The South African facing casino and hotel group, Sun International, is undergoing major changes in order to keep up with a growingly competitive market. While investors are worried that the current environment is not ripe for the types of changes announced by Sun International, and are wary about the way the group is handling current issues, analysts believe that, overall, Sun International stocks offer attractive returns.
The current environment in South Africa's gambling industry shows that visitors to casinos are spending less per person than before. As such, margins fall as casinos carry the same costs but receive less revenue over the long run. Since 2008, there has been a slow growth in gross gaming revenue.
Some of the restructuring announced by Sun International include plans to sell 1.8% of SunWest, owner of GrandWest Casino and other properties, to Tsgo Holdings. The group also plans to move its license from the struggling Morula Casino in Gauteng to the new Menlyn project in Pretoria, and will invest R3 billion in developing the casino.
The casino group has also got plans in the pipeline to purchase a 25% stake in Grand Parade Investments to the tune of R285 million, with an option to buy up to 70%.
Also in South Africa, Sun International wants to rethink its plans for its flagship Sun City and find ways to increase cash flow and turn the iconic casino into a destination casino once more.
Looking overseas, Sun International plans to invest R1.3 billion to buy out its partners of the Monticello Grand Casino in Chile which it already manages. Sun International also wants to sell its majority stakes in all its African operations (except South African and Nigeria) and make R664 million. The group has already invested R1 billion in a casino in Panama City, and has also invested – albeit on a smaller scale – in Columbia.
Like any business, Sun International faces a number of challenges along the way as it moves to sell some of its interests and invest in others. For example, South Africa is currently mulling a full public smoking ban which could affect business significantly, while Latin American governments continue to charge high taxes.
However, according to analysts from the Allan Gray Group, quoted in SA Commercial Prop News: "The share price has already begun to discount many of the changes in the business, but we believe Sun International provides an attractive opportunity on depressed cash flows in an expensive stock market."