About this online reporting
CHIEF FINANCIAL OFFICER’S REVIEW
IMPACTS
VALUE CREATION FOCUS AREAS
Capital Allocation
Disciplined investment in quality assets
Strong Governance
Driving efficiency and optimisation
FINANCIAL PERFORMANCE REVIEW
Despite a tough trading environment, which includes low GDP growth, high unemployment and an uncertain political landscape, the group’s South African operations delivered a pleasing result. With income up 2% and adjusted EBITDAR up 5%, the EBITDAR margin improved from 28% in 2018 to 29%. This improvement was driven by the continued growth of the flagship TIme Square property, above-market growth at Sibaya, SunSlots and SunBet. This was partially offset by weaker performances at GrandWest and Sun City, the latter of which is in the early stages of a full operational turnaround plan.
Our Latam operations showed tremendous resilience despite the significant impact of unexpected and widespread social unrest which erupted in Chile during the last quarter of the year, resulting in curtailment of operations, some damage to our properties and significant deterioration in trading conditions during October and November.
Income from the Latam operations was up by 8% from the prior year to R5.4 billion with adjusted EBITDAR declining by 8% from the prior year to R1.3 billion.
On a comparable basis income was up 1% from the prior year at R4.6 billion and adjusted EBITDAR decreased by 11% to R1.2 billion.
We increased our interest in Sibaya to 87.2.% with the effective acquisition of a further 23.9% equity interest from minorities.
We concluded agreements to acquire the 30% minority equity interest in SunSlots which will result in SunSlots being a whollyowned subsidiary. This transaction is awaiting certain regulatory approvals which we anticipate will be received in the short term.
Both Sibaya and SunSlots have been trading above expectations, with the transactions being concluded at attractive valuations and at levels which will be earnings and cash flow enhancing.
| South Africa | Latam | Nigeria | eSwatini* | Total | ||||||||||||||
| R million | 2019 | % | 2018 | 2019 | % | 2018 | 2019 | % | 2018 | 2019 | % | 2018 | 2019 | % | 2018 | |||
| Income | 11 481 | 2 | 11 254 | 5 396 | 8 | 5 018 | 162 | 9 | 148 | 193 | (1) | 194 | 17 232 | 4 | 16 614 | |||
| Adjusted EBITDAR | 3 303 | 5 | 3 143 | 1 294 | (8) | 1 406 | 12 | 33 | 9 | 1 | (50) | 2 | 4 610 | 1 | 4 560 | |||
| Rental | (65) | 59 | (159) | – | 100 | (43) | (1) | – | – | – | – | – | (66) | 67 | (202) | |||
| Depreciation and amortisation |
(1 016) | 4 | (1 058) | (517) | (13) | (457) | (25) | – | (25) | (7) | 13 | (8) | 1 565) | (1) | (1 548) | |||
| Adjusted operating profit |
2 222 | 15 | 1 926 | 777 | (14) | 906 | (14) | 13 | (16) | (6) | – | (6) | 2 979 | 6 | 2 810 | |||
| Foreign exchange profit |
(13) | <(100) | 2 | 17 | >100 | (11) | – | – | – | – | – | – | 4 | >100 | (9) | |||
| Net interest | (861) | 10 | (954) | (251) | (39) | (181) | (45) | (13) | (40) | (1) | 50 | (2) | (1 158) | 2 | (1 177) | |||
|
(785) | 18 | (954) | (232) | (28) | (181) | (45) | (13) | (40) | (1) | 50 | (2) |
(1 063) |
10 | (1 177) | |||
|
(76) | (100) | – | (19) | (100) | – | – | – | – | – | – | – | 063) | (100) | – | |||
| Profit before tax | 1 348 | 38 | 974 | 543 | (24) | 714 | (59) | (5) | (56) | (7) | 13 | (8) | (95) | 12 | 1 624 | |||
| Tax | (376) | 14 | (436) | (221) | 4 | (230) | (2) | <(100) | 1 | 1 | – | 1 | 1 825 | 10 | (664) | |||
| Profit after tax | 972 | 81 | 538 | 322 | (33) | 484 | (61) | (11) | (55) | (6) | 14 | (7) | (598) | 28 | 960 | |||
| Minorities | (350) | (10) | (317) | (132) | 39 | (215) | 30 | 3 | 29 | 3 | – | 3 | 1 227 | 10 | (500) | |||
| Attributable profit | 622 | >100 | 221 | 190 | (29) | 269 | (31) | (19) | (26) | (3) | 25 | (4) | (449) | 69 | 460 | |||
| Share of associates |
2 | (75) | 8 | 1 | 100 | – | – | – | – | – | – | – | 778 | (63) | 8 | |||
| Continued adjusted headline earnings |
624 | >100 | 229 | 191 | (29) | 269 | (31) | (19) | (26) | (3) | 25 | (4) | 3 | 67 | 468 | |||
| Discontinued operations |
– | – | – | (18) | 83 | (103) | – | – | – | – | – | – | 781 | 83 | (103) | |||
| Group adjusted headline earnings |
624 | >100 | 229 | 173 | 4 | 166 | (31) | (19) | (26) | (3) | 25 | (4) | 763 | >100 | 365 | |||
| * | The prior year comparable financial information was restated to reflect the eSwatini operations as continued operations, the published prior year results included eSwatini as discontinued operations as required by IFRS 5: Non-Current Assets and Liabilities Held for Sale from Discontinued Operations. |
The group has incurred a number of once-off or unusual items that have been adjusted for in headline and adjusted headline earnings, the most significant of which are described below.
