SunBet to offset potential margin drag from casinos

#themes: online betting, casinos, debt reduction

SUI delivered mixed 1H25 results, with strong online betting growth offset by weakness in both urban and resort casinos. SunSlots returned to topline growth for the first time since 2022 benefiting from machine portfolio optimisation, while non-gaming assets (rooms, F&B, conferencing, entertainment) are benefitting from improved traffic, in our view. We believe, the cessation of the Table Bay Hotel lease limits this upside ahead of the G20 summit, as SUI will only earn management fee (based on gross operating profit, c. R25m – R30m) upon the re-opening of the hotel in Dec-25, as it is currently being refurbished by InterContinental Hotel Group, the new lease holder. While urban casino softness was expected, the extent of decline in resort casinos may surprise investors given their proximity to tourist destination locations. We believe some investors may take comfort that management have initiated measures to stabilise casino performance across the group, focusing on floor optimisation, slots machine mix, table games pricing opportunities and targeted marketing to improve footfall conversion. Additionally, early signs of omni-channel traction is potentially reflected in urban casino’s continued outperformance (net gaming wins: down 1.9% y/y) relative to the sector (GGR: down c. 4% y/y), in our view. 

1H25 results highlight: (1) Group income of R6.1bn was up 3.2% y/y, excluding TBH up 6.7% y/y. (2) EBITDA was R1.6bn down 3.8% y/y, excluding TBH up 1.1% y/y. (3) Adj. diluted HEPS was up 6.5% y/y to 228cps (implied SBGSe: 235cps) aided by favourable tax rate (due to prior solar incentives), reduction in minority interest (c. 13% from 17.5%) and net finance charge (down 15% y/y) as total debt declined from R5.2bn to R5bn. 

Deleveraging provides an earnings tailwind. In our, view, with casino topline under pressure, SUI may rely on debt reduction to support earnings, in the near term. While net debt/EBITDA of 1.5x was previously cited as palatable for a special dividend (post-Peermont deal), we see this as unlikely given capital allocation priorities: reinvestment to stabilise casino revenues and expand SunBet’s market share, which we currently estimate at c. 3.5-4%. However, we expect the payout ratio to be maintained at c. 75%, as net debt/EBITDA is well below the group’s appetite of 2x.

We downgrade our Adj. diluted HEPS estimates for FY25E (568cps, previously 573cps) and FY26E (622cps, previously 638cps). Our earnings are supported by strong performance in online betting, recovery in SunSlots and good growth in non-gaming assets supported by improved consumer traffic ahead of the G20 summit.

Margin outlook revised, weakness in casinos offset by SunBet strength. We revise Urban Casino FY25E margins down to 32.3% (from 33.5%), with efficiency gains from the new operating model expected to limit near-term pressure. Resorts & Hotels margins were cut more sharply to c. 20% (from 24.5%) on resort casino pressure and the loss of Table Bay Hotel contribution (EBTIDA margin of c. 33%). SunSlots margins are broadly unchanged at 24%. We lift our SunBet margins to c. 34% (from 31.5%), though we expect a modest pullback in FY26E as we expect management to step up investment to capture market share.

After incorporating the result, we moderate our fair value range to R50–R57 (prev. R52–R60), implying a total return of 20% to 35%, including a 10% DY. Our FY25E rolled Adj. dHEPS of 610c implies a 12m Fwd.PE of 7.5x. Key risks: (1) smoking ban, (2) slow economic recovery, (3) tax hike in online betting, and (4) Tsogo Sun's Western Cape relocation.

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