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SunInt to shine

Johannesburg -  Investors in unloved gaming group Sun International (SunInt) may well be about to enjoy some brighter days.
 
That's according to leading value investor Piet Viljoen from Cape-based asset management firm RE:CM.
 
"In South Africa, casino operators are especially advantaged because only a limited number of licences are available and with the exception of the Eastern Cape, licences are issued permanently.

"In many other jurisdictions, there is no predetermined limit on the number of licences and therefore no true barrier to entry," Viljoen said.
 
He added that if you were thinking of launching a casino business in South Africa, you should think again as 37 of the 40 available licences have already been issued; epic battles have raged over stakes in those casino assets since gaming became legal in 1996.
 
SunInt has been an average performer for investors over the last five years. In October 2005 it was trading at around R73 per share before rising up as high as R155 in June 2007. The counter fell to R59 in March 2009, but has gradually recovered to trade at around the R97 mark.
 
However, Viljoen concedes that while SunInt "is a quality company, it is not a 'winning' stock" and it has underperformed the market over a meaningful period of 15 years".

Online uncertainty
 
Viljoen believes that this underperformance could be attributed to a couple of key areas, including the fact that the group has five of its 13 casino licences in remote locations like Sun City; Sun International is still earning weaker returns on its asset base. Other factors include high gearing levels emphasised by a weak operating environment.
 
"To replace Sun International's assets will cost about twice the value of its current market capitalisation. Although this does not automatically imply the company will produce cash flows worth twice its market capitalisation and earn high economic returns, it provides a solid underpin to the valuation," Viljoen concluded.
 
On the gambling front, the sector had also been facing increased pressure from a variety of international online casino offerings, which are now involved in a high profile legal tussle with South African regulatory authorities. With uncertainty over their legality, punters are being forced back to licensed casinos.
 
SunInt is also a major holding in the Discovery Equity Fund managed by Sam Houlie of Investec Asset Management. The company is the fifth-biggest holding, comprising 4.6% of the portfolio.
 
When SunInt reported full-year results for the year ended June 30 2010, the company saw revenue down 1% while headline earnings slipped 18%. On the positive side, investors started receiving their dividend again with 100c/share declared.
 
Commenting on the the group's prospects for 2011, CEO David Coutts-Trotter told investors that the outlook for the remainder of the year would be "weak". However, he expected growth in headline earnings courtesy of its Monticello and the Federal Palace operations.
 
Monticello is located in Chile and suffered damage during a recent earthquake, while the Federal Palace is in Lagos, Nigeria.
 
In late trade on Wednesday SunInt was up 98c (1%) to trade at 9 848c/share.

 - Fin24

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