Is Sun International still worth a punt?

The market reacted brutally to interim results released last week, shaving 15% off the share price in two days. Though revenues were 12% ahead of the comparable period last year, Sun International’s operating profits were battered.

As recent interest rate increases and higher inflation rates begin to bite, the group’s revenue growth has slowed.

“So much for the alleged defensiveness of gambling,” says Imara SP Reid analyst Warwick Lucas.

Imara says the size and aggression of the two share buy-backs at R2,3bn that Sun International undertook, as well as the purchase of 61,3% of Real Africa Holdings, hit Sun International’s net asset value (NAV) hard. The buy-backs were an effort to improve balance-sheet ratios but effectively doubled debt on the balance sheet as interest rates began heading upwards.

Debt now amounts to 4,3 times operating earnings, up from three times a year ago. Debt service costs are also now 72% higher.

Sun International finance director Rob Becker says the balance sheet is not overgeared. “We still have capacity for debt,” he told the FM.

However, NAV per share has dropped to 17c from R21,01, making for a pretty strong return on equity figures, but scary for lenders worried about the amount of security underlying the balance sheet.

The wisdom of sticking to its policy of increasing dividend payouts is questionable considering the level of gearing.

The operating performance is also a little unconvincing. Overall group occupancy soared seven percentage points, though average room rates improved just 2% to R794.

A weaker rand should help attract more foreign visitors, but the group is also committed to much offshore hard currency spending.

“In general casino stocks have been overpriced,” says Lucas. “But with the fall in price, we’ve recently upgraded Sun International to a hold.” - Jacqui Pile

Source: Financial Mail