Sun’s out, baby
Sun International is back with a bang — and its shares are still seen as cheap, even with a 40% rally over the past year
● The odds have started to narrow on Sun International regaining its winning streak. The share is up almost 60% over a year 11% over one month alone on “cracker” year-end results.
“We have turned a corner and achieved a lot,” is CEO Anthony Leeming’s rather understated way of putting it.
It’s easy to argue that the easy money has already been made. Brave punters who, three years ago, backed a Covid-hit Sun to cope with its legacy debt load have coined it big time.
It’s worth remembering the share sank as low as 833c at the end of May 2020 when Covid was starting to rage. Debt was as high as R15bn in 2018 after the brief Latin American incursion and the R4bn splurge on the Time Square casino precinct in Pretoria. It is now well below R7bn. Operational cash flows in the just-released results for the year to end-December will help keep the balance sheet well oiled, coming in at R3.2bn on a net basis.
Yet punters are clearly still not willing to bet the house on the gaming sector icon. The share trades on a modest eight multiple based on adjusted headline earnings of 439c a share, and the yield (factoring in the latest 241c a share final dividend) is now close to 10%.
That’s roughly in line with larger gaming rival Tsogo Sun. But Sun’s dogged determination in cutting debt and costs might have resulted in a little more market respect thrown its way.
Yet Rozendal Partners fund manager Paul Whitburn, who made the “cracker” comment on the results, reckons margins at Sun’s key Sibaya and Time Square casinos “looked very good, but have probably peaked”.
A breakdown of Sun’s results shows that Time Square, in Gauteng’s heavily contested market, increased revenue 49% to R1.45bn, with adjusted earnings before interest, tax, depreciation and amortisation (ebitda) coming in 85% higher
Increased revenue: Time Square at R507m. A margin of 35% will assure even the most sceptical punters that Time Square will more than justify its hefty development cost in the longer term.
Leeming concedes that Time Square took a long time to bed down. “We were a bit bloated. We had to gear back costs without losing margin or market share. We have focused on the right areas. Now if we get Montecasino customers visiting us a few times a year then that’s just a bonus.”
The Sibaya casino in Durban was the surprise performer, with a 49% gain in revenue to R1.345bn transformed into a 59% gain in ebitda to R481m. Leeming says Sibaya was “well up on market share”.
The Western Cape gaming market has slightly lagged behind Gauteng and KwaZulu-Natal in recovering from Covid. Still, the GrandWest casino in Cape Town long viewed as Sun’s flagship property had a 43% increase in revenue to R1.83bn and a 54% hike in ebitda to R613m. Leeming believes GrandWest has room to grow. “We will be doing some work on top line and margin.” GrandWest’s margin was 33.5% not a bad achievement if measured against the other casino properties in Sun’s portfolio, but still well off the 40% achieved several years ago.
Sun is throwing a bit of money at GrandWest, which for now still enjoys an extended period of exclusivity in the Cape Town metropole. Leeming says work on the expansion of GrandWest Hotel has started, to increase the rooms from 39 to 103, at a cost of R125m.
“The existing 39-room hotel achieves
Golden Valley casino in Worcester.
A few years ago such a dalliance might have irked shareholders. But with debt down and dividends flowing again the GPI tilt won’t be seen as too distractive or costly
especially if Sun Slots and a revamped GrandWest continue to spin cash.
Overall, group debt (excluding lease liabilities) has dropped from R7.1bn at the end of 2021 to R6.6bn. And after some really hairy times with its lenders, Sun’s debt to ebitda ratio of 1.84 is now well within its banking covenants of 3.25. What’s more, it can tap a further R2.5bn from the banks, which gives Sun a fair bit of headroom for selective dealmaking. Certainly, there’s more than enough leverage to pitch an offer for GPI, in the unlikely event of such an opportunity presenting itself.
For now, Leeming is intent on increasing free cash flows and disciplined capital allocation. The group is also considering share buybacks and special dividends.
Says Leeming: “We need to invest in energy, but there are no large greenfields projects under consideration. We’re aware of the mistakes of the past.
“But there is still lots of value in the share price and we can look to take advantage of this opportunity.”
Sun is targeting a debt-to-adjusted ebitda ratio, excluding acquisitions, of two and a dividend payout ratio of 75% of adjusted headline earnings.
These are compelling statistics though the market’s ongoing caution is easy to understand considering the huge cost of power cuts and the impact that higher interest rates will have on gamblers’ spending habits.
The FM reckons Sun is still worth a flutter at current levels. This is a proper dividend-paying company that is still able to degear its balance sheet. The market value is just 2.6 times the latest adjusted ebitda number of R3.3bn. Surely the market will eventually see this value?
SUNNIER CLIMES
an occupancy of
99% and can only accommodate a limited number of our top-end customers. The additional rooms will ensure that we can fully implement our out-of-town strategy
which, in turn, will impact positively on gaming income.”
But it’s Sun’s alternative gaming thrust that is really paying off.
Sun Slots which specialises in limited-payout machines (LPMs) and electronic bingo terminals (EBTs) bumped up revenue 20% to almost R1.5bn, with ebitda 19% higher at R367m. Then there’s Sun’s sports betting business, SunBet, which had an 86% hike in revenue to R339m transformed into a R42m profit. These businesses combined produce roughly the same revenue as GrandWest, and probably offer Sun the most prudent options for operational expansion. While the margins aren’t as fat, Sun will need to spend far less on their development.
“SunBet is achieving record numbers in terms of revenue and all key indicators, and will deliver another step change this year,” says Leeming even though the LPM and EBT operations are vulnerable to longer hours of load-shedding.
One investment transaction worth noting is Sun’s 24.8% stake in Grand Parade Investments (GPI), which is now under the control of gaming and horse racing enthusiast Greg Bortz.
GPI holds a 30% stake in Sun Slots as well as a 15% stake in GrandWest and the
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Source: Infront
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