. The recent draft amendments to Western Cape legislation on gambling and racing would mean, if implemented, that GrandWest’s zone would be reduced from 75km to 25km. Sun has submitted comments on the bill, but if the draft is passed the result could be the entrance of a competitor uncomfortably close to the important GrandWest asset.

Despite the risks, Sun’s share price has been under strain this year and may now have reached levels where investors with some risk appetite may consider placing money on the table.