It is time to buy sun international

Investment Thesis

Sunburst Africa, Johannesburg-Sun International, (JSE Code: SUI)  is the leading casino operator in the southern hemisphere and currently enjoys 45.5% of the market share of South African casino market. It owns and owns and operates internationally recognized tourism resorts, luxury hotels and urban entertainment operations in eight countries, including South Africa, Zambia, Nigeria, Botswana, Namibia, Lesotho, Swaziland and Chile. I would say, Sun international is still a growth company with more than half of its portfolio developed in the last 15 years, with new projects launched in West Africa and South America. The company currently has a market capitalization of approximately R14 billion on the JSE.According to the company website, it has over 50,000 customers from over 50 countries visiting its various properties daily. The company directly employs over 10, 000 people with over 50, 000 indirect jobs created. With its global focus, the company has a potential to continue to grow in Africa and other continents. The group is specifically focused on the development, operation and management of hotels, resorts and casinos. ​​​​​​​​​​

According to the company’s financial report for the period ended June 30th 2014, the various segment reporting as a percentage of revenue shows South African operations contributing 72.56%, Monticello 12,67% and other African operations 9,4%. Revenue for the year ended 30 June 2014 was 5.4% ahead of last year at R10.8 billion, reflecting a significant turnaround in the second half in which revenue was up 7.4% compared to 3.6% in the first half of the year. EBITDA for the year was 5% ahead at R3.1 billion, with EBITDA growth of 16% achieved in the second half offsetting the 5% decline in the first half. The EBITDA margin for the year was marginally below last year at 28.2%, however in the second half it improved to 28.8%. This was achieved after absorbing additional gaming taxes and levies – on a like-for-like basis the second half EBITDA margin would have been 29.2%.

Figure 1: Sun International ten Year Share Price on the JSE.

sun

Looking at the company’s ten year equity prices, figure one shows that the shares have gained 159.7% over the past ten years.  The dividend yield currently stands at 1, 7% and earnings yield 4, 62%, and the price earnings ratio 21.63. The stock is currently undervalued with potential future earnings potential and thus offers a lucrative investment opportunity. The 52 months highs and lows have seen the share price move from a low of R86, 5 52 weeks ago to R128, 0 currently. However according to standard bank equity analyst the stock is still underpriced with great earning potentials as illustrated on table one.

Table 1:  SUI Valuation

As at:
06 Jun 2014
30 Jun 2015 30 Jun 2016
DPS cents 370.00 550.00
EPS cents 934.00 1106.00
PE 13.15 11.11
Earnings Yield % 7.60 9.00
Dividend Yield % 3.01 4.48

Source: www.standardbank.co.za

Table one shows that the dividend per share, earnings per share, earnings yield and dividend yield all showing significant growth potentials into the future.

Risks

Though Sun International presents a great investment opportunity, there still exist risks of depressed growths in South Africa due to general economic slowdown in the economy with growth rates revised downward from 2.7% to currently 1.4% for 2014. Infrastructure and other regulatory challenges continue to constrain growth for the group in other parts of Africa. Increased operational costs pose another challenge to the investment thesis for the group.

Conclusion

I would say, Sun International remains a strong buy stock with huge growth potentials within South Africa and globally. Its current valuation shows great future earnings and growth potentials. Investors interested in owning a share of the tourism industry in Africa may want to have a close look at sun international.

 

Disclaimer: Information and sources in this document are from sources believed to be reliable, but cannot be guaranteed due to the nature thereof. Information contained in the report should not be construed as financial advice. Professional financial advice should be sought before any course of action is pursued. Atud and Associates (Pty) Ltd t/a Sunburst Africa shall not be responsible and disclaims all liability for any loss, liability, damage (whether directly or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable, directly or indirectly, to the use or of reliance upon any information contained in this report. The company, directors and staff may from time to time have interests in the shares mentioned in this report. Sunburst Africa is a Division of Atud and Associates- A Registered Financial Services Provider. www.atudandassociates.co.za, Tel: 0110786607, info@atudandassociates.co.za, info@sunburstafrica.co.za.