Playing for time
I’ll bet even the coolest punter wasn’t able to maintain a poker face when perusing the trading update issued by Sun International last Friday. It was bad enough dealing with the expected loss of 161c-196c/share for the year to end-december — but far worse to hear the admission that the new (and much vaunted) Time Square is not spinning the expected profits.
This new casino in Menlyn, Pretoria, was expected to be one of the most profitable gaming properties in SA. But the trading update indicates that Time Square — which opened last April, with the arena opening in November — generated revenue of R827m and earnings before interest, tax, depreciation and amortisation (Ebitda) of R184m for what was effectively a nine-month trading period. That’s a 22% trading margin. While Time Square may be a new development, that figure is still well off the margin achieved by larger casino properties, which range from 34%-40%.
Sun concedes that Time Square is trading behind expectations and has captured only 13% of the Gauteng gaming market. A significant loss before tax has been incurred on the property.
This, along with depressing dispatches from Sun’s Latin American operations, is not great news for the group . . . not when borrowings have grown to R15bn. (See page 12.)
More than R11bn is linked to the SA balance sheet, with Sun holding about R230m to add finishing touches to Time Square. Though the total debt burden is twice the size of Sun’s market capitalisation, directors have reassured that strong operational cash flow has ensured the company is trading within the debt covenant of four times debt/ebitda. Still, it will take a while to whittle down the debt, and shareholders can be sure dividends won’t flow any time soon.
Sun shareholders have been itching to hear details of a rights issue that will raise R1.5bn. More details will be made available next week when its results are released. Without sounding flippant, will R1.5bn in fresh capital really provide
Sun with enough breathing room, especially after the admissions about a disappointing start at Time Square?
For years I’ve been harping on about restructuring at Sun, which would involve a portfolio reshuffle and the sale of the smaller casino properties. That might have worked a few years ago, but I doubt smaller casinos would fetch a decent price in this dour discretionary spending environment.
Clearly Sun is going to be sweating over the hand it is holding — and desperately hoping its trump card, Grandwest casino in Cape Town, is not dealt a blow in the form of a change to its longstanding exclusivity arrangement.
Family ties
Family controlled businesses can be a bit tricky — especially when it comes to handing over the baton of leadership. Sometimes the second (or third) generation of family leaders doesn’t have the same street smarts or hunger for success as the founding members. Sometimes the founding family member hangs on too long, to the detriment of strategy and operational sharpness.
With this in mind, I didn’t detect much disparaging debate around the appointment of Simone van Straaten as COO of Verimark. She is the daughter of CEO Michael van Straaten, and will also serve as an alternate director to him. This suggests that the chartered accountant, who has held various portfolios at Verimark over the years, is in line to take the reins when her longserving father decides to step down.
Some older readers may recall that another direct retailer, Mashold, did not enjoy great fortunes after the business passed from one generation to another in the 1990s.
Verimark has endured a number of challenges over the years, but it has always delivered on recoveries (replete with damned rewarding dividend declarations). Its shares have appreciated since the appointment, suggesting shareholders have not been spooked by the development.
Time Square is trading behind expectations and has captured only 13% of the Gauteng gaming market