Sun International’s debt problem

Anthony Leeming, CEO of Sun International since February this year, is a man in a very hot seat. Aside from having to navigate the casino and entertainment company through a tough economic climate, he needs to persuade investors that they should continue to back the management team – because recent results are likely to raise questions about its credibility.

An investment spree, which was mandated by the board and initiated by former CEO Graeme Stephens four years ago, has left the group highly indebted, regardless of how you cut the cake. Net debt sits at about R14 billion balanced by shareholders equity of R2.4 billion.

In the six months to June earnings before interest, tax, depreciation and amortisation (Ebitd) increased by 15% from R1.6 billion to R1.9 billion.

While a high level of gearing was not seen as a problem – because the group is historically highly cash generative – the low growth scenario that it finds itself in is cause for concern as new investments such as Time Square in Pretoria have come on stream, bumping up interest payments and sucking up operating cash flow.

This has left management with a dilemma. The first step was to meet with its lenders to restructure covenant levels. The next step is to consider ways of deleveraging the group’s balance sheet.

While deleveraging includes cost cutting and reducing capital expenditure; it is not certain that this will be enough. The group may have to consider a rights issue, which would be dilutive to existing shareholders.

No interim dividend will be paid as management seeks to preserve cash.

Management has also shifted gears from a growth and investment phase to one of getting ‘back to basics’. “Graeme had a mandate to reinvigorate the business, which saw us dispose of our other African operations, move the Morula gambling license to Menlyn and go through a big retrenchment process in SA,” says Leeming. “Now we are reviewing several aspects of our business model, increasing disciplines across the organisation, driving efficiencies, analysing capital allocation and managing cash flow.”

Also on the table are plans to downscale or exit its businesses in Panama and Colombia, which are not meeting management’s targets.

The results for the six months to June provide evidence of this not so rosy picture. While group revenue increased by 19% from R6.4 billion to R7.6 billion, it was driven by inorganic growth attributable to the inclusion of Sun Dreams (from June 1 2016), Sun Slots (from April 1 2016) and Time Square (from April 1 2017).

Revenue generated by the core South African operations, which contribute 68% to the overall results declined by 1.9% on a comparable basis. Ebitda generated by the South African operations declined by 9%, on a comparable basis. The good news is that Sibaya, Sun City, Sun Slots and the Table Bay managed solid growth in revenue and Ebitda.

In Chile, trading has improved at most of the properties other than Iquique and the flagship Monticello. Iquique has been affected by strike action in the mining industry, while Monticello continues to be impacted due to the relocation of the toll road. However the Chilean economy is showing signs of improvement and the revenue trend is encouraging,

Interest charges rose from R385 million to R592 million due to the inclusion of Sun Dreams for the full period and the opening of Time Square on April 1 2017.

Adjusted headline earnings of R206 million are 29% below the comparable period with adjusted headline earnings per share down 29% to 198 cents.

It is fair to say that Sun has suffered an almost perfect storm in its casino businesses: Aside from the slow economy, internet gambling, including sportsbetting has become more accessible, reducing the need to travel to casinos; the smoking legislation in Chile almost killed Monticello, until the company built a smoking deck; and money laundering legislation has curbed the high rollers – reducing revenue even further.

These are among the many issues that management will have to deal with. Shareholders, it seems, are yet to be convinced.

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