Wednesday, February 17, 2010

Sky City Entertainment: CEO Nigel Morrison discusses 2010 Half Year

After the release of Sky City Entertainment Group [SKC.NZ] half year profit to 31 December 2009 yesterday, I though it might be worthwhile speaking to CEO Nigel Morrison again to get his view on the company that he leads.

The result was a record for the half year of NZ$71 million on revenue up by almost 6% and cost cutting due to a capital raising last year and other efficiencies.

With this in mind lets put some questions to Nigel to get a better picture on where the company was in the half year and why and where the company might be headed in 2010.

The interview was conducted by email and Nigel completed it late last night so he was working like a trouper yesterday dealing with folk like me.

Share Investor (SI) Congratulations Nigel, an excellent result on the surface and a record half from memory for the company. Where you surprised at all by how well the last half of 2009 went if when you look at the NZ$71 million profit headline?

Nigel Morrison (NM)
I think the $71m on the face of it up nearly 30% is pleasing. I don’t think it’s an outstanding result – and would liked to have seen stronger revenues in Auckland. I thought the Australian results weren’t bad given the fiscal stimulus package benefits in the prior comparative period. And of course the savings in funding costs following the USPP debt repurchase. Other than the above the win rate on international – I would have thought the result was within most analysts ranges – albeit at the upper end.


SI - The main bulk of profit increase seems to come from lower interest costs, from lower debt levels paid down in 2009, where will growth come from in 2010?

NM - That is correct – funding cost savings represented about 60% of the increase in NPAT. We expect the benefit of the funding cost savings to flow into the rest of 2010 – and so will continue to enhance comparative performance. Beyond that it’s about increasing the appeal of our core businesses, driving visitation and growing revenues. We will continue to focus on the International business.

SI - Auckland Casino revenue appears to have been stagnant for some time. What are you going to do to increase real revenue beyond cost cutting?

NM - As above the challenge is to enhance the appeal of our core businesses, driving visitation and grow revenues – We have a new TV ad that we will run over the next few months, we are enhancing the quality of our restaurants and bars offerings, new bars TwentyOne, XO and new Cantonese restaurant Jade Dragon opening next week, continuing to invest in gaming product, and some management changes with Jane Hastings who oversaw the turnaround of our Cinemas business returning to our core business here, heading up our restaurants and bars, Sky Tower, entertainment and attractions focused on driving visitation.

SI -How much impact do you expect on the Darwin Casino from the full effect of the smoking bans introduced there?

NM - Experience would suggest gaming machine revenues would decline by 10-15 % following the introduction of smoking bans – early indications are that following the expansion and refurbishment of the Darwin casino last year we would expect to mitigate this effect.

SI - Your reasons for keeping Adelaide Casino within the group have turned out to be vindicated, in least in terms of revenue growth, where do you see this unit going in 2010 and beyond?

NM - I think Adelaide has great potential – a city with over a million people and we have an exclusive casino licence – our job is to maximise its potential and we will work to do that. There is an election in March.

SI - While always a wildly fluctuating part of Sky City's business, the international revenue or VIP business seems to have been a winner this year. Is it at all an important part of the business as a whole and can we expect better results from it considering its high risk and volatile nature?

NM - We are trying to manage this business with a lower risk profile – and focusing more on volume players. I think if we manage it appropriate it is totally legitimate for a leading casino group to operate in the VIP player space.

SI - SKC shares have been sold down by more than 10% over the last few weeks in a flat market, pre-profit announcement and are incidentally up strongly today on the announcement. Clearly the market was expecting a poor result. What do you put the drop down to and do you think the market is valuing Sky City shares appropriately given a record result this half and an indicative record for full year 2010?

NM - I’ll leave this judgement to other commentators – but I do think our result was very solid.

SI - Looking past 2010 and into winter 2011. How much positive impact, if any, do you expect from patronage from Rugby Word Cup supporters using your facilities nationwide?

NM - I think the Rugby world cup will be great for NZ we will be doing everything we can to support it – I think we will be incredibly busy over that period – the challenge will be to carry it forward beyond the immediate period of the World cup.

SI - Just as an aside, can we see Sky City looking at online gaming if legislation allowing New Zealand companies to do that is passed and is that something Sky City would lobby Government for considering the loss of revenue from Kiwis gambling on overseas based gaming offers?

NM - We will stay close to this and open minded – but I can tell every major casino operator in Australia has looked at this and at the end of the day gone back to focusing on their core businesses – and most after investing and tearing up some $20m. So we will proceed with caution.

SI - Finally, as you say 2010 looks to be a challenging year for the company and economy as a whole, what new things, if any, can we expect to see as shareholders as a reaction to that challenge.

NM - We will continue to invest in our core facilities – new restaurants, bars, technology, systems, etc – we have a new TV ad that we will launch in March April in Auckland, communicating and presenting the enhanced Auckland facility to Aucklanders and New Zealanders. We have made some management changes that we think will help and as part of that we are welcoming Jane Hastings back to our core management team to run our restaurants and bars and entertainment and attractions at Auckland, after the great job she has done for the last 2 years turning round our cinemas business.

SI - Cheers Nigel and thanks for your time

NM - Cheers Darren – hope this helps.




Sky City shares were up 6c yesterday to NZ$3.19 on roughly double the normal volume traded, in a market up 28 points.


Disclosure: I own SKC shares in the Share Investor Portfolio


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