1H23: Leisure normalising despite a weak backdrop, earnings upgraded

#themes: SunBet, leisure normalisation, load-shedding, payout raised

Sun International reported a robust FY23, driven by a surge in online betting, foreign tourism recovery, and resilient domestic consumer spending on leisure activities, despite pressure on consumer disposable income and load-shedding challenges. Total income was up 11% y/y returning to pre-pandemic levels, however, EBITDA margins dipped by 150bps y/y to 27.2%, largely due to net diesel costs of R60m, which shaved off c. 100bps. Adj dHEPS was up 10.1% y/y to 194cps in line with mid-point of guidance (c. 195cps) but outperformed our implied 1H23 estimate of 175cps. Cash flow conversion remains strong, as ND/EBITDA was maintained at 1.8x, below the LT target of 2x. DPS was up 68.2% as management expanded the dividend payout from 50% to 75%, delivering on the group’s commitment to grow dividends.

SunBet exceptional, tracking ahead of targets (GGR of R2bn by FY26E and >10% market share, Dec 2022: 4.2%) with all key performance indicators (deposits, active players, unique players) performing well. Customer retention remains intact, as cohorts acquired pre-pandemic accounts make up at least of third of the active customer base. Sector growth remains robust, delivering c. 30% to 50% y/y and management expects growth to continue its double-digit trajectory. EBITDA margins expanded to 30.2%, in line with global peers (c. 30% - 35%). However, the positive step change in margins was partly attributable to a deliberate decision to delay marketing spend into 2H23E. Normalising for this translates to a margin of c. 25%, in line with medium-term targets. Expansion into Ghana, Zambia and Kenya is scheduled for 1H24E.

Resorts and Hotels reflects strong momentum supported by resilient domestic tourism, conferencing, and a recovery in international travel. Room occupancies are improving though lag 2019, while room rates are above 2019, in line with sector trends. EBITDA margins delivered a positive step change supported by sustainable cost efficiencies (eg. flexible movement of labour).

Urban casino income growth broadly in line with guidance of below (or on par with) CPI, though remains below pre-pandemic. The division is expected to exhibit low single growth (3% to 4%) over the medium term as management focuses on optimising casino floors to protect margins as casino operations are inherently high cash generative, even during phases of low growth. EBITDA margins contracted over the period by c. 150bps primarily due to increasing spend on diesel as the division consumes c. 80% of the group’s total diesel costs. Risks we have previously raised: 1) The parliamentary process surrounding the Smoking Bill faces challenges, as recent parliamentary discussions reflected a split decision. In our view, the bill is unlikely to pass in the short term. 2) Tsogo Sun applied to relocate to Helderberg in Strand, but management is of the view that the impact will not be severe; 3) Management is of the view that leveraging the Sun International stable could negate the effect of cannibalisation from online betting as promoting the group’s omni-channel strategy.

SunSlots impacted by load-shedding. Total income and LPMs growth turned marginally lower. Considering the recent intensification of load-shedding we expect roll-out growth to be muted for the remainder of FY23E likely delaying the achievement of full capacity.

We update our numbers to reflect the step change in Resorts and Hotels and SunBet. We estimate a fair value range of R52 to R65 (from R49 to R56), providing a total return of 43% to 78%, including a dividend yield of 10%. We forecast dHEPS of 479cps and 540cps in FY23E and FY24E respectively. Earnings are expected to improve aided by: 1) Further cost efficiencies and installation of alternative energy solutions (Sun City installed 1.4MW, Sibaya and Carnival 2.5MW in 4Q23, 30MW – 40MW of battery storage solution given greenlight); 2) Ongoing tourism and conferencing recovery. Moreover, should gearing (ND/EBITDA) remain below 2x, a share buyback and/or special dividend may be triggered, in our view the latter likely favoured considering liquidity (free float).

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