Sun International: Can SUI Share Double?

Gambling is at least as addictive as smoking, alcohol, or drugs. As such, like other forms of human addiction, it has always been an excellent money-spinner. People love the ambience, excitement and risk associated with casinos and the gambling world.

Unlike working for a living, gambling offers the magical opportunity to make a substantial quick return with almost no effort. The problem is that the potential return involves taking more than a commensurate risk.

The underlying principle of a casino is that its customers essentially bet against each other while the house is continuously skimming off a small percentage in exchange for offering an appropriate forum. In this, it is very similar to the financial markets, especially those involved in trading the various derivatives.

Stock markets are different because they offer the opportunity to make investments rather than to trade and, unlike the casino, investment makes it possible for participants to significantly improve their probabilities being successful by doing basic investment analysis.

Sun International (SUI) is a listed share whose primary business it is to exploit the human gambling addiction and the public’s fascination with casinos and games of chance. This business has the disadvantage that it usually requires a substantial capital investment, but once established and paid for, the cash flows from gambling in all its forms are compelling.

SUI suffered when its monopoly was unceremoniously removed when South Africa abandoned apartheid and the ANC took over. Suddenly it was no longer necessary to travel to Sun City to have the casino experience. Casinos were allowed all over Gauteng.

SUI was recovering well from the spread of casinos and increased competition when the COVID-19 pandemic delivered a major blow to casinos generally because it precluded gatherings of large groups of people in close proximity to one other. The casinos did their best to continue operations by putting up dividers and limiting attendance, but there can be little doubt that COVID-19 resulted in a massive and unexpected reduction in casino profits.

Now that the pandemic is more-or-less behind us these the gambling industry is recovering. Consider the chart of Sun International since early 2006:

Chart by ShareFriend Pro.

You can see here that SUI made a record high at around R160 per share immediately before the sub-prime crisis of 2007/8. It was hammered down by the outbreak of COVID-19 in 2020 reaching a low of just 833c on 29th May 2020. Since then, it has been recovering steadily.

It closed on Friday at 3468c following the release of a trading statement in which it estimated that adjusted headline earnings per share (HEPS) would be between 415c and 461c per share in the year to 31st December 2022. This is almost a ten-fold increase on the previous year’s HEPS of just 44c and will move the company’s P:E ratio to around 7,9 – which looks cheap to us.

It seems unlikely that SUI will suffer from any further “black swan” events like COVID-19 in the immediate future – so we should expect its P:E to gradually recover towards a P:E of somewhere around or even above 15 – which effectively means that the share has the potential to double from its current level.


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