Sun International - Annual Integrated Report 2019 | Protect-and-leverage-our-asset-portfolio

Improve our existing operations and guest experience

Protect and leverage our asset portfolio

Grow our business into new areas and products

Our people

Governance and sustainability

PROTECT AND LEVERAGE OUR EXISTING ASSET PORTFOLIO

Our diverse portfolio of assets includes world-class hotels, modern and welllocated casinos, and premier resorts with event facilities. We continue to harness the full potential of our portfolio by providing memorable experiences, exploring land development opportunities, and identifying properties that either need reinvestment and upgrading, or are no longer core to our strategy.

IMPACTS

EBTs in our catchment areas continues to impact market share in the Eastern Cape and KwaZulu-Natal

Chile’s operations and property impacted by recent riots

GrandWest’s exclusivity still not resolved

The Table Bay Hotel lease renewal has still not been determined by the V&A Waterfront

FOCUS AREAS IN 2019

Self-assessment:

ALL

ACHIEVED/ GOOD PROGRESS

IN PROGRESS

LIMITED PROGRESS

Completing the Boardwalk restructure and commencing with construction of the Boardwalk Mall

WHAT WE ACHIEVED

Boardwalk restructure and construction of the mall in progress

Restructuring the Carousel

WHAT WE ACHIEVED

Reviewing the operating model to improve profitability

Pursuing land development opportunities at certain properties

WHAT WE ACHIEVED

Ongoing – handed over Wild Coast Sun’s vacant land and exploring land development opportunities at Carnival City

Protecting GrandWest’s exclusivity

WHAT WE ACHIEVED

Ongoing as discussed in the risk section

Continuing with maintenance across our properties

WHAT WE ACHIEVED

Ongoing maintenance in line with central maintenance schedule

Managing our Latam operations to ensure they meet expectations

WHAT WE ACHIEVED

Completed room refurbishments at Temuco, Valdivia and Punta Arenas

Bid proposals for SCJ licence renewals

WHAT WE ACHIEVED

Process to start in 2020

Continually monitoring the risk of cyber attacks across the business

WHAT WE ACHIEVED

Enhanced cyber security monitoring and detection capabilities

Renewal of the Table Bay Hotel lease

WHAT WE ACHIEVED

Submitted Sun International’s lease renewal proposal

South Africa 1

Boardwalk’s income decreased by 1% with adjusted EBITDAR down by 14%. We are busy implementing our LA10 restructuring, following gaming board approval in February 2020. The shopping mall development is progressing well, with Site Development Plan approval having recently been received and leasing commitments in place from major retailers. Construction is expected to commence in the second quarter of the year. We are leveraging our tables business as a key differentiator and will be reducing slot machines after the restructure to optimise gaming floor space. Boardwalk’s food and beverage offering will also be reviewed to determine the feasibility of keeping all outlets due to decreased gaming demand.

Carnival City’s income was in line with the prior year and adjusted EBITDAR was up by 1%. The Privé refurbishment was completed in September 2019 to coincide with Carnival’s 20th birthday celebrations. It has been well received by our guests and has shown a marked improvement in income generated since it’s opening. Refurbishment of the first 15 hotel rooms was also completed. Due to unforeseen circumstances we are seeking a new development partner for the proposed land development.

The Carousel, which has been severely impacted by the opening of Time Square, was restructured at the end of May 2019 following receipt of gaming board approval. The Carousel was significantly downscaled resulting in a significant headcount reduction. In addition, slots were reduced to 400 and the tables department together with the hotel were closed. Sun International continues to explore land development opportunities.

GrandWest’s income and adjusted EBITDAR were down 3% and 5% to R2.1 billion and R831 million respectively. Although slots handle remained in line with the prior year, the win percentage decreased, resulting in slots gross income decreasing by 3%. Tables’ performance was impacted by a challenging environment. GrandWest’s exclusivity remains under threat, with no resolution to the draft legislation (released in February 2018) from the Western Cape to establish three zones for casinos in the Cape Metropole, and to allow for the relocation of casino licences from the Western Cape to the Cape Metropole.

Maslow Time Square continues to show steady improvement with income increasing by 15% to R1.4 billion and adjusted EBITDAR increasing by 42% to R452 million. Its casino market share for the year ended 31 December 2019 was 15.7%, up from 14.2% as reported at 31 December 2018. The hotel continues to improve occupancy and room rate, with the aim to improve our market share of the transient and group government business into the Menlyn node. As a result of a focus on costs and efficiencies the adjusted EBITDAR margin of 32% improved throughout the period from the 26% achieved in 2018.

Sibaya’s income increased by 6% with adjusted EBITDAR up 14%. The refurbished Privé and food and beverage offering has been well received by guests. A continuous focus on the guest experience as well as tactical marketing interventions have ensured that Sibaya has maintained its market share, following the opening of EBTs in KZN and the Sun Coast expansion, which was completed in August 2018.

Sun City experienced difficult trading conditions, with income down 4%. Trading for the period was volatile with a difficult start to the year following the December 2018 hailstorm, which resulted in us being unable to capitalise on the peak season. Occupancy for the year at 63% was down 6% on the prior year, with the average room rate remaining in line with the prior year at R 1 825. The Sun City Resort is in the early stages of a full operational turnaround plan with a new leadership team. The decline in business from groups and conventions and lower room occupancies negatively impacted Sun City’s food and beverage income. Gaming income at R505 million was down 1% from the prior year. As a result of the difficult trading conditions and the high fixed cost base, adjusted EBITDAR was down by 32% compared to the prior year.

