Jacqui Pile

It’s been seven years since Sun International SA (Sisa) and founder Sol Kerzner went their separate ways.

After a messy divorce settlement, Kerzner agreed to rename his operation Kerzner International and said it would operate outside Africa. Each group promised not to operate in the other’s territory for one year.

It’s taken a number of years for Sisa to finally launch its international career. “This is not a McDonald’s type of business,” says CEO David Coutts-Trotter. “It’s not as if we rent a 15m² space and start trading. These are major developments, where we need lots of legal and regulatory approvals.”

With the regulators having limited opportunities for new casino licences in SA, Sisa has set aside R2,25bn for international expansion projects, including a US200m casino complex in Chile and a $120m development in Nigeria.

It has even hired actress Charlize Theron as the new face of the company.

But at a time when markets are volatile and interest rates expected to increase, the group’s gearing has raised eyebrows.

After a R2bn share buyback, the group has in effect doubled debt on the balance sheet. Debt now amounts to 4,3 times operating earnings. However, Barnard Jacobs Mellet analyst Adrian Ince says Sisa’s strong cash flow (it converts nearly 100% of operating income into cash) has made it a target for takeover by a private equity firm.

“By raising the gearing, management makes it a less attractive target,” he says.

The company is also hedged to some extent. It will fund the equity components of the Chile project (45m) and Nigerian expansion (38m) from existing internal resources, while all project finance will be from new facilities raised in the countries in which development takes place.

The Chilean peso has strengthened from 525 to 460 against the US dollar in a year, while the rand has weakened from around R7,05 to R7,55 to the dollar.

Investors are upbeat about the group’s 40% interest in Chilean entity San Francisco Investment SA, which won a 15 year casino licence at Mostazal, 57km from the capital city of Santiago, and with a 70km exclusivity zone.

The 66300m² hotel and casino complex is Sisa’s first major investment outside Africa. It’s expected to open in October. “We see this as an opportunity to get involved in other opportunities in South America,” says Coutts-Trotter.

With its stable economy, sound judicial system and secure property rights, analysts reckon Chile is a good bet.

South America has a small but growing gaming industry.

Few hotel groups have invested in infrastructure in Africa, but Sisa hasn’t forgotten its home continent. Most international hotel groups have management contracts with existing hotels, which Coutts-Trotter sees as the main reason for the poor quality of hotel services on the continent.

Sisa learnt some valuable lessons setting up the Royal Livingstone in Zambia. The company launched the development just as political turmoil hit neighbouring Zimbabwe. It’s managed to grow that business and will use that experience in Nigeria, where expansion plans include a 49% interest in the existing Federal Palace Hotel property on Victoria Island near Lagos.

Coutts-Trotter says one of the main challenges in Africa is that processes take so long. “There are additional risks in Africa, but it’s more a matter of having patience,” he says.

“Our strategy in these new territories remains basically the same: deliver consistent quality and deliver on the brand,” he says. Unlike Kerzner, Sun International will not be looking to expand in the Far East just yet. “We’re just not,” says Coutts-Trotter. “There is no legal gaming in China.”

Source: Financial Mail