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Sun City dimmed by profit eclipse

Mar 02 2010 16:27 Marc Hasenfuss

Company Data

SUN INTERNATIONAL LIMITED [JSE:SUI]

Last traded 106.00
Change -0.95
% Change -0.01
Cumulative volume 134160
Market cap 12.10bn

Last Updated: 24/07/2014 at 04:25. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg - Sun City, once the flagship development in Sun International's [JSE:SUI] gaming and hotel portfolio, looked a pale shadow of itself in the six months to end-December 2009.

The resort, developed as a homeland-based gaming mecca during SA's apartheid years, appeared to come under severe operational strain during the six months to end-December 2009.

Sun International's divisional report showed that while Sun City's revenues were down marginally to R583m,earnings before interest, taxation, depreciation and amortisation (Ebitda) slumped by nearly a quarter to R68m.

On an operating profit basis, Sun City generated a mere R3m - a hefty 90% down on last year's R32m.

Sun International CEO David Coutts-Trotter confirmed much of the operating profit was wiped out by depreciation and amortisation charges.

This followed extensive refurbishment and maintenance to the Sun City site during the previous financial year. The refurbishments, which totalled R260m, included 170 rooms in the main hotel.

Room occupancy down

Coutts-Trotter stressed that Sun City was a very different business to the group's core focus on urban casinos. "There are a lot of costs...it's like running a city. We have to provide our own services from sewerage to water supply...even our own fire engines."

It seems most of the strain in the interim period came from markedly lower room occupancies. Sun International reported that Sun City's room occupancy was 71% for the interim period, well off the 81% recorded in the corresponding six months in 2008.

It also appears there was some pricing pressure with Sun International disclosing that the average room rate was 3% below that of last year at R1 188.

Sun City's trading margins - which were squeezed to under 12% - were hit by increased indirect costs (including the cost of additional security), increased energy costs and various maintenance initiatives to improve standards.

To put the once-mighty Sun City's performance in perspective, it is worth noting that Sun International's Boardwalk casino complex in Port Elizabeth - which only generates about R200m in revenue - notched up more Ebitda (R75m) than Sun City.

Likely profit-rebound

Sun International's popular Gauteng casino, Carnival City, made more than double Sun City's Ebitda despite churning substantially less revenue at R472m.

Analysts argued that while Sun City's performance was poor, there was a good chance of a profit rebound in the second half.

The general sentiment from market watchers was that Sun City was something Sun International shareholders simply had to live with.

One noted: "Sun City is a legacy asset...a sizeable asset that the group could not really sell".

While Sun City does attract some fairly large costs in terms of maintaining its hotels and from extensive marketing campaigns, analysts generally feel the development is not a serious drag on Sun International. "Sun City fortunately does wash its own face from a cash flow perspective."

- Fin24.com

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