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Standard Bank Group
Sun International 11 September 2024

Odds for omni-channel jackpot lift

Tinashe Hofisi

#themes: omni-channel, online betting, travel activity

Sun International 1H24 results reflected benefits of a diversified portfolio and emerging signs of an omni-channel strategy bearing fruit, potentially easing certain investor concerns on casino revenue cannibalisation from online betting, in our view. Urban casino net gaming revenue was flat y/y while the sector was down c. 4% y/y. As a result, investors may favour SUI. SunBet has now exceeded 2 million site visits per month (June’23: c. 550 000) and is on track to exceed R1bn GGR by FY24E, with a target of c. R3bn by FY28E.

The Peermont acquisition could help scale SunBet and enhance the omni-channel strategy. The deal is progressing and is expected to be completed by 1Q25E. Should the acquisition be blocked, focus could shift to a share buyback or a special dividend, with the latter more likely due to liquidity considerations.

1H24 Results key highlights include:

  • Total income was R 5 999m, up 5% y/y supported by SunBet (+72% y/y) and Resorts and Hotels (+6.3% y/y) as room rates (c. 14%-15% y/y), offset the impact of a temporary pause in travel. Sun slots revenue was down (-4% y/y) in line with sector trends possibly due to punter migration to online slots during intense load-shedding.
  • Adj. EBITDA of R1 636m was up 4.1% y/y, representing margin expansion of 20bps y/y (1H24: 27.3%, 1H23A: 27.1%) as urban casino (down 160bps y/y to 33.1%) was offset by the rest of the divisions including SunSlots. SunBet margin was 33.2% (1H23A: 30.1%) ahead of FY28E guidance of above 30%. However, margin may recede to c. 30% due to increased focus on enhancing the product offering and boosting marketing activity.
  • Operating expenses increased by +3.3% y/y (1H23A: 12% y/y).
  • Net interest charge of R304m was up 1.7% y/y limited by debt payment of c. 300bn and the exclusion of TCN Nigeria debt (R815m) post disposal.
  • Adj. HEPS of 215cps (+9.6% y/y, 1H23A: 194cps, + 11.3% y/y) was broadly in line with our implied 1H24E estimates (c. 213cps) and further aided by a share buyback (c. 2% of total ordinary shares at an amount of c. R141m). DPS of 161cps was up 8.8% y/y.
  • Net Debt/EBITDA improved to 1.6x (1H23A: 1.8x).
 

We forecast FY24E and FY25E Adj. Dil. HEPS of 533cps (535cps, +15% y/y) and 576cps (554cps, +8% y/y) supported by debt reduction (c. 300m + exclusion of Nigeria debt of c. R815m), sustained momentum in SunBet (operating leverage benefit), Resorts and Hotels as travels improve in 2H24E. We moderate our margin expectations for urban casino considering the sector backdrop. Our FY25E Adj. Dil. HEPS factors in the Table Bay Hotel lease expiration at the end of Feb’25 and the subsequent management of the property (FY25E Adj. Dil. HEPS impact of c. 10cps to 15cps, representing a drag of 2% -3%).

We adjust our estimated fair value range, now R53 to R62 (previously R48 to R59), providing potential total return of 31% to 51%, including an attractive DY of c.10%. Our FY24E rolled Adj. Dil. HEPS of 533cps implies a 12m forward PE of 7.9x. Risks to investment case include: (1) smoking ban legislation, (2) slow economic recovery and (3) intense competition (4) Relocation of Tsogo Sun in Western Cape.


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