Headline earnings adjustments include the following:
- net loss on disposal of property, plant and equipment of R21 million;
- profit on sale of the Lesotho and Botswana management contract of R18 million;
- reversal of prior year impairment relating to Panama of R34 million; and
- impairment of the Maslow Sandton and other assets of R163 million and R9 million respectively.
Adjusted headline earnings adjustments include the following:
- restructuring and related cost of R55 million relating to various properties within the group and the South African central office;
- amortisation of R104 million of the Sun Dreams intangible asset raised as part of a purchase price allocation adjustment;
- a decrease in the value of the Tsogo Sun put option of R44 million;
- insurance proceeds received relating to the Sun City storm damage claim of R89 million;
- additional Latam income tax of R155 million provided for relating to an ongoing dispute with the Chilean revenue authorities;
- Latam withholding tax of R22 million; and
- Time Square deferred tax asset recognised relating to the prior year’s assessed losses of R193 million.
BORROWINGS
Sun International’s borrowings (excluding IFRS 16 adjustments relating to the capitalisation of lease hold liabilities) as at 31 December 2019 were R13.3 billion, a decline from R14.7 billion as at 31 December 2018.
South African debt reduced from R9.2 billion at 31 December 2018 to R8.8 billion due to strong cash generation. The Debt (excluding lease liabilities) to Adjusted EBITDA (after lease payments), reduced to 2.8x as at 31 December 2019, down from 3.0x a year earlier and significantly lower than the current bank covenant threshold of 3.5x.
Net debt in Latam (excluding lease liabilities), reduced to R3.9 billion from R4.9 billion. Sun Dreams’ Net Debt to EBITDA (excluding the effect of IFRS 16) reduced from 3.0x to 2.6x at 31 December 2019.
During the year, the refinancing of the South African debt facilities was also successfully completed in a transaction that was 50% oversubscribed, with all existing lenders renewing their commitment to the group. The restructure has extended maturities, increased covenant headroom and reduced overall net finance costs through a more efficient facilities package. The weighted average cost of interest fell from 9.6% in the prior year to 8.6% for 2019.
| South Africa | Chile | ||||||||
| Times | Covenant | Actual | Covenant | Actual | |||||
| Debt to EBITDA | 3.5x | 2.8x | 4.5x | 2.6x | |||||
| Interest cover | 3.0x | 3.9x | |||||||
| * | The above covenant calculations excludes the impact of IFRS 16, that’s in accordance with our facilities agreement. |
SEGMENTAL HIGHLIGHTS
SIGNIFICANT REPORTING CHANGES
The group has adopted IFRS 16: Leases, from 1 January 2019.
IMPACT ON TRANSITION AND FOR THE YEAR ENDED 31 DECEMBER 2019
| R million | TOTAL GROUP | ||
| INITIAL RECOGNITION | |||
| Lease liability | 1 145 | ||
| Reversal of straight-line | (241) | ||
| Lease incentives | (81) | ||
| Right-of-use asset | 823 | ||
| YEAR ENDING 31 DECEMBER 2019 | |||
| Additional right-of-use asset depreciation | (105) | ||
| Additional lease liability interest expense | (95)) | ||
| Operating lease expense not accounted for in profit and loss | 162 | ||
| Foreign exchange | (25) | ||
| IMPACT ON PROFIT BEFORE TAX | (63) | ||
| Right-of-use asset impairment | (163) | ||
| Right-of-use asset additions during the year | 2 | ||
| STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019 |
|||
| Lease liability | 1 078 | ||
| Right-of-use asset | 532 | ||
| IFRS 16 EFFECT ON EBITDA | 162 |
LOOKING AHEAD
Given the current uncertainty in global markets linked to a depressed local economy and subdued consumer confidence, we do not anticipate an improvement in trading conditions in the short term. In spite of the subdued trading conditions, management will continue to focus on its key strategic objectives, including creating ongoing efficiencies and optimising business opportunities. We will place emphasis on improving our operations and guest experience and will continue to take the necessary action on loss-making entities. Time Square is expected to gain further market share as well as grow income and adjusted EBITDAR and we will focus on growing our alternative gaming business.
Notwithstanding the various challenges faced in Latin American, we are focusing on our current operations to improve their performance and will leverage off Chile and Peru’s positive GDP growth forecast. We continue exploring further growth opportunities in Latam, including in the online space, where a number of countries are going through the process of regulating this industry.
While it is too early to forecast what financial impact the coronavirus might have on our operations, we continue to review and assess the long-term impact this global pandemic will have on our properties.
NORMAN BASTHDAW
Chief financial officer
31 March 2020