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HOSPITALITY: Sun International Weathers Tough Trading Environment


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Leading leisure group Sun International has reported a 1% drop in revenue and a 7% drop in EBITDA for the year ended 30 June 2010, a period characterized by continuing depressed consumer spending.

Group revenue declined to R8.0 billion (-1%), while comparable revenue (excluding Monticello in Chile and the Federal Palace in Nigeria) was 3% lower. Gaming revenue was in line with last year at R6.2 billion while rooms revenue declined by 5%. EBITDA of R2.5 billion was 7% lower than last year and the EBITDA margin declined 2.2 percentage points to 32.0%. The lower margin is due to the contraction in comparable revenue and increases in operating costs. Excluding the results of Monticello and the Federal Palace, the EBITDA margin was 32.9% versus 36.2% last year.

However, given that trading conditions are stabilising and the group's financial position and debt ratios have strengthened, together with lower expected capex than originally forecast for next year, the board has resolved to resume dividend payments and a dividend of 100 cents per share was declared.

Adjusted headline earnings of R512 million and diluted adjusted headline earnings per share of 507 cents were 15% and 18% below last year respectively.

CE David Coutts-Trotter said that while the popularity of the company’s properties remained high and footfalls were strong, spend per customer declined across the board and comparable gaming revenue decreased by 2% from last year as customers continued to feel economic pressure.

Capital expenditure reached R1 031 million (Monticello R377 million, including asset reinstatement of R64 million and capitalised interest of R21 million) and included expansions to Sibaya, refurbishment at Lesotho and Wild Coast Sun, and other ongoing asset replacement. Borrowings decreased by R217 million to R6.3 billion. The Chilean facilities have been restructured resulting in the shareholders funding a US$50 million repayment of the long term facility.

Fluctuations in the Rand and Chilean Peso against the US Dollar during the year resulted in a net exchange loss of R15 million compared to a gain of R42 million last year. Net interest paid decreased by 19% from R626 million to R506 million as a result of lower prevailing interest rates and lower borrowings. Tax at R452 million declined by 26% from last year as a result of the lower earnings in the current year and the reversal of prior year over-provisions. The effective tax rate excluding non deductible preference share dividends, STC and prior year over-provisions was 36% (33%) due primarily to other permanent differences.

GrandWest was again impacted by the depressed regional economy and achieved revenue of R1 582 million and EBITDA of R614 million which were 4% and 9% below last year respectively. The EBITDA margin of 38.8% declined by 2.3 percentage points from 41.1%. Carnival City achieved revenue of R965 million and EBITDA of R303 million, a decline compared to last year of 3% and 14% respectively. This resulted in an EBITDA margin of 31.4% which was 3.8 percentage points below last year. EBITDA was also impacted by increased property taxes and energy costs.

Sibaya increased revenue by 5% to R849 million. EBITDA of R296 million was in line with last year, while the EBITDA margin of 34.9% declined by 1.5 percentage points. The KwaZulu-Natal market grew by 3.8% in the year and Sibaya’s market share at 35.5% was 0.3 percentage points higher. Boardwalk’s revenue declined by 1% to R414 million and EBITDA by 7% to R160 million. As a result the EBITDA margin declined 2.5 percentage points to 38.6%.

Following the earthquake in February, Monticello closed for repairs, re-opening on 30 June. Property damage of US$8.2 million and a business interruption claim of US$25 million was finalised with insurers, and included in adjusted headline earnings is the insurance deductible of US$7.5 million. The earthquake and its consequences masked a positive trading trend at Monticello. Without it, revenue was anticipated to have increased by more than 122% over last year, and the EBITDA achieved of R99 million (which did include the business interruption proceeds) compares favourably to the R22 million loss last year. Monticello was completed just ahead of the earthquake in February 2010 at a final cost of US$262 million.

Rooms revenue of R857 million declined by 5% from last year. Group occupancy was down 5 percentage points at 67% and an average room rate of R898 was achieved, which was a marginal decline on last year. The occupancy decline was due primarily to Sun City, The Table Bay and the Zambian hotels experiencing weaker demand from both international markets and the groups and conventions sector. While occupancy levels during the World Cup were below expectations, higher room rates were achieved, improving the overall achieved room rates particularly at Sun City and Table Bay.

Sun City’s room occupancy was 5 percentage points lower at 69% while the average room rate was 7% higher than last year at R1 334. EBITDA declined by 16% to R173 million. The Table Bay achieved occupancy of 53% (67%) and the average room rate increased by 5% in the current year to R2 033 resulting in an EBITDA decline of 46% from last year to R35 million. The Royal Livingstone and Zambezi Sun achieved an aggregate occupancy of 49% (60%) at an average room rate of US$189, a 12% decline against last year. In US dollars, EBITDA was 45% below last year.

The Botswana operations achieved revenue of R156 million and EBITDA of R48 million, which was 14% and 29% below last year respectively. The decline was exacerbated by the 10% strengthening of the Rand against the Botswana Pula.

The Federal Palace transaction was completed on 26 May 2010 with the group now owning 49% of the company. Prior to this date, the 29% investment was held as an associate. The group has invested US$28 million in equity and advanced a loan of US$15 million to the company. The casino opened in December 2009 and steady progress has been made in attracting gaming customers to the property. Demand in Lagos was subdued with consequent pressure on occupancy and rates resulting in an aggregate occupancy of 36% at an average room rate of US$320.

Management fees and related income of R607 million was 9% lower, while EBITDA of R345 million was 10% lower. Included in revenue are development fees of R26 million compared to R40 million last year.

Looking to expansions and refurbishments, the first two phases of the Wild Coast Sun refurbishment programme, which comprised the refurbishment of the casino and 54 rooms, were completed during the year. The next phase, the refurbishment of an additional 57 rooms, will be completed by December 2010. The project will be completed by mid-2012 at a capital cost of R400 million. Construction of the new Prive area at Windmill commenced in May 2010 and should be completed by December 2010. The total capital expenditure on this project is estimated at R35 million.

The 200-slot and 8-table casino at the Federal Palace Hotel in Lagos was opened during December 2009 and the conference facility during January 2010, at a combined cost of US$19 million. The refurbishment of the swimming pool and creation of a pool club, including a water park, sports facilities and exercise area, is well advanced and is expected to be completed during September 2010 at a cost of US$2.5 million.

GrandWest's initial 10-year casino exclusivity in the Cape Metropole expires during December 2010. The Provincial Government of the Western Cape (PGWC) is considering whether to permit one of the other casino licence holders in the Western Cape to relocate to the Cape Metropole and is engaging interested stakeholders before taking a final decision. The PGWC has indicated that it would seek to extend GrandWest's exclusivity to enable proper completion of this exercise and any consequential processes. Insufficient information is currently available to assess the potential impacts on GrandWest's revenue and profitability. However, in the event that a relocation and establishment of a new casino goes ahead, it is likely to be material to GrandWest once opened, which is unlikely to be before the end of 2012.

The Eastern Cape Gambling and Betting Board (ECGBB) announced during September 2009 that Boardwalk is the preferred bidder for the exclusive gaming licence in Port Elizabeth. Currently the licensee and the ECGBB are in final consultations on the licence conditions and finalisation is anticipated in advance of the expiry of the current licence in October 2010.

Looking ahead, Coutts-Trotter said that although trading conditions are stabilising, it is anticipated that demand within the gaming and hospitality industries will remain weak in the year ahead. “Notwithstanding this, some growth in revenue is expected from existing operations in addition to greater contributions from Monticello and the Federal Palace. Accordingly, the group expects growth in adjusted headline earnings per share.”

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