The Table Bay’s income increased by 4% with adjusted EBITDAR up by 5%. Occupancy at 70% improved from the prior year and the average room rate increased by 2% to R3 247. The property is slowly recovering from the drop in foreign tourists due to the drought in the Western Cape in 2018. We have submitted our proposal in response to a request for proposal issued for the renewal of the Table Bay lease, which expires in May 2022, and remain in ongoing discussions with the lessor. We anticipate a final decision will be made by the end of March 2020. Maslow

Wild Coast Sun’s income decreased by 5% to R474 million, with adjusted EBITDAR down from R98 million to R84 million. The current casino licence, which expired in August 2019, has been extended to 31 March 2020 while the gaming board finalises its adjudication of our bid. The land settlement claim was finalised in the prior period and the official handover of land took place in 2019. Community engagement was enhanced to address concerns over local procurement opportunities. Focus for the year was on VIP activations to increase footfall during the week and over weekends.

SunSlots has delivered consistent double-digit EBITDAR growth over the last three years and has now reached critical scale as a core contributor to the group’s profitability. Our operations in the Western Cape and Mpumalanga posted pleasing results while KwaZulu-Natal and Gauteng were adversely impacted by delays in the roll out of sites. Income increased by 13% and EBITDAR by 14%. In the Western Cape, we were granted a further 500 machine licences by the Western Cape Gambling and Racing Board during the latter part of 2019.

SunBet, our South African online sports betting business, continues to trade extremely well. Having invested in a new platform in August 2018, income increased by 82% from R77 million to R140 million, while adjusted EBITDAR increased from R8 million in the prior year to R44 million at 31 December 2019.

Latam 1

Monticello’s income was up by 4% while adjusted EBITDAR decreased by 6%. The decrease in adjusted EBITDAR was due to the impact of the civil protests and increased marketing and promotional activity. The income and the EBITDAR from the remaining SCJ licences declined by 1% and 6% respectively. Iquique, which is located in a coper mining region, was negatively impacted by a stagnant local economy as well as a flood in February 2019, damaging approximately 200 slot machines that were out of service for a prolonged period.

The Peruvian operations’ (excluding Thunderbird Resorts) income increased by 5% while adjusted EBITDAR was up from R68 million to R74 million. The adjusted EBITDAR was impacted by the introduction of a new gaming tax equal to approximately 4.8% of revenue. The gaming industry is challenging the imposition of this new tax on the basis that it is unconstitutional and illegal. An additional R14 million was incurred relating to this tax. The adoption of IFRS 16: Leases, has resulted in a R48 million increase in depreciation.

Thunderbird Resorts, which was acquired effective April 2018, generated income of R299 million and adjusted EBITDAR of R31 million. The new Peruvian tax has also negatively impacted adjusted EBITDAR by R13 million.

The Park Hyatt Hotel, Casino & Spa in Mendoza, Argentina, acquired in July 2018, generated R466 million in income and R77 million in adjusted EBITDAR. Despite the weak Argentinian economy and depreciating currency, the property has benefited from dollar-based income in the hotel operation.

Panama and Colombian, losses have reduced significantly, with a combined EBIDTA loss of R5 million. We continue to pursue opportunities to exit Panama. In October 2019, the Colombian operations were merged with a local operator who manages the operations. Sun Dreams hold 60% of the combined operation which are accounted for as an associate.

Sustainable water solutions

Management continues to look at implementing sustainable water solutions to ensure our guests are not negatively impacted should the water crisis escalate.

Details of these solutions are discussed in the environmental section.

Maintaining our assets

We continue improving the aesthetics of our casinos and hotels through a scheduled maintenance plan that prioritises the upkeep across our operations. Ongoing maintenance assists in driving footfall to our properties and improving customer service and satisfaction levels. A group engineer will be appointed to coordinate all property maintenance.

Cyber security

Cyber security remains one of the group’s top risks and Cyber security remains one of the group’s top risks and preventing cyber and ransomware related attacks is a group priority. During 2019, we enhanced security monitoring and detection capabilities with all service providers to co-ordinate responses and ensure support is available in the event of a significant cyber attack. Our revised information security and cyber strategy focuses on an intelligence-led security capability, with increased emphasis on detecting malicious activity. We also invested in new technologies and capabilities that focus on early detection and rapid response using intelligence and early warning analytics to mitigate cyber threats.

Business continuity

Business continuity management includes specific response measures relating to physical security, health and safety, surveillance, political and social uncertainty as well as IT recovery. We adopted a unit-specific risk-based approach to ensure we are capable of effective response measures, with increased awareness and simulations conducted across all units. The group also aligns with best practice ISO 22301 and ISO 27031 standards.

LOOKING AHEAD

Continuing to protect and leverage properties through ongoing refurbishments and maintenance (operational and environmental)
Protecting GrandWest’s exclusivity
Pursuing land development opportunities at certain properties
Managing South African and Latam operations to ensure expectations are met
Monitoring and enhancing cyber risk security

STRATEGIC OBJECTIVES

PROTECT AND LEVERAGE OUR EXISTING ASSET PORTFOLIO

IMPACTS

FOCUS AREAS IN 2019

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LOOKING AHEAD