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Sun International, effects of lockdown and the human factor score

Can the gaming group justify its share price?

According to this article on Moneyweb, Sun International has posted a R1 billion headline loss in its latest set of results.

Yes, the reasons for this are rather obvious. The pandemic hit and the long lockdown and alcohol prohibitions that came with it hurt the leisure and conferencing industry hard. Add to that the meeting technology applications like ZOOM and Microsoft Teams, and it looks as if the conference industry will never recover to the levels it was at pre-lockdown.

But let’s not get too negative. Let’s remember that the Spanish Flu also affected millions around the world 100 years ago and life went back to normal after that. Although I do think some of technology’s influence will affect the conferencing industry, there are certain things that technology simply cannot replicate.

A prime example of this is the in-person networking opportunities one has when attending a conference at the lunch table or at a pre-dinner cocktail. When one attends a virtual seminar, once the speaker has finished, it’s over! Participants simply log off and it’s done. No getting to know the person next to you, finding out who they are or what aspect of the industry they concentrate on, how their business differs from yours, or if there are synergies between that person’s business and yours. These are perhaps the most valuable reasons for attending conferences.

Big conferences that a place like Sun City can host are perhaps where a company like Sun International needs to focus. These conferences will continue after the pandemic has passed. Although some insistence on hand sanitising and face mask-wearing may continue for some time, and not as many large conferences will be held, but carry on they will. Humans by nature are social beings and we need to be able to network with one another, make connections that can benefit us at a later point in time. That’s the real reason for going to a conference, not necessarily just to listen to the speakers.

Sun International has had a hard time lately as its results reflect. We think it is large enough to survive the pandemic, we also think that it is well-positioned with the properties it currently has. The unfortunate thing is that what we have just said about Sun International’s future prospects is that this is forecasting, and forecasting is flawed.

The future is uncertain.

How long will it take for Sun International to get back to where it was pre-pandemic? The truth is no one knows for certain.

What do we know for sure? We know Sun International’s current share price and the results it has just announced.

New Age Alpha, an asset management and technology company in New York uses a probability-based approach to assess the ability of a listed company to be able to grow its business performance at the rate implied by its share price.

This strategy is known as the “Avoiding Human Factor” (“H-Factor” for short). The H-Factor is an actuarial approach to portfolio management.

When a company’s H-Factor score is determined, this is an indicator of how much human behaviour risk has been included in the current share price. Simply put, the current share price been pushed above reasonable levels by share investors who believe that the company’s future prospects are very positive. The information used by investors that are buying this share is vague and ambiguous, this information has been impounded into the stock price in a systematically incorrect way.

Sun International is a prime example of a high H-Factor score share. Sun International is also an example of how we at Global & Local Asset Management would “avoid the losers” because we would focus on the listed companies with a lower H-Factor score which would indicate a better probability of being able to justify its share price through its business performance.

The H-Factor does not focus on the future prospects of Sun International because, no matter how positive the future of Sun International may be, once the Covid-19 pandemic has run its course (and we do believe the Sun International is well run and will eventually get back to pre-Covid levels), the future is uncertain.

How long will this pandemic go on? What will the outcome post-pandemic for hotel guests and conference participants be? Will the punters go back to the casinos at the same levels as pre-pandemic?

None of these questions can be answered with absolute actuarial accuracy. We do know that Sun International is well managed and they will of course get back to where Sun International was pre-pandemic, the question is simply, when? It is the “when” that is actuarially uncertain.

Let’s take a quick look at the H- Factor score for Sun International:

The H-Factor score for Sun International is 92.6%, which means that Sun International has a 92.6% probability of not being able to justify its current share price through its business performance.

The S&P South Africa BMI Index median H-Factor score is 58.2%. Thus at current share price levels Sun International can be seen as too expensive at this moment in time.

If you would like to know more about how the H-Factor score tool works and how we “avoid the losers”, then please contact us at Global & Local Asset Management.

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Mauro Forlin

Global & Local Asset Management


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