1H23 Pre-close: Urban Casinos and Sun Slots update force HEPS downgrade
#themes: load-shedding impact, SunBet above expectations, Debt maintained
Sun International hosted a pre-close call, we highlight the following:
Urban casinos revenue growth is expected to be below CPI in FY23E, with margins impacted by load-shedding. GrandWest casino recovery lags due to a lower active customer base and higher main floor activity by low to middle income players.
Load-shedding significantly affects Sun Slots, necessitating funding for power solutions to site owners. Traffic remains low in certain areas due to safety concerns during power cuts. Revenue has held up relative to last year, but margins are under pressure. 2H23E is expected to show an improvement.
SunBet exceeds expectations in revenue and profitability, achieving record active customers as deposits and sign-ups increase, indicative of future growth potential. Management indicates no cannibalisation of sales as acquired customers show interest in both online and offline play. SunBet aims for a c. 10% market share, currently estimated at 4%, and plans to expand to other African markets in Q3.
Demand is strong or improving across Resorts and Hotels, especially at Sun City, with improving margins. Table Bay benefits from international traffic which is skewed towards Cape Town. Its occupancy is close to 76% with stronger room rates. Waterfront contract extension talks are ongoing.
Management plans to install 10.1 MW of solar in CY23 to reduce costs. Sun City will implement a 1.4 MW solution. Debt levels are expected to be in line with December 2022 levels confirming that management is comfortable with its debt levels as previously indicated.
The implementation of the Smoking Bill faces pushback, as recent parliamentary discussions resulted in a split decision. The bill is unlikely to pass in the short term and may be delayed by a few years.
We update our numbers to factor in the softer update from Urban Casino’s and Sun Slots, we estimate a fair value range of R49 to R56 (prev R50 to R57), providing a total return of 37% to 57%, including a dividend yield of 9%. We forecast diluted HEPS of 442 (2%) in FY23E and 492 (11%) in FY24E and a DPS of 331 (1%) and 369 (11%), respectively.
- Concerns over cannibalisation may arise due to sluggish growth in Urban Casinos.
- Load-shedding poses a significant risk for Sun Slots, with potential pressure if conditions worsen, as it does not have control of the sites. To alleviate the problem, Sun Slots may appeal to the Gambling Board to fast-track the issuance of an independent site operator's licence (ISOs).
- Resorts and Hotels show encouraging performance, with strong demand and improving margins, particularly at Sun City, indicating sustainable cost-saving measures implemented in FY22.