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Sun International share analysis |
25 Feb 2013. Sun International is a risky company to invest in - it isn't as empowered as Tsogo Sun so may lose out on new casino licenses in South Africa, there's a new gambling tax the government is implementing and there's the ever-present threat of online gambling being legalised (causing punters to get their fix at home rather than in Sun International casinos).
Sun International run very profitable casinos and less profitable resorts. Up to the early 1990s they had a monopoloy over gambling in South Africa with their resorts in the apartheid-era homelands, but their profitability was hammered by the introduction of casinos in & close to South Africa's cities. Fortunately for Sun International, they were adept at gaining new licenses close to the cities. Sun International's assets include the Sun City resort, Federal Palace, the Wild Coast Sun, The Table Bay Hotel and Kalahari Sands. In 2007 Sun International purchased 40% of Chilean casino license holder, San Francisco Investment.
I did a valuation based on discounting owner earnings, assuming a spread of 8% spread, and future growth in owner earnings of 0% p.a. real. On this basis Sun International is worth some R100 to R120 per share.
A weaker Rand means more people holidaying in South Africa, since they cannot afford to travel abroad. It also means that it becomes cheaper for overseas travellers to visit South Africa. This points to the valuation in the second half of 2011 being more indicative of the value of Sun International.
Tsogo Sun is 41% owned by Tsogo Investment Holdings Pty Ltd (which is owned by Hosken Consolidated Investments, a listed company, some 40% owned by the Southern African Clothing & Textile Workers Union) & 40% by SABSA Holdings (Pty) Ltd (which is owned by SABMiller). Sun International is owned 6% by Dinokana Investments (includes Dinokana, the Sun International Employee Share Trust & the Sun International Black Executive Management Trust shareholderings). Its number one beneficial shareholder is "Sun International Investments No. 2", but that's s a wholly-owned subsidiary. It's clear that Tsogo Sun has far better empowerment credentials than Sun International, and over time this may result in Sun International losing out on casino licenses in South Africa, or having to carry out another empowerment transaction.
To me this is really the elephant in the room. If online gambling is legalised, I can see many people getting their gambling fix at home rather than by going to Sun International casinos. Of course Sun International could participate in the online gambling industry, but this isn't their area of expertise.
Due to limited licenses in SA, existing casinos have strong competitive moats over the lifetime of the licenses, the hotels & resorts less so. Grandwest's exclusivity in the Cape Metropole has expired, & the Western Cape provincial government is thinking of allowing one of the other casino licence holders to relocate closer to the city, which could impact on Grandwest's profits.
The report of the Gambling Review Commission says:
"The Commission is of the view that the current limit of 40 casinos in the country is appropriate & should be maintained in future"
"The Commission recommends that the New South Wales approach of comprehensive licence reviews every 5 years be considered"
"The present licensing & regulatory functions of the provinces should remain as they currently are."
"The Commission recommends that limits on the total number & type of slot machines should be set. This would include both casino-based & non casino-based slot machines. The Commission recommends that the maximum number of slots per gambling establishment should remain at the current number of 40 machines."
"In order to preserve this cap on convenience gambling, it is important that large numbers of gaming machines should not be easily accessible from shopping malls".
"The managed rollout of gambling opportunities since 1996 has stood us in relatively good stead"
"The Commission is concerned that there appears to be pressure building from the gambling industry & from regulators to allow more gambling activities. In the absence of a clear policy & regulatory framework this has the potential to increase dramatically the level of demand for gambling, & may not readily be contained"
"There is scope for the introduction of a limited number of new forms of gambling"
"It is proposed that a maximum number of licences should be determined for online gambling to allow for the controlled rollout of online gambling & to monitor its socio-economic impact over time. Too little is known at this stage about its impact on problem gambling to be able to allow a free market. In addition, the approach to limit the number of land-based gambling opportunities can be substantially undermined, if online gambling is not strictly controlled & limited."
"There appears to be substantial demand for poker to be played outside of licensed casinos & in particular online...The current framework appears to be too restrictive, given the demand...It is proposed that regulators should license poker tournament operators...this could provide gambling operators, such as bingo halls, with other forms of revenue...Standalone poker houses & clubs should not be permitted. Online poker should be regulated through online gambling legislation."
"The Commission recommends bringing betting exchange activities into the regulatory framework...On the assumption that betting exchanges are unlikely to stimulate much new demand, the Commission is not greatly concerned that it will result in proliferation."
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