Sun International’s Latin American gamble
Sun International’s likely abandoning of the Peermont Global acquisition and the transfer of an existing casino licence to the vibrant Menlyn Maine have lately overshadowed the gaming giant’s efforts to build a niche in Latin America.
The company’s decision to merge its fledgling Latin American operations (in Chile, Panama and Colombia) into existing operator Dreams is arguably as important over the longer term as attempts to buy out a rival and establish a large new casino.
In its recently released interim results, Sun International says the enlarged Latin American casino operations could contribute as much as 30%-35% of group revenue in the short term. That figure, the Financial Mail presumes, excludes the possibility of further corporate action by Dreams and the winning of more licences on the continent, which are both developments that cannot be ruled out.
Crunching the interim numbers for only three operations in the form of Monticello (Chile), Ocean Sun (Panama) and the brand new Sun Nao (Colombia) reinforces the notion that Latin America will be an important source of growth in spite of these operations typically achieving markedly lower margins than the core SA casinos.
As a collective, the Latin American operations generated R1.1bn revenue and chipped in R104m to operating profit. The earnings before interest, tax, depreciation and amortisation (Ebitda) margin came in slightly higher at 21.3%.
Higher marketing spend (to secure market share) and higher energy costs (priced in dollars) are just two of the factors inhibiting the Latin American margins.
At first glance the Ebitda margin does not seem too far off the 25.6% average achieved by Sun International’s SA operations. But this figure is skewed by its (numerous) small casinos and its legacy operations like Sun City, which mostly operate on lower margins. A fairer comparison for the Latin American operations would be the group’s larger urban casinos — GrandWest in Cape Town (Ebitda margin of 40%), Sibaya Casino in Durban (33%) and Carnival City in Gauteng (30%).
The lower margin might worry punters since Latin America’s profit contribution is only around 10% of gross profits — less than the R132m that Carnival City generated in operating profits.
But the odds on Latin America turning into a long-term winner do narrow markedly on closer inspection.