Sun is still shining through pandemic

Sun International, the owner of Sun City and other top hotels and casinos, says its balance sheet is strong enough to ride out a potential fourth wave of Covid-19 infections and any stricter lockdowns that may accompany it.

In an interview this week after the release of half-year results, CEO Anthony Leeming said though a fourth wave and lockdown would be "unfortunate", the group's "balance sheet is quite strong at the moment" and "would be able to deal with it".

Health experts have warned of the possibility of a fourth wave as early as November, but there is uncertainty about how severe it will be if and when it happens.

The number of staff Sun International has retrenched

since the pandemic hit SA

—  2,300

Leeming struck an optimistic note in the statement that accompanied the group's relatively strong results, saying it was well positioned to recover from the effects of the pandemic due to the momentum the vaccination programme in SA was gaining and an anticipated return to full economic activity once the pandemic recedes.

In particular, for the group to achieve pre-pandemic levels, the resumption of business conferences was essential, Leeming said.

Sun International's strong balance sheet is due to the group slashing costs, improving efficiencies across the business and reducing debt significantly. Group debt, excluding lease liabilities, is sitting at R7.6bn from R11.1bn as at June 30 2020 thanks to a R1.2bn rights offer in July last year and the disposal by Sun Latin America of its 64.94% interest in Sun Dreams for $160m in November.

Some of the other difficult decisions the group made last year during the height of the first severe lockdowns included closing down its Naledi Sun Casino in the Free State and Carousel in the North West, and retrenching 2,300 of its 9,000 staff.

Peter Armitage, CEO of Anchor Group, agrees that Sun International has the firepower to weather a potential fourth wave of lockdown.

"They've shown the ability to still generate cash in bad times."

He says that once market conditions return to some semblance of normality, there should be some upside for Sun International in terms of its share price.

Armitage says the fair value of Sun International's shares would probably be in the R30 to R40 range in more normal conditions. The group's shares are currently trading at about R18.40.

Sun International was given a boost by the fact that its gaming assets, which account for about 70% of its earnings, recovered strongly each time lockdown restrictions were eased.

The group reports that income from casino operations "increased by 53% compared to the prior comparative period. Overall footfall at our properties remains well down with the lack of shows, concerts and general entertainment at our complexes due to the Covid-19 restrictions."

The group also received a significant business interruption insurance payout of R235m in August this year, which Leeming says is expected to further strengthen its position. The group says in a statement that remaining claims totalling R260m are expected to be "settled shortly".

For the six months ended June 30 2021, overall income from the group's South African operations improved 52% to R3.7bn compared to the prior period. Adjusted earnings before interest, tax, depreciation and amortisation (ebitda) increased to R749m from R89m in the same period last year. Total group adjusted headline earnings improved from a loss of R885m to a loss of R7m.

The easing of lockdown restrictions to level 1 during the period also saw an uptick in domestic leisure travel to resort destinations such as Sun City and the Wild Coast Sun. The group's Sun Vacation Club at Sun City achieved occupancy rates of 64%.

Leeming says that overall "the truth is we are still well off the numbers that the business is capable of doing".

"All the work that has gone into getting the business right over the last 18 months has really put us into a good position to start generating strong cash flows, but I think we are not going to get to where we want to be until Covid restrictions are lifted," he says.

"If you look over the last 18 months, we've probably lost over R3.5bn in ebitda from what we would have done.

"We are very comfortable with the results. June was not a great month as there were stricter lockdown restrictions, an earlier curfew was imposed and we had to close our operations on June 28 [due to Covid-19 restrictions].

"Our six months could have been far better and remember we started in January [during the second Covid wave] with alcohol bans and curfews. I think it is encouraging that we can generate the cash we are."

Conferences

Leeming says that for the group to get back to pre-Covid trading levels there would have to be a return of international and corporate travel. Although there had been encouraging improvements in domestic travel, he says for a resort property such as Sun City to perform to its potential it needed the midweek corporate conferencing market to return.

"Whether that return of conferencing is in six months or a year from now, I don't know, but I'm confident it will bounce back quickly."

Leeming says people are getting tired of online interactions and that over the long term conferencing goes a long way to building up a corporate culture.

"Companies are a bit reluctant right now to travel or have conferencing until people are vaccinated. I think the vaccination programme will help corporate travel. Those people who are fully vaccinated could potentially look at conferencing again."

Leeming says the corporate market is a big part of the group's hotel business, especially at resort properties such as Sun City and business-focused hotels such as The Maslow in Sandton.

He says each of the group's various hotel and gaming properties has different features, making them dependent on different customers.

For instance, conferencing is critical for Sun City's midweek occupancies as "leisure travel outside of holiday periods is limited".

"We used to have big companies booking out Sun City for three days for a conference. You could have thousands of people there. It is critical for a place like Sun City and less so for our Table Bay hotel, which in turn is very dependent on international travel. Each market is a little different."

Anchor's Armitage says the hotel sector remains challenging as "the concerts and conferences, a lot of the things that are the drivers of their [Sun International] business, are dead at the moment".

"I think they've done superbly well in the conditions to still be making that sort of money and margins in these conditions."

Armitage says that when the hotel and gaming sector will bounce back is "more a macro question than a Sun International one", but that when restrictions "are relaxed, one would expect there would be a big bounce-back".

The hotel sector in general has been focused on cash preservation as it negotiates the pandemic.

Earlier this year, reporting results for the year ended March 31 2021, Tsogo Sun Hotels said it "continues to focus on cash preservation and liquidity to continue trading through the pandemic and to protect the livelihoods of the many stakeholders" who depended on the group, "from our employees and suppliers to our communities and investors".

Tsogo Sun Hotels' full-year results bore the brunt of the first hard lockdowns and included the effects of a number of liquor bans and curfew restrictions late in 2020 and early in 2021.

The results, which were released in May, showed that total income for the year of R1.2bn (2020: R4.5bn) ended 74% below the prior year, with a 79% decline in hotel room revenue and a 75% drop in food and beverage revenue.

The separately listed casino operator Tsogo Sun Gaming, whose full year also ended on March 31 2021 and included the full effect of the various lockdowns, reported a 51% drop in income to R5.7bn, while earnings before interest, tax, depreciation and amortisation were 57% down at R1.7bn.

City Lodge Hotels is due to release full-year results on Wednesday.