Johannesburg, Aug 29, 2001 (Moneyweb/All Africa Global Media via COMTEX)– While local companies continue to blame gambling, cell phones and the lottery for the deterioration of trading conditions, the casino operators themselves are also coming under pressure. Shawn Stockigt says keep Sun International, but another analyst expects it to continue to Pengeluaran HK underperform.
It is a little disconcerting when one of South Africa’s biggest casino operators claims that decreasing disposable income is affecting its business as well. For Sun International, gaming revenues increased for the year but this was as a result of three new casinos Pengeluaran HK being opened. Without these, revenues and margins would have fallen. The company will have new operations helping to prop up the financials for the next two years, but thereafter organic growth will take over as the main contributor to earnings.
The waning local tourism industry does nothing to instill investor confidence either. With hotel occupancy rates remaining low, companies like Sun International will not easily replace reduced gaming revenues with higher income from hotel operations.
The expansion of the gaming industry in South Africa has brought with it huge employment opportunities, and in some cases requirements that company’s undertake upliftment projects, but new legislation has also meant that fierce competition has become the norm in the casino industry, making it increasingly difficult to generate strong and sustainable earnings growth.
While the larger listed gaming companies on the JSE, including Kersaf, Sun International and Gold Reef, all showed increased revenues in their latest results, the figures for gaming revenues alone are not always given. Sun International grew through new business, Kersaf showed a loss in attributable earnings in the six months to December, and Gold Reef grew headline earnings per share by 18% at the expense of negative operating cash flows. Kersaf and Gold Reef are both due to release results to June shortly.
A Hotels and Leisure analyst says that the increase in competition in the industry has impacted Sun International’s existing business far more than the other casino operators as it was the only company with an extensive structure prior to the new regulations. Casinios such as Gold Ref City and Tsogo Sun have a different profile to Sun International’s operations. She adds that the company has had to restructure its operations in order to accommodate empowerment partnerships, and that it has extremely high interest charges due to the cost of building the new casinos.
Although top line growth can be expected to continue for Sun International, the analyst expects earnings and margins to remain under pressure for at least the next two years. The company has, however, remained a strong generator of cash, and this is expected to continue.
Shawn Stockigt of Gryphon Asset Management has a different opinion on Sun International. He believes that the new operations will provide a good base for growth in the company, and says that “going forward we’re expecting strong growth in both headline earnings and cash flow. Next year gearing should be at its peak, so we’ll stick with the stock for the meantime.”
Another analyst estimates that Sun International has approximately 40% market share in South Africa, with 13 out of the total 29 issued licenses. This would suggest that, with Sun International’s casino revenues of R2bn for the year to June, total casino revenues in South Africa are approximately R5bn.
It is difficult to estimate whether the amount spent by consumers at casinos is growing or declining, as the National Gaming Board does not supply any figures to the public, but certainly as the number of casinos grows, the amount of money being spent at each venue is likely to decline. In addition, it would appear that growth in total spend should decrease since most of the casino sites have been built and the initial rush to gamble is beginning to stabilise. Another analyst agrees with this sentiment saying that the growth in spending going forward should be in line with or slightly below growth in inflation.
Total casino spending of R5bn amounts to less than 1% of total disposable income in South Africa. But add that to the spend on cell phones, the lottery, betting on horse racing and the high petrol price, and it will come as no surprise if consumers begin to tighten their belts on leisure spending.
Industry changes indicate where the future of relevant companies might lie, but when management has a gloomy outlook, shareholders should sit up and take notice. Peter Bacon of Sun International said on an interview with Classic Business last week “we’re very concerned about the overall growth rate here in South Africa, and in fact in markets like Gauteng. If you take the month of July, which is after our year-end, 30 June, the market grew by just under 3%. So when you take inflation into consideration, it actually went backwards, which is quite concerning.”
Perhaps it is time to concede that the casino operators are going to be hard pressed to keep their earnings growth at reasonable levels for the foreseeable future. The huge increase in competition, the potential for a decrease in total spend on gambling and the unabated dearth of foreign tourists to South Africa will add to the long-term concerns of these operations.
Sun International looks set to be the hardest hit with its holding company, Kersaf likely to feel the heat as well. But if you believe Shawn Stockigt, it is one to keep – at least for the short term.
