Sun International weighs rights issue for rising debt

Sun International is mulling over a rights issue to deal with its debt ballooning to R15.1bn for the half-year to end-June.

Of that, R11.4bn is housed on its South African balance sheet and its Time Square development in Gauteng is partly to blame, with the final price of the new casino and hotel complex set at R4.2bn.

Asset sales are also on the cards, although Anthony Leeming, who took over as CEO in May, was reluctant to give more detail.

While Sun International was still “highly cash generative” and not overgeared, “there’s a lot of uncertainty around the political and economic landscape in SA. Given that outlook, we’ve taken a cautious approach to try and strengthen the balance sheet,” Leeming said.

As it is, the cost of Time Square meant Sun International was close to breaching covenants on its local debt, forcing it to renegotiate with its local lenders. The megacomplex — two floors of gaming, four years in the making and officially the country’s second-largest casino — has not provided the fireworks Sun International was hoping for, either.

“If I look at our share of the Gauteng market, we are not at what we expected to get based on our analysis,” Leeming said.

Sun International holds 13.4% market share in Gauteng but says this should be closer to 18%.

“We are looking forward to the Arena opening in November, which will drive a lot of footfall as well as a kid’s entertainment area which hasn’t been open until recently, and the hotel will open next year. That’ll drive footfall,” Leeming said.

Releasing results after the market closed on Friday, Sun International posted a 19% rise in revenue to R7.56bn, due entirely to the inclusion of Sun Dreams — its Latin American operation — Sun Slots, the business it bought from Grand Parade, and Time Square. Without those, revenue generated by its local businesses fell 1.9% and adjusted headline earnings slid 29% to 198c.

Given its debt headache, Sun International has scrapped the interim dividend.

But it is not just SA where business is buckling. The group is considering pulling out of its investments in Colombia and Panama, where it has spent altogether $130m in capex to date, as neither investment has met its initial expectation.

Leeming said Sun Dreams, under which both countries’ operations were housed, would sell some of the assets and get “some cash” back. Major writedowns were not on the cards.

“The asset value in Panama is still well in excess of book value so there shouldn’t be a significant writedown there at all. In Colombia, there’s a lease that we have a major problem with,” said Leeming. That could cost Sun Dreams $3.5m to exit.

As if a decline in the Chilean copper belt, and the relocation of a key toll road was not enough, Sun International’s flagship Monticello casino in Chile was rocked in July by a shooting on the gaming floor, where a customer killed two staff members, injured five others and then took his own life.

As a result, regulators shut Monticello for 12 days, while staff were counselled and extra security measures put in place.

Leeming said the casino’s insurance would cover all cash flow and profit lost, and that slots numbers had recovered since it reopened.

Sun International’s market cap has sunk since June 2015, when it hit R10.9bn, to R5.7bn.

Of the three analysts surveyed by Bloomberg, two have “buy” calls on the share. Their 12-month target of R120.50 implies considerable upside if Leeming manages to right the ship. Sun shares closed 1.78% higher at R52.15 on Monday.