Share Investor: Sky City 2008 profit preamble

Sunday, August 24, 2008

Sky City 2008 profit preamble

It is going to be Sky City Entertainment [SKC.NZ] 'tastic at the Share Investor Blog over the next few days as I take a look at the company, analyze and comment on tomorrow's profit announcement live webcast (10.00am Monday 25 Aug 2008-NZ time) and generally rip management a new one if I don't like what I hear.

The casino company is my largest holding and I have been a shareholder since 2002.

Its NZ$3.43c closing on August 22 2008 is lower than the $8.05c (pre 2:1 share split) it was on Jan 1 2003 and it had a profit of $107.2 million on $556 million in revenue.

2004 saw Sky City post a record $121.1 million profit (before abnormals) on revenues of $590 million and the 2007 year saw the company post a $98.4 million profit on record revenue of $798.6 million.

Sky City’s guidance (PDF) for the full year 2008 year to June 30 is for a net tax-paid profit of $108-110 million, excluding the $60 million write down of its cinema business.

These figures do not make pleasant reading for any investor. Rising revenues but patchy, stagnant and poor profit results.

There are a number of reasons for this.

Management under the previous CEO made some bad decisions.

The purchase and subsequent write off of NZ $20 million on Canbet, the Australian online betting company.

The purchase and write off of more than NZ $100 million on Force Corp's cinema business, now operating as Sky City Cinemas and barely breaking even.

Overpaying for the Adelaide Casino in 2000, even after 70 million of "refurbishing" it still earns less than $10 million annually.

Not a good record and that is understating it.

All this has been done in a regulatory environment that has had a huge negative impact on the bottom line.

The Labour Government banned smoking in bars and restaurants in December 2004 and that had a marked impact on gambler behaviour. Coupled with the limiting of slot acceptors to $20 from the previous $100 in 2005, that period was the beginning of a slow down in profit growth-minus management induced write downs.

So alot of the deleterious effects on profit were from influences out of management's control but the greatest negative impact has clearly been from bad management decisions and mis-management of largely good assets.

Revenue has tripled from 1999's $ 264 million to 2007's record $798.6 million but profit has less than doubled from $46.9 million to last years $98.4 million.

The bad decisions and government legislation has led to increased borrowing and debt servicing charges and had a subsequent impact on the bottom line after tax profit.

All is not lost though.

With that tripling of revenue comes an opportunity for the current new management to cut out the fat and increase that bottom line.

New CEO Nigel Morrison has hired his own team, who have already cut costs by slimming down middle management and minimising floor staff wages-so much so that some union staff are striking . There is easily more to trim.

At a possible NZ$110 million profit for 2008, Morrison clearly has the scope to increase profit-based on high historical revenues and cost cutting- by at least another $10 million for FY 2009 and beyond that, without even factoring in an increase in revenue from 2007's $798.4 million.

I would expect something between $125-130 million for 2010-barring Kerry Packer winning a baccarat hand or two.

The Auckland Casino historically has been the jewel in the crown for the company It has been stagnant in growth over the last few years but good management of that asset will positively affect revenue growth.

The future star, in my opinion is Sky Citys Darwin Casino. Situated in Australia's fastest growing region.

The Darwin casino has increased revenue from $62 million in its first full year after it was purchased in 2004 to $54.9 million in the half year to December 31 2007. It looks set to keep delivering in the future as a $30 million expansion of the gaming complex is on track to be finished at the end of this year.

The casino operates under a a more relaxed Government regulated gaming regime and is the only casino in the Southern hemisphere to continue to allow smoking. A must for gamblers who like to enjoy a drink and a fag when spending their hard earned.

Tomorrow's announcement will be interesting to see. It will be Nigel Morrisons first six months and his report will reflect somewhat how he has done and where he will take the company in the future.

I will look forward to seeing some positive direction from Morrison; what he is going to do and how he is going to achieve it.

I want to hear it described clearly, concisely and without the business gobbledygook Evan Davies was well known for.

I wait with unabated, and slightly restrained, enthusiasm.

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