Sun International ‘fares well’ in tough year

Sun International CEO, Graeme Stephens said the improved second-half performance did not reflect the full benefit of cost-cutting efforts

Hotel and gaming group Sun International on Monday reported adjusted headline earnings per share (HEPS) fell 7.3% in the year ended June with headline earnings down 24% to R530m.

Results released showed that a focus on cost efficiencies allowed Sun to record a slightly stronger second half, with a 5% gain in full-year earnings before interest, tax, depreciation and amortisation (Ebitda) to R3bn, coming off a 5% gain in revenue to almost R11bn.

Sun executives described trading conditions as subdued, with minimal improvement expected in the medium term.

The market was not overly impressed and the share drifted about 1% lower on the JSE.

But market watchers reckon there is some encouragement to be taken from Sun’s revenue in the second half shifting up 7.4% (from 3.6% growth in the first half) and ebitda by 16% (reversing a 5% decline in the first half).

Kagiso Asset Management investment analyst Dirk van Vlaanderen said the results showed a marked improvement in the second half as initiatives implemented by management began to bear fruit. "It is clear to us that this new management team is refocusing and reinvigorating the business for the better, and we are likely to see continued operating momentum into 2015 as a result of recently implemented initiatives."

Sun CEO Graeme Stephens said the improved second-half performance did not reflect the full benefit of cost-cutting efforts. The company is still in the throes of a rigorous restructuring exercise, which should be completed by the end of next month.

"There are more cost-cutting benefits to come, and we’re reasonably sure we will see some upside in the business in financial 2015," he said.

Sun’s adjusted headline earnings of R683m and diluted adjusted headline earnings of 655c per share were 6% and 7% down on last year respectively.

At the GrandWest casino in Cape Town, which remained Sun’s cash cow, revenue improved slightly — to R2bn — and operating profits came in 5% higher at R723m.

Mr Stephens described GrandWest’s performance as satisfactory, considering an increase in gaming taxes to secure an extended period of exclusivity in Cape Town (where there has been talk of accommodating a second casino licence).

Sun, which has recently moved into sports betting and alternative gaming limited-payout machines and electronic bingo, has subsequently proposed selling a 40% stake in GrandWest and the Worcester casino to rival gaming group Tsogo Sun.

The Sibaya casino in Durban managed operating profit of R318m from revenue of R1.1bn, while Carnival City in Gauteng experienced a 6% drop in operating profit to R217m with revenue static at about R1bn.

Sun City, a casino legacy from the "old" South Africa, is Sun’s second-largest contributor to the top line but the sprawling property’s contribution to operating profit is a mere R38m.

Sun City, despite its negligible profit contribution, clearly still holds some importance in Sun’s casino and hotel portfolio, which is now subject to proposals to partially disinvest from a number of African hotel properties.

Sun has already spent R179m as part of a R300m planned refurbishment of Sun City’s phase 1 Vacation Club, which should be completed in November.

Sun City’s main casino will also be refurbished, at a cost of R50m, and the Cabanas hotel will undergo a R100m revamp.

Further afield, Sun also appears to have turned around operations in Chile, where the Monticello Casino enjoyed second-half trading margins of 25% after profitability was hit by a smoking ban. Mr Stephens was confident Monticello could sustain a 25% margin with four new smoking terraces operational. "As long as there are no further smoking regulations in Chile we could see further improvements at Monticello." This would bode well for Sun, which last month increased its stake in Monticello to 98.9% in a R1.2bn deal.

There should be further impetus to the Latin American thrust later this year with the Trump Ocean Club International Hotel and Tower in Panama City, where Sun will operate a casino, set to open next month. Sun is expected to open a casino in Colombia next year, with rumours of similar moves in Peru and Uruguay.