Business Maverick


The Sun does in fact occasionally go down on the empire

The Sun does in fact occasionally go down on the empire
From left: Scott Vincent of Zimbabwe putts on the 10th green during the final round of the South African Open at Gary Player Country Club on 6 December 2020 in Sun City, South Africa. (Photo: Richard Heathcote / Getty Images) | Unsplash | People sun bathing at the Valley of Waves in Sun City, North West. (Photo: Gallo Images / GO! / Jon Minster)

Sun City is the notional embodiment of two great business maxims. First, in order to succeed, you have to dream big and, second, if you build it, they will come. Both of these turned out to be sort of true and sort of not.

I can’t remember my first visit to Sun City — they all seem to blur into sunny, drunken hazes. I do remember that on several occasions there was golf involved. It was great to see, in person, famous golfers, but like so much of Sun City, you struggle to get away from the impression that this was all being staged. The players were taking it enormously seriously, but clearly, the money was the big motivator.  One has to ask, taking another sip of G&T, are they real?

And that, somehow, was the overriding impression one got from South Africa’s Highveld playground: it’s all very impressive, but fantastically (some would say wonderfully), fake. The waves are fake, the earthquakes are fake, the rainforest is fake. I’m not necessarily deriding Sun City here; the establishment is a truly extraordinary and wonderful tourism effort. I just feel it helps if you spend the entire weekend one drink shy of falling over. I guess I’m not the target market.

Sun City is the notional embodiment of two great business maxims. First, in order to succeed you have to dream big, and second, if you build it, they will come. Both of these turned out to be sort of true and sort of not. The original Sun City was underpinned by a gambling prohibition in the rest of South Africa and a weird loophole provided by the homeland situation. Its success was at least partly built on its competitive exclusivity, but there is no doubt that founder Sol Kerzner played a big role in boosting the experience and the location through his marketing prowess.

There is a famous story (not sure whether it’s true) about Kerzner giving a presentation to the board of the then holding company, Kersaf, in which he “presented” two sentences. “Last year, we increased profits by 40%. We will do the same next year.” The board then went and munched sandwiches.

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But when that competitive exclusivity finally disappeared in the 2000s, we Sun City frequenters were in an almost constant state of angst about the future of our playground. Over the years, Sun International’s management has done all the sensible stuff. Having run out of room to grow locally, the company has dipped its toes into the international market. But from being the star asset in the group, Sun City has become a kind of marketing exercise: too far away for hard-core punters, generally breaking even but not contributing meaningfully to the group.

What’s interesting is that lots of the DNA of the group remained: Sun International continued to build these “blow-away” hotels, including the Table Bay at the V&A Waterfront in Cape Town. The whole idea of a grand statement still seems part of the mix, although straight up-and-down gambling venues are there too, like Grand West in Cape Town.

CEO Anthony Leeming has been in the driver’s seat for five years now and he has been with the group much longer. I don’t know if he is a betting man — I presume not, since he knows the odds he is offering his punters. But you have to sympathise a bit, because the roulette ball dropped in the green during the Covid crisis, which obviously klapped the group and others in the sector around the ears. For investors, however, this creates an intriguing investment opportunity.

This is particularly the case because Sun International has a major comparator in Tsogo Sun, the other part of the old Sun empire, which was divided up to provide some competition in the sector. Tsogo has adopted a less showy strategy, but it’s working out quite a lot better. It’s a fascinating comparison and forms the basis for the third iron law of business, which, you know, seldom works out. This law, we shall call the “rubber law of business” and it states that slow and steady wins the race. Sometimes. Often slow and steady is just slow.

Here are some of the basic stats: Sun International went into the pandemic trading at around R40 a share, it dropped to about R10 a share and is now back to R30. That means, theoretically, there is still a bit of upside, particularly since margins are better than they were before the Covid crisis.

Tsogo also got thumped by Covid, but bounced back harder. It was trading at around R4, it dropped to R1.50 and is now, after a really specular bounce, much of which happened only this month, trading a bit higher than it was before Covid. Tsogo is the slightly larger of the two groups, but I bet you will struggle to name offhand its flagship gambling operations. (Gold Reef City and Montecasino, both of which make Sun City look like a paragon of authenticity and class.) Both companies are properly in debt, but revenues are holding up, so the debt is not an immediate concern.

Tsogo has all kinds of online operations, including a bingo operation. When you are in the gambling market, it pays to go downmarket and stay there. Sun International also has a nice online business, but the numbers are pretty small.

Having withstood the new gambling laws in SA and the Covid crisis, the big question now is whether these two quite small hotel and gambling groups in international terms can show some real growth, and that means online, which is the next frontier. 

There is a chance of a jackpot result but it’s not as though the thousands of gambling operations around the world haven’t thought about this. I was delighted to see that Sun International is, at last, putting some more money into Sun City, even if it is more holiday homes. This suggests the group is still struggling to fill the beds in the hotels, but since it offloads the asset — in this case, a holiday flat — on to the balance sheet of the punters, it’s a great idea.

If Sun City cannot be Johannesburg’s playground, with any luck, it could make it as a great property development. The upside of the turnaround for both companies is now, I suspect, in the share. But both companies are, in my opinion, a credit to SA’s mid-cap corporate environment; all we need now is a bunch of foreign tourists. DM/BM

An earlier version confused The Cape Grace with The Table Bay. Apologies. 


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