Sun International optimistic despite casino slump

Cape Town - Gaming and hospitality company Sun International [JSE:SUI] announced on Monday an increase in revenue of 10.3% to R5.8bn for the six months ended 31 December 2015.

The group has an interest in a total of 27 resorts, hotels and casinos across eight countries. This includes 15 operations in South Africa, two each in Zambia and Lesotho and one each in Botswana, Nigeria, Swaziland, Namibia and near Santiago in Chile. Sun International also opened a casino in Panama in October 2014 and has been granted a casino licence in Colombia.

The group's revenue was boosted by insourced food and beverage revenue and new properties opened in the prior year, while comparable revenue excluding these new businesses increased by 4.6%. The board has declared a gross interim dividend of 90 cents per share compared to 110c per share in 2014.

Ebitda (Earnings before interest, tax, depreciation and amortisation for the period was down marginally (0.8%) at R1.6bn. As a result of the disappointing South African casino revenue growth and the addition of the new, low margin food and beverage business, the overall group Ebitda margin declined 3.0% to 27.4%.

With the lower Ebitda and higher depreciation and interest charges, adjusted headline earnings of R346m and diluted adjusted headline earnings per share of 332 cents were 19% below last year.

Significant adjusted headline earnings adjustments include not only the Menlyn Maine settlements of R747m in relation to objections raised by Goldrush and Peermont, but also an earn out payment of R195m due to the minority shareholders of Monticello bought out by the group last year.

Key achievements for the six months include finalising the merger of the group’s Latin American interests with Dreams. The deal is now subject only to final gaming board approvals, which are anticipated in the first quarter of 2016.

The group has also made significant progress with the construction of its new casino entertainment complex at Menlyn Maine, which will open during 2017. It has also exercised its option to acquire a further 25% interest in GPI Slots. This deal is also subject only to gaming board approvals, anticipated in the first quarter of 2016.

Renovation plans at Sun City is progressing well, according to the group and the project is already in the third year of the planned five year duration. Other achievements include completing the insourcing of food and beverage operations and making good progress with its International VIP gaming business.

READ: Subdued casino trading impacts Sun International

Sun International CEO Graeme Stephens told Fin24 that ongoing strategic changes in the group made comparisons to prior periods difficult.

"I am happy with the integration of the food and beverage insourcing and, in my view, the initial risk of taking on thousands of people, for instance, is starting to pay off. I am happy with the progress so far. I think we we are close to the break even point and have at least another year to go before we turn some profit in this regard," said Stephens.

He emphasised that the impact of the insourcing of food and beverage is distorting the group's numbers during the interim period. The same goes for the impact of new businesses.

"Our revenue is looking alright, but none of those new businesses are making money yet. They are close to break even, though. We did well out of Latin America as the peso strengthened against the rand. At the same time we had hoped that our merger in South America would have been completed already by now. We hoped to have had the merger in our numbers already this time," he added.

He said the main driver for the insourcing of food and beverage was to improve employee morale.

"We had a lot of different outsource service providers asking guests different prices and having different opening hours. We were working hard to attract guests, but then they ended up being unhappy with the food and beverage offering and we were not making any money from it.

Another aspect Stephens pointed out was that the group had brought back to SA a lot of its dollar loans before the rand crash.

"We were lucky and it saved a huge amount of money," said Stephens.

The crux of his concern is about the SA gambling business of the group. At the same time he has noted some improvement in this area over the last few months. He pointed out that, apart from the impact of the SA economy on the gambling business due to consumers' financial constraints, but also due to certain changes made in the group itself - including regarding loyalty programmes.

The core South African operations of the group still contribute 80% of revenue and the prevailing economic conditions in the country had resulted in extremely low casino revenue growth (0.6%), which is well below the level of cost escalation.

This had been partially offset by the continued growth of Monticello in Chile, where the positive earnings growth was also amplified by the strengthening of the peso against the rand.

"The internal mood in the group is positive and we are in better shape than in years, although we are currently in a state of flux," said Stephens.

"We are optimistic that we should get growth in the next few months. Our first half was against a very high first half last year. I am, therefore, more encouraged by the fact that we are seeing a pick up and that our customers are better off in terms of what we are offering. It takes a while for people to realise this."

A major strategic initiative for the group over the past year has been the potential acquisition of the Peermont Group, which was prohibited by the Competition Commission in December 2015. Given that the Competition Tribunal hearing dates have been set down for after the transaction deadline of March 31 2016, the transaction cannot be concluded in time and it is anticipated that the transaction will simply terminate on March 31 2016.

With the termination of the transaction, the Menlyn Maine note will come into effect in recognition of Peermont having lifted its objection to the relocation of Sun International’s Morula casino licence to Menlyn Maine. Discussions are underway to cash settle the note for R675m on April 30 2016. This amount has been provided for through the statement of comprehensive income in the period under review. With the anticipated termination of the Peermont acquisition there is no longer any need for the potential rights offer that was announced in 2015.

READ: Sun International to buy Peermont for R9.5bn

“The challenges facing the global economy and the uncertainty regarding the Chinese economy continue to have a major impact on emerging market commodity-based countries such as South Africa and Chile. The South African economy is not only dealing with the global challenges but is being further impacted by the uncertain political and social challenges facing the country," said Stephens.

"Against this background, in particular a loss of business and consumer confidence, we expect subdued trading in the group’s core South African casino business. In contrast, we expect the hotel side to continue to do well given the weak currency and the changes being made to visa requirements for foreign travellers."

He said the short term outlook for Chile remains for lower growth than in recent years although the gaming industry continues to grow and consequently we expect Monticello to achieve reasonable results. The acquisition of the second tranche of 25% in GPI Slots will result in GPI Slots being consolidated and consequently revenue and Ebitda will increase. With steps being taken to restructure Panama and to grow the international VIP business Stephens anticipates an improved performance in the second half of the year.

“We anticipate that the Dreams merger will be completed by the end of the 2016 financial year which will have a significant impact on the group’s reported results. As it is largely a merger of equals with Sun International only buying up an additional 5% we do not expect a significant impact on adjusted headline earnings in the short term. It does however diversify the earnings base of the group and brings a number of expansion opportunities which will be considered in due course," said Stephens.  

ALSO READ: Sun International reduces African asset stake

WATCH:Sun International CEO Graeme Stephens chats about the results:

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