Mark Ingham's Fun-damental analysis

“In gaming, Tsogo continues to trump Sun”

Share price: SUI:SJ 5694 cents, TSH:SJ 2259 cents

Recommendation: A Trading Sell and Portfolio Sell maintained, fair value at 4800 cents

A year ago, I chose Tsogo Sun above Sun International as a gaming stock for the Pink Drive Basket. Of the two, my analysis assessed Tsogo as having the lower balance sheet and income statement risk and the probability of dividends being maintained. The recent annual results from Tsogo underscore the correctness of that call, with like-for-like earnings up by 6% to 207,6 cents and the dividend, covered twice by earnings, up by 6% to 104 cents for the full year. Cash flow from operations increased by 9% to R4,8 billion. Whilst net debt is R12,1 billion it is comfortably covered 4,5x by adjusted EBITDA. Macro concerns will weigh on sentiment towards consumer-facing stocks but Tsogo has a solid portfolio of assets and is expanding selectively.

Sun International has a complicated balance sheet, a relatively high gearing of R14,5 billion and an ambitious capex programme of R5 billion. This tends to unnerve investors. Recent trading is patchy, with six month like-for-like EBITDA declining by 12%, there is expansion indigestion, and the dividend has been suspended. However, I am satisfied that Sun has reasonable medium-term prospects, supported by a quality estate, but patience is needed for earnings to reflect that. Geographic spread is widening with South Africa now 67% of revenue and the balance principally Latin America. Debt is ring-fenced to each geography.

On the face of it, the group is in negative equity of R2,6 billion, a consequence of a “contingent liability” because of IFRS requiring Sun International to account for written put options held by minority shareholders. In the real world, minorities have been allocated their share of the net asset value whilst the contra as a debit raised against ordinary equity is the same non-controlling interest. Treating these as a normal derivative would cancel this out.

Sun changed the year-end from June to December to align with the Chilean operations that have a statutory requirement to have 31 December year-end. Sun reported a six-month result to December 2016 on 24 March, with earnings down by 35%, and the next full financial period will be the 12 months to 31 December 2017.

Based on the recent six-month result, the run-rate on adjusted EPS I estimate to be closer to 440 cents rather than the 628 cents for the twelve months to June 2016. This puts the stock on a forward PE of 13,0x. Even in a relatively optimistic scenario, the 2018 forward PE ratio of 10,0x is insufficient attraction given the uncertain macro environment, need to conserve cash to paydown debt, and lack of a dividend. My fair value of 4800 cents is 15% below the prevailing share price. Bid/offer spreads need to be closely watched but there is something to be said for taking money away on relative strength in the share price.

Sun International and Tsogo Sun based to 100 over two years

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