Sun International expects Sun City to have one of its best years ever

JSE-listed hotel and resort group Sun International is anticipating that its Sun City resort will have one of its best years ever in terms of operating cash flow in the current financial year following the disruption caused by the Covid-19 pandemic.

“Looking forward, we are seeing a strong improvement and have set a target of R400 million Ebitda [earnings before interest, tax, depreciation and amortisation] in two or three years’ time,” says Sun International CEO Anthony Leeming.

He says Sun City made R150 million in Ebitda in 2019 and in the current financial year is “definitely going to exceed 2019 by a long way”.

But Covid-19 cost the resort about R150 million in operational costs in 2020, when it was closed for about five months because of the lockdowns, and about R50 million in 2021 “with the ups and downs, closures in July, restrictions, curfews and everything else”.

Leeming admits that Sun City has always been a challenge and investors have long asked why Sun International does not close it or sell it and reinvest in other things.

Instead, the group last week announced the investment of R295 million in Lefika Villas, the first phase expansion of its Sun Vacation Club timeshare product at Sun City, which will add 58 luxury three- and four-bedroom villas.

This is the first major new development at Sun City since 2004, says Leeming, and the group’s first major expansion since the pandemic.

“We are excited about launching this. We have had masterplans for Sun City for the last 20 years.

“There is still lots to come – a fifth hotel potentially down the line, more residential around the golf course and a lot of future plans. We believe in the future of Sun City and this is just the first phase of it.”

The second phase Sun Vacation Club expansion is still subject to approval from Sun International’s board. It will comprise around 200 two- and three-bedroom units, and is expected to commence in January 2023.

Demand up

Leeming says there has been huge demand for local travel, including self-drive and self-catering Vacation Club getaways, and for the hotels at Sun City since the end of the Covid lockdowns.

“The demand has picked up massively. It’s an easier destination [to get to], the property is in a good state and we have the right management team. We used to get more complaints than compliments. Now it’s switched around.”

Conference business has gone through the roof, he adds. “During Covid-19, everyone thought it’s going to be a thing of the past because of [Microsoft] ‘Teams’

But people want to get together and [companies] want to get their teams together.

“The people who have been coming back here are booking for two or three years out and are committed to keep coming back because there are not too many destinations where you can do what you can do here.”

Leeming says Sun City’s leisure business has always done well and the product probably deteriorated over the years. However, Sun International has reinvested more than R200 million in the refurbishment of The Palace of the Lost City and also refurbished The Cascades, while the Cabanas was upgraded a while ago and the main Sun City hotel will be the next to be refurbished.

Occupancies

He says occupancies at the hotels were running at close to 80% at their highest point, which is extremely high, and were in the 60% range in the first half of the financial year to end-June 2022.

But Leeming says there were a lot of cancellations for this period, particularly from international guests, because of the emergence of the Covid-19 omicron variant.

“We are building back up to where occupancies are now probably 10% behind 2019 levels, but cash flow is ahead [of 2019] because operationally we are performing better and looking to beat 2019.

“We are getting close to 70% occupancy in October and are strong for November and December.”

Financially fit

Leeming says Sun International is now in a very strong financial position in terms of its cash flow, its balance sheet is strong and the business is in “pretty good shape” and generated reasonably good cash flow even during the Covid-19 pandemic when it held back on most capital expenditure.

In addition, the group managed to get about R600 million from a business interruption insurance claim and did a R1.2 billion rights issue.

Leeming says the Time Square Casino in Pretoria is performing well and this “will be its best year ever, especially cash flow, not necessarily the top line”.

He says the pandemic taught the group a lot and it has managed to restructure the business, eliminating “all wastage” and becoming efficient and more effective.

“We believe we have taken out between R600 million and R800 million in costs permanently from the overall business.”

Leeming stresses the importance of Sun Vacation Club to Sun City, saying that people staying at such developments “are critical for concessionaires, food and beverage sales, entertainment, casino, you name it”.

He adds that Sun Vacation Club largely pays for itself through the levy and the group re-sells it every 10 years, which means capital keeps coming back in.

“We have to invest a little bit each time but it’s significantly less than the upfront costs. It’s a constant cash flow stream, upfront capital for the next 10-year sale, and so it’s a very good cash generator for the group.”

August saw Sun International declare its first dividend since 2016 after achieving a significant improvement in operations following the lifting of the last pandemic-related restrictions.

The group declared a gross cash dividend of 88 cents per share for the six months to end-June.

Leeming said at the time Sun International anticipates the improvement in the group’s operational performance to continue for the remainder of the financial year.

Analyst’s take

Independent analyst Simon Brown of Just One Lap (and MoneywebNOW presenter) says Sun City is a jewel asset, being two hours from Johannesburg, having the Pilanesberg National Park on its doorstep, the golf courses, its gaming offering and so on.

“I think there is a fairly strong investment case for hospitality broadly and Sun City is well positioned.”

Brown says conferencing is starting to come back, South Africans are travelling again, foreigners are returning, and flights are full.

The current tough economic times are taking some of the shine off the hospitality sector but there is a lot of pent-up demand “heading that way” he says, because people have been locked down for more than two years and businesses have not had conferences either.

Brown says Sun International took costs out of the system during the pandemic, which has fundamentally changed the company’s cost base, and also got rid of some B-grade and vanity assets.

“They were massively aggressive on reducing their cost base and that is going to keep them in good stead for some time,” he says.

Listen as Fifi Peters talks to Sun International CEO Anthony Leeming about the interim dividend announced in August (read the transcript here):