Less debt at Sun International but the stock is still a gamble
A major operational worry is the underwhelming trading at Sun’s new Time Square casino
Sun International, now carrying a lighter debt load after a large rights issue, reckons dividends could be resumed within two years.
This week Sun completed its R1.6-billion rights issue – an exercise that saw a hefty oversubscription from shareholders. Total applications were close to R3-billion.
There has been persistent debate around whether Sun – which had a total debt burden of around R15-billion – was raising enough capital in the rights issue. The group forked out over R1-billion in interest in the year to end December.
Sun has traditionally been a strong cash generator but a major operational worry is the underwhelming trading at Sun’s new Time Square casino in Menlyn, Pretoria. To compound matters, casino groups might soon have to also contend with a looming smoking ban that could hinder gaming activities.On Wednesday Sun CEO Anthony Leeming said the rights issue would bring debt levels down to around three times ebitda (earnings before interest, tax, depreciation and amortisation). “We think we are still a little overgeared at these levels. But if we have another good year of cash flows, the debt levels will drop to around two times ebidta.”
He believed if ongoing debt reduction plans remained on track Sun might be able to consider resume dividends within two years.
“The rights issue gives management the time and headroom needed to focus on the business and strategy execution.”
But Electus Fund Managers equity analyst Damon Buss said Sun was unnecessarily slow in undertaking the rights offer – believing Time Square would produce enough cash to de-gear the group and not breach debt covenants.He said this was always a risky bet as rival Tsogo Sun had issued much lower forecasts for Times Square.
Buss also reckoned R1.6-billion was not enough of an infusion of fresh capital when considering the underperformance of Time Square, weak gaming growth and the capital requirements in terms of maintaining casino properties.
Asked about current trading at the Time Square casino, Leeming said footfalls had improved and trading levels had shown an improvement. “There’s still a long way to go at Time Square … but the property is cash positive on a pre-funding basis.”
Time Square was mooted as a game changer for Sun, which is under-represented in the Gauteng casino sector. But the R4-billion development has not snagged yet as much market share from rival casino groups Tsogo Sun and Peermont Global as was initially predicted by Sun.
Sun boasts the cash spinning GrandWest casino in Cape Town as its flagship property and holds an array of smaller urban casinos scattered around South Africa. The group also holds profitable alternative gaming assets in South Africa as well as a handful of casinos in Latin America.