Sun International looks like a bargain, but
Sun International’s recently released results for the year ended December 2023 were on all accounts quite pleasing, especially when considering the tough economic environment the group operates in.
A highlight of the results was the record trading numbers in its SunBet online gaming business. Though SunBet is still a relatively small contributor to the group, it is growing rapidly. Growth in this area of the business is exceeding its five-year targets at an income and earnings before interest tax, depreciation and amortisation (ebitda) level. This speedy growth is evident in the improvement of its margin, which more than doubled from about 12.4% to 30% in the 2023 year-end results.
SunBet now contributes R221m to the group’s R3.4bn ebitda. Management estimates that the total online and racing betting market is about R25bn, meaning SunBet has roughly 3.7% market share based on its current gross gaming revenue. When you consider the speed the online gaming market has grown at, especially since Covid, SunBet is now well positioned to increase its market share; the target is 10% by 2028.
Despite good growth from the group’s smaller operators, Sun International still generates the lion’s share of its income from its urban casinos (R6.7bn), resorts and hotels (R3bn), and Sun Slots (R1.5bn).
Here the results are more mixed. Urban casinos reported flat income growth. But resorts and hotels continued to show notable recovery growth — benefiting from domestic travel and inperson conferences bouncing back from virtual ones during the pandemic.
Most of the group’s hotels are showing impressive growth, especially in Cape Town, with The Table Bay Hotel increasing occupancies from 55.7% to 72%. This hotel will be closed in March 2025 for a major refurbishment and in all likelihood will be opened under an international brand with Sun International as the fee-earning managing operator. There seems to be international investment interest in the Cape Town hotel and leisure sector, as seen recently with the Cape Grace sold by Meikles Ltd to Kasada Capital Management and now rebranded as a Fairmont hotel.
Another key highlight for Sun International was Sun City, which smashed previous records at the ebitda level, reporting a 37.5% growth on the previous year’s comparable number to R455m (pre-management fee). If you compare Sun City’s current 66.9% occupancies to the 72.3% achieved in 2017, there is still potential for good growth for the top line.
Sun International exited most of its foreign businesses (South America and rest of Africa) a few years ago and is now predominately a South Africa-focused business. The exiting of the foreign businesses enabled the group to substantially deleverage the balance sheet and total group debt is down 51% since 2019. Debt is still high at R5.7bn but is down from R5.9bn reported in 2022 and is within the group lender’s covenants.
IM has previously written that one of Sun International’s strengths is the ability to convert operating cash flow into free cash flow. This was evident again in the latest results, with about 65.4% of operating cash converted into free cash flow (before expansionary capex but after ongoing maintenance capex).
Sun International is now a simpler domestically focused business. The group is well through its recovery from a period of a highly leveraged balance sheet and the devastating impact of Covid on the hotel and leisure sector. Even so, the share price has not performed well over the past 12 months, despite the group reporting decent results of late and the resumption of dividends.
At the current share price, the group now appears cheap on most valuation metrics.
There may, however, be concern regarding debt levels increasing again after Sun International recently announced the proposed acquisition of Peermont Group. The purchase is expected to be fully debt-funded.
Peermont seems to be a good fit, with many synergies for the group, and is an opportunity to acquire a profitable asset such as Emperors Palace. The acquisition will also help grow SunBet as Peermont also has an online platform, PalaceBet.
The target date for completion of the Peermont deal is the fourth quarter of 2024 as there are still several conditions to be fulfilled.
The group is well through its recovery from a period of a highly leveraged balance sheet and the devastating impact of Covid on the hotel and leisure sector