The house always wins

#themes: Omnichannel Gambling; Tourism; De-gearing

Sun International (SUI) is one of SA’s leading gambling/gaming businesses founded in 1967, with substantial market share in urban casinos, Limited Payout Machines (LPMs) and an emerging competitor in SA’s online betting sector. The group has transformed since 2018, as recent capital raises, improved cash conversion (from FY19: 59.2% to FY22: 67%), the LATAM divestment and c. R600m embedded cost savings since 2019 have facilitated debt reduction from 5.6x to 1.8x EBITDA. The strengthened balance sheet, in our view, provides a firm base for management to drive its omnichannel strategy, facilitating improved shareholder returns. 

SunBet, the growth engine, catapults to be the fifth-largest gaming operation in the group in FY23E with 5x growth expected to FY26E. as management endeavours to leverage SUI’s well-established brand, presence, and loyalty programme to attract and retain players. Management’s current focus is on investing in growth and enhancing brand awareness to gain market share. We note more established global peers deliver c. 25-30% EBITDA margins relative to SunBet at c. 12%. Therefore, we expect profitability to improve, as the investment cycle settles into FY26E. Our analysis based on FY26E estimates suggests the division could be valued at c. R2.5bn in 2025/26 (c. 26% of current market cap) versus our current fair value of c. R1.2bn.

Urban casinos (74% of group EBITDA) are expected to hold their own. SUI’s urban casinos have successfully defended their market share and achieved record margins (post IFRS 16) despite revenue remaining below pre-pandemic levels. We believe the company's focus on attracting and retaining high-end customers through events, refurbishments, and the most valued guest (MVG) loyalty programme has and is likely to continue contributing to its success. Although load-shedding may impact costs (SBGSe c. R120m in FY23E), we expect increased traffic during these periods to support topline.

Resort and Hotels (14% of group EBITDA) reflects a strong post pandemic recovery with record margins (IFRS 16) despite the absence of international tourists. Sustained margin support has been achieved through renegotiated labour contracts with labour unions providing flexibility (particularly at Sun City). We anticipate further margin improvement supported by improved occupancy rates and growth in room rates, bolstered by the return of international tourists.

We initiate coverage of Sun International with a fair value range of R50 to R57, providing an estimated total return of 39% to 59%, including a 9% dividend yield (historic average c.6.3%). We forecast FY23E and FY24E dHEPS of R4.73 (+9%) and R5.05 (+7%) respectively. Should debt levels be maintained at c. 2x EBITDA, we expect management to prioritise returning excess cash to shareholders, in the absence of acquisitions. We suspect management will favour special dividends ahead of share buybacks considering liquidity constraints.

Risks: regulatory adjustments    on licences, smoking ban implementation, limited domestic flights challenging ease of travel and load-shedding.

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