PRETORIA – South African investors, in general, have written off South African companies as an investment. Minimal new investment funds have flown to the JSE in the past 18 months.
Maybe I am wrong, but this is my experience – and perhaps it is a sign of some recovery in the share prices on the JSE, especially the mid- and small-capitalisation shares.
In the past, investors were prepared to invest in these companies by the prospect of better times to come, but nowadays it is only negativity that prevails – except for a handful of top 40 companies that are still favoured.
Two weeks ago, the results of Sun International were released, and the following day, only a handful of market participants attended the results presentation at the Time Square Casino in Pretoria. A sign of little interest in Sun International.
Admitted, they had much debt, but if Time Square takes off, it will be possible to reduce their debt by R500 million per annum.
The results for the six months to June 2018 were nothing to get excited about, and entirely predictable, given the stagnating state of our economy.
Trading was challenging due to the continued pressure on the disposable income of consumers. Gaming income increased by 2 percent and rooms revenue decreased by 2 percent, while comparable income was only 1 percent higher.
At a total cost of R4.3 billion, the new Time Square Casino in Pretoria is now fully operational since the hotel recently opened its doors. The hotel is a unique concept encompassing three-, four- and five-star rooms, a total of 238 rooms. Time Square generated revenue of R582m and earnings before interest, tax, depreciation and amortisation (Ebitda) of R130m.
Although profits from this casino did not increase in the period under review, there was a marked increase in activity after June. Gaming income in July was up 32 percent, and in August up 33 percent. If they can get to a R1.2bn revenue mark, it would imply Ebitda of R300m. In the planning phase, Sun International projected Ebitda of around R900m, based on specific economic growth and urbanisation targets, none of which materialised.
Considering the cost of the complex, and assuming a 10 percent interest rate, the annual debt servicing alone cost R430m. They will need to get to the projected profits to be profitable and reduce their debt, not only for this complex but the total debt of the company of R15bn.
Chief executive Anthony Leeming was pragmatic about Time Square’s slower-than-expected start, stressing that the value of the property would come to the fore over time. With only 13 percent market share in Gauteng, there is room for improvement.
Operations in this region contributed 30 percent of revenue and performed satisfactorily. They concluded the acquisition of 20 percent minority interest in Sun Dreams and acquired the Park Hyatt hotel and casino in Mendoza, Argentina.
Trading in Chile remained subdued, while Peru performed very well. Sun International is considering the possibility of a separate listing in Latin America. Management feel that the time is right and have no plans to exit the region.
The proposed new tobacco bill is a threat because about 55 percent of gamblers are smokers. The one positive is that it can take a long time to implement – probably anything from one to six years.
Although Sun International have a vast debt pile, they aren't in trouble. It's possible for the company to generate R500m in profits annually and, together with a few other steps, reduce the debt significantly. Sun have R850m in cash resources and R1.2bn access to credit.
Time Square can come to the table, the 8 500-seater arena is world-class and attracts excellent shows and artists – they already have an impressive line-up and will bring many more feet to the casino.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Sun International shares are held in her own capacity and on behalf of clients.
The views expressed here are not necessarily those of Independent Media.
– BUSINESS REPORT