Tough road ahead for Sun International reflects tourism industry’s gritty future

Anthony Leeming, the CEO of Sun International can’t help but laugh, though somewhat ruefully. After three years of applying a “back to basics” strategy the gaming and leisure group is now positioned for growth, its debt is coming under control and costs have been stripped out – but this is good news that no one wants to talk about. 

Instead, everyone wants to know how Corona-19 will affect the business.

It’s a relevant question, unfortunately.

The impact has already been felt, says Leeming. Conferences large and small have been cancelled across Sun International’s 15-odd venues in South Africa. Foreign tourists are rapidly cancelling their bookings at upmarket destinations like The Table Bay Hotel in Cape Town (which has only recently recovered from the water crisis of 2017/18). And concerts such as that of Lighthouse Family, which is due to play at Montecasino and Grandwest in late March, and which attract thousands of music lovers, will be postponed.

Sun casinos in Peru, Columbia and Panama have been closed for 14 days by authorities, and Chile is introducing similar lockdown measures to South Africa, though at a slower rate.

It is difficult to predict the financial consequences over the next six months, but they will be severe.

Leeming is hoping that the local leisure industry in South Africa will remain relatively buoyant. But how does one encourage local visitors when at the same time it is necessary to reduce crowds?

In the casinos, one solution is to reduce the number of people at a poker or blackjack table and to switch off every second slot machine to ensure sufficient distance between people. Antiviral sprays via the air-conditioning is another thought.

“As management, we will be discussing these issues in the coming week,” he says. Fortunately, the industry is moving into the winter cycle which is typically a little quieter, but the prospect of a prolonged slowdown and reduced activity on the casino side is a worry.

All the more because Sun International has pulled itself up by the bootstraps. In 2017, after a period of rapid expansion the company reported diluted adjusted headline earnings per share (heps) of 304c and debt of R15-billion. Its structure was bloated, and non-performing operations in the rest of Africa were subsidised by the better-performing ones in South Africa and big capex projects such as the Maslow Times Square Hotel in Tshwane were running ahead of budget.

However, in the year to December 2019, the back to basics project delivered adjusted heps of 605 cents per share, up 91% from the previous year. 

Tackling high debt levels is a priority. Management raised R1.6-billion through an equity raise in June 2018 and in the process reduced debt from R11.4-billion in 2017 to R9.2-billion the following year and to R8.8-billion at December 2019.

“We’ve made considerable progress in reducing our debt, which includes R593-million paid for our increased interest in Sibaya,” the casino complex in Durban, Leeming says.

Revenue for the year increased by 2% to R11.5-billion with earnings before accounting treatments increasing by 5% to R3.3-billion.

This improvement was driven by better performance from the flagship Time Square property, above-market growth at Sibaya, SunSlots and SunBet, and margin improvement.

The results validate the decision made the previous year to increase its stake in Sibaya and Sun Slots, Leeming says.

In addition, the popularity of online sports betting is reflected in results from SunBet, which grew earnings to R44-million, up from R8-million in the prior year.

Income from the Latam operations was up by 8% from the prior year to R5.4-billion but with earnings declining by 8% to R1.3-billion. These results are not directly comparable to the prior year due to the acquisitions of Thunderbird Resorts in Peru in April 2018 and the Park Hyatt Hotel and Casino in Mendoza, Argentina in July 2018.

The results were achieved in a difficult operating environment and are “generally good’, notes Reuben Beelders, CIO at Gryphon Asset Management.

Past performance is one thing, but what of the future?

“The Covid-19 virus is creating huge uncertainty and travel and entertainment stocks are being trashed worldwide,” he says. 

While there is R790-million worth of cash on the balance sheet, one wonders whether this is enough to sustain Sun through a period where their business levels drop off significantly?

“It doesn’t seem to be the case, which must be a worry to investors,” Beelders says. Like many asset-heavy organisations, Sun has a high fixed cost base, which has to be paid regardless of whether the punters come. If they don’t, the company could run into some troubles.

“All we can do is keep going, manage as best we can, and make the decisions that are in the best interests of employees and guests,” Leeming says. “We have already cut costs and managed our capex.”

Given the need to reduce the debt levels and to fund the Sun Slots and Sibaya acquisitions, the board is not paying a dividend for the year ended 31 December 2019 – just to add to investors’ misery. BM