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Sun International hassled to list LatAm business

Hopes for local revenue pinned on new casino.

A minority shareholder in Sun International’s Latin American (LatAm) company Sun Dreams has requested it list on the Santiago or New York stock exchanges, through an initial public offering (IPO).

And there’s a possibility it’ll have to comply, says new CEO Anthony Leeming, who replaced Graeme Stephens on February 1.

“On condition that appropriate market conditions exist, Sun International has the option to list Sun Dreams or if it chooses not to do so, the minority shareholder who requested the IPO will have the right to exercise its put option against the Company. If Sun Dreams conducts an IPO, the minority shareholders’ put options will fall away. Strategically the group would like to increase its interest in this business, subject to valuation and funding considerations,” states the Sens issued on Monday.

Leeming says it’s not Sun International’s preference, but the puts are against it, and it will need to list if an agreement can’t be reached for the minority shareholders to drop the puts.

“Within the next six to eight months we need to list or reach a deal. It’s all in discussions and hopefully we’ll know something soon,” says Leeming.

This will create liquidity in the shares of the merged entity and will enable Eds – which currently holds 49% of Dreams – to exit its shareholding in the merged entity if it wishes to. Sun intends to maintain its shareholding above 50% in the event of a listing.

Sun International’s LatAm portfolio recently merged with the casino and hotel portfolio of Chile-based Dreams SA, forming the largest gaming company in Latin America. 

Anchor Capital CIO Sean Ashton says in that theory “the listing should allow investors to more efficiently value the group as it will force a market value upon the LatAm assets.”

No dice

Meanwhile Sun International is feeling the pinch in its casino revenue at home, but is pinning its hopes on new developments.

Ashton says the six-month results to December 31, were very disappointing, missing Anchor’s – and consensus – expectations by over 35%.

(The company changed its year–end from June 30 to December 31, to align with its Chilean operations. These results are for July 1 to December 31 2016.)

Group revenue increased by 31% to R7.7 billion, with growth due to the inclusion of Dreams S.A. and Grand Parade’s GPI Slots’ operations for the full period.

South African revenue continues to be affected by difficult trading conditions linked to an uncertain macro-economic environment and reduced consumer spend. South African comparable revenue (excluding GPI Slots) was flat off the back of lower casino revenue, according to the company.

“The results do point out that gaming is not bullet proof …With their heavy capital costs and high fixed cost component they suffer more (than other segments) though,” says Sasfin’s David Shapiro.

For now South Africa still contributes the most (67%) to group revenue – at R5 149 million (y/y R4.646 billion). LatAm operations contributed R2.451 billion (R1.076 billion).

Casino revenue was down year-on-year in SA, to R3.488 billion (Dec 31 2015: R3.586 billion), but soared in LatAm to R2.061 billion (R952 million).

Sun City and Table Bay continued to benefit from higher international tourism which helped boost rooms’ revenue 14% to R482 million.Sun City’s entertainment and conference centre, Sun Central, which is being upgraded, is expected to bring in good mid-week business this year, according to Leeming.

“But hospitality (rooms and eats) is not where they make money – it’s at the slots. And that’s dragging at the moment,” says Shapiro.

The group’s progressing with its Time Square development in Menlyn, with the casino expected to open on time on April 1, and within budget and to positively impact the group’s performance. “I think it’ll be quite a big game-changer for us,” says Leeming.

The numbers

Adjusted headline earnings of R232 million for the year are 35% below the prior year with diluted adjusted Heps down 35% to 223 cents.

Ebitda increased 24% to R1.9-billion. Year on year, (excluding consolidated GPI Slots and Dreams S.A. operations) it decreased 12%. Ebitda from SA operations was down 8%.

No dividend was declared due to “difficult trading conditions and the need to complete strategic group initiatives… reduce debt levels”.

On the likelihood of a dividend in the next results, Leeming said everything depends on how Time Square trades. “If it trades very well we could resume dividends quite quickly. We’d like our debt levels well below three times debt to Ebitda….”

To manage debt, Leeming says it will hold back a little on capex. Times Square also needs to rise to the occasion. “If it trades well,… we’re not planning to sell or dispose of assets…. We are very cash-generative still, and Time Square will be very cash-generative….”

Sun International was one of five stock picks for Anchor Capital for 2017. Read more here.

On Monday, Ashton said: “We like the company’s Times Square opportunity in SA as it will likely be materially earnings accretive at full capacity, and is very high return (debt funded). However, the earnings base has fallen far enough for the stock to not appear compelling value unless a material improvement in gaming conditions in SA can be expected soon.”

But Leeming is positive: “I think there is still growth in certain places in gaming revenue.”

LatAm operations

Latin America is one such region. Though he says it and other emerging markets have been (negatively) impacted by worldwide economic circumstances, he believes there’s “more green shoots there, more light in the tunnel” with a turnaround on the horizon.

“We’re now the biggest player (on the continent) with the merger with Dreams last year. There are more opportunities opening up there,” including acquisition opportunities in Peru.

“Brazil’s been illegal up to now. They are passing regulations and bills to allow gaming and that will open up for bidding processes.”

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