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Sun International 20 March 2024

Online betting and non-gambling activity supports performance

Tinashe Hofisi

themes: online betting, non-gambling activity, land-based casino

Sun International (SUI) FY23 results were marginally below expectations, albeit supported by online betting and non-gambling activity (tourism, conferences, sports, and events) while Urban Casinos and Sun Slots were a drag, underperforming SBGSe. Total income for the period was up 7% y/y (SBGSe: +8.3% y/y) with adj. EBITDA margin lower by 130bps y/y to 28.1% (SBGSe: 30.4%) impacted by net diesel costs of R60m, shaving off c. 80bps. Adj. HEPS increased by +5.9% y/y to 468cps vs SBGSe: 479cps, and DPS grew by c. +6.7% y/y (351cps vs SBGSe: 359cps). Cash conversion (Free Cash Flow/Adj. EBITDA) improved (FY23: 70.1%, FY22: 66.4%), reflecting the group’s flexibility to invest in growth and provide additional shareholder returns. Post period end, trading activity is indicated to have marginally improved with SunBet and Resorts Hotels sustaining momentum. While election uncertainty may cause a temporary pause in consumer leisure activity, we expect a rebound post-election.

Online betting and non-gambling activity tracks ahead. SunBet outperformed, exceeding targets with sustained momentum expected to result in an upward revision of management’s medium-term target (GGR of R3bn by FY28E (previously R2bn by FY26E), >10% market share). Key metrics (deposits, active unique players) reflect strong growth, aiding total income growth of +116.2% y/y. EBITDA margin was marginally higher h/h at 30.2% (1H23: 30.1%, FY22: 12.4%) with management indicating an FY28E EBITDA target of c. R900m, implying a c. 35% margin. Resorts and Hotels was supported by tourism recovery (total income: +17.4% y/y). EBITDA margins expanded by 170bps y/y to 23.3% driven by marked improvement at Sun City (up c. 340bps y/y to 23.6%).

Urban Casinos and SunSlots disappoints, the former likely to raise concerns regarding the acquisition of Peermont. Urban casinos reflected modest growth as non-gambling activities (rooms, food & beverage, +18% y/y) offset a contraction in core casino business (-1.3% y/y). We note that the contraction in casino income could raise concerns regarding the structural growth outlook for land-based casinos in SA and subsequently the appeal of the Peermont transaction considering the businesses skew to urban casinos. In our view, risks include: 1) pressure on consumer disposable income, 2) online betting competition, and 3) a demographic shift towards digital entertainment. However, we believe physical casinos offer an experience that cannot be replicated online. Additionally, although economic growth may be lacklustre, an increase in disposable income due to interest rate cuts could potentially result in increased gambling propensity at land-based casinos. SBGSe shows a c. 75% positive correlation between disposable income and casino gross gaming revenue. SunSlots total income contracted by 2.7%, impacted by load-shedding, though we find SUI fared better relative to the sector (c. -4%) potentially due to faster service delivery in our view, especially when machines break down. LPM rollouts marginally increased supported by an improvement in loadshedding over 2H23. However, a slow approval process has limited further rollouts. In our view, reduced load-shedding intensity presents a positive outlook for Sun Slots revenue and margins into FY24E.

We update our numbers post the results, reflecting tapered growth in Urban Casinos and SunSlots. We adjust our estimated fair value range to R48 to R59 (previously R52 to R65), providing potential total return of 34% to 63%, including a dividend yield of 11%. We forecast adj. HEPS of 538cps and 558cps in FY24E and FY25E respectively. Our FY25E adj. HEPS factors in the Table Bay Hotel lease expiration at the end of Feb’25 and the subsequent management of the property (FY25E adj. HEPS impact of c. 25cps to 30cps).

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