Southern Sun posts healthy results, but gaming is where it’s at

25 May 2023

The hotel group won’t declare a final dividend until operations recover and the power crisis is under control, but its gaming subsidiary Tsogo is soaring.

Leisure travel is almost fully recovered for Southern Sun as the hotel operator posted healthy results, overshadowed somewhat by its Tsogo Sun subsidiary, proving that when times are tough, punters bet on the house.

The hospitality group, which has a market cap on the JSE of R6.24-billion, says trading levels in its properties are climbing, particularly in the second half of the financial year, as local and international travel normalised and demand for conferencing and events increased.

All regions performed well and exceeded pre-Covid levels – except for the Sandton Convention Centre, reflecting the delayed recovery in corporate transient travel exacerbated by many companies in the node still operating a hybrid remote-working model.

It has significantly reduced debt levels, which means reductions in capacity – over the short- to medium-term – will no longer pose an “existential threat” to the group.

Southern Sun’s adjusted headline profit for the year ending 31 March 2023 was R443-million, with net debt reduced to R1.3-billion.

Its total revenue (including discontinued operations) for the year was R5.1-billion, which is up 87.6% on FY22 and 13.5% above FY20 revenue of R4.5-billion.

It also generated Ebitdar (earnings before interest, taxes, depreciation, amortisation and restructuring or rent costs), including discontinued operations) of R1.4-billion, which is significantly higher than FY22 and a growth of 6.2% on FY20 of R1.35-billion.

The Ebitdar margin of 28.3% is well above the prior year margin of 21.8%, but below FY20 due to the consolidation of hotels previously treated as investment properties.

It had net cash and cash equivalents net of bank overdrafts of R653-million (FY22: R66-million), R1.96-billion of gross interest-bearing debt and access to R1-billion in undrawn facilities.

It has grown average room rates by 18.3% and 16.3% from FY22 and FY20, respectively.

This performance, it says, is particularly encouraging considering group occupancy of 51.5% (30.6% last year) for the FY23 year is well below the 59.3% achieved in FY20.

Through managing cash flow and liquidity closely and maintaining cost efficiencies, it is now in a position where it can focus on various refurbishment projects that had been placed on hold, particularly at flagship properties.

While trading levels over the past six months have continued to grow into April and May 2023, the impact of winter on an already unstable and severely constrained electricity grid is still unknown.

SA economy

Southern Sun says it remains heavily exposed to the South African economy which faces slow GDP growth, high unemployment and a lack of policy certainty and solutions to the country’s ongoing energy crisis, adding that the continuous crisis has a detrimental impact on both consumer and corporate sentiment.

The cost of diesel and the adverse effect on income due to rolling blackouts, especially in January and February 2023, hurt the group’s expected year-end position and margins.

Southern Sun has spent R41-million so far this financial year on diesel to power its owned hotels, compared to R10-million in FY22 and R11-million in FY20.

Repairs and maintenance costs are mounting – some of which relate to generator and other equipment faults caused by rolling blackouts. In FY23, repairs and maintenance costs were R159-million (FY22: R103-million), a 54.4% and 15.2% increase on FY22 and FY20, respectively.

Until trading and occupancies normalise, and the threat of increased load shedding during winter subsides, the directors have resolved not to declare a final cash dividend.

However, shareholders in the gaming division will be smiling, as Tsogo Sun Gaming is flying.

Tsogo Sun split its former hotel and gaming businesses last year, which are now separately listed as Southern Sun Hotels and Tsogo Sun Gaming.

The gaming unit which owns Suncoast, Gold Reef City and Montecasino reported today that it had reduced its net interest-bearing debt and guarantees by R1-billion or 11% over the year. R2.6-billion of its debt was refinanced in February 2023, so it effectively has no short-term debt, although the RCF of R1.15-billion can be called up on 13 months’ notice. A further R1.6-billion of medium-term debt is anticipated to be refinanced on 31 May 2023.

It also tripled dividends, with the board declaring a final gross cash dividend of 57c/per share from “distributable reserves”, which will be paid to shareholders on Friday, 14 July 2023.

In 2022, the group – still known as Tsogo Sun – declared a final dividend of 19c/share.

It generated R11.3-billion in total income for the year, Ebitda was R4-billion, and adjusted Ebitda was R3.9-billion.

Headline earnings achieved for the year amounted to R1.6-billion compared to R1.2-billion reported for the previous year.

In a press announcement, Tsogo said it was pleasing to note that the net debt to adjusted Ebitda ratio for the 31 March 2023 year-end, as measured for covenant purposes, amounted to a two-times multiple, which is a reduction from the 2.9 times multiple at the 31 March 2022 year-end. DM

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