Tuesday, August 17, 2010

Sky City Entertainment Group Ltd: 2010 Full Year Profit Analysis

The 2010 Sky City Entertainment Group Ltd [SKC.NZ] 2010 full year profit out this morning was no surprise to the market.

It is a record profit for the company.

When compared to the $115 million 2009 full year result, the 2010 net profit of $141.725 million (Net profit is down 13% on 2009 due to Govt tax changes. This is merely a one-off balance sheet entry)is up by more than 22% on slightly higher revenue of $837,855 million, that is down 1 % on 2009.

Key Points from the 2010 Result

1. Record net profit of $141.725 million (Net profit is down 13% on 2009 due to Govt tax changes.)

2. Total revenue down by 1% to $837,855 million. (Cinema revenue excluded from part of the year)

3. Dividend up by more than 40% to 9.25c vs 2009 6.5c.

4. Uncertain 2011 outlook.

5. Reliance on Australian casinos for future revenue growth.

6. Just over $10 million of profit from the gain from disposal of cinema assets.

Cost savings through paying down debt and other business costs savings continue to be a major factor in the improved bottomline and the proceeds of the sale of their cinema business which was $10.3 million went million straight to the bottom-line.

Overall revenue is sadly still stagnant and at the main profit maker, the Auckland Casino, revenue is down by more than 2% but Sky City's two hotels in Auckland had gained significant market share during the past two years with hotel revenue up, against the overall market trend.

It should be noted that alot of the increased profit has already been wrung out so 2011 is going to be a struggle.

Its Australian casino assets in Darwin and Adelaide have continued to trade well and the currency swap from revenue exported to head office in Auckland has given SKC a good boost.

The key part of today's announcement is surely the indication by CEO Nigel Morrison that the company sees more uncertainty ahead and it will be hard to see SKC beating the 2010 result come this time in 2011 but Morrison seems to be reasonably positive about the next 12 months:

"However, we expect to continue to deliver improved returns as the economy recovers."

As he said in my interview with him earlier this year, he expected double figure profit growth again in 2011.

I cant see it.

9 out of 10.

: I own SKC shares in the Share Investor Portfolio

2010 Profit in Detail

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View Webcast of Result Presentation

Sky City Entertainment Group @ Share Investor

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  1. A disappointing result, given how much time and effort management have supposedly put into this business over the last few years. However, with the recession and ongoing slow recovery the environment hasn't provided any favours. The real issue seems to be the lack of turnaround in the Auckland property - particular gaming machines and tables. And it was disappointing that Nigel and team didn't offer any strategy for improving this - except adding a few more bars and restaurants to Federal St and waiting for a recovery in the economy! If the business didn't operate an effective monopoly, they would be heading the way of FAP. Goodluck - I am selling!

  2. Hi anon, to be fair management has done well to get a record result on lower revenue.

    I agree with you though that the Auckland Casino is a problem and Nigel's rationale of building new bars etc while at first glance an expensive exercise in getting more traffic in the door is one way of revitalising this mature asset.

    The possibility of a national convention centre being built, with taxpayer money, next to this business will have a big impact on casino revenues.

    I cant see them doing better in the 2010 year.

    I am negative that they can do the same in 2011 though as most business costs have already been cut.

    I am a happy 8 year shareholder.

  3. Hi Darren,

    Fair call on the convention centre - I am sure it would have an immediate impact. Although I am sure the convention market for big conferences is a highly competitive space (specifically the big players out of Oz and Asia). However, I find it hard to believe a few new restaurants and bars are going to significantly impact casino revenues in a positive way. I haven't done the math yet, but I am sure if you remove the savings from repaying debt and the gain on sale from the cinemas, the underlying result would look pretty flat (hardly a record :-) ). Doing a share placement is not growing the business and some would argue they have diluted existing shareholder value by underpricing the issued shares. Again, I would be skeptical of the company making any real ground in the near future. I guess it comes down to how long you are prepared to hold on - hoping! I certainly hope I am wrong. It is a great business and should be booming, spinning off the cash at a massive rate.


  4. Hi Jason,

    Convention Centres don't really make money. Most people know that and even Morrison told me that back in June.

    The extension to the convention centre that SKC currently run will lose money but they hope to make that up in foot traffic to the casino and bars.

    The national one, funded by someone else, will be a clear winner for them.

    It is ALL about foot traffic into the casino.

    For me the capital raising WAS dilutionary but has now more than paid back in terms of dividends, share price gain and increased profit due to lower interest costs on debt paid down.

    SKC is the best run casino company in Australasia. It can do better and in the long term I hope it will.

    By the way Nigel also told me he is looking at buying Australian assets. He has more than 1 billion in borrowing for an acquisition before going to shareholders

    I don't like that much and think he should concentrate on what he has before buying up and would put it out there that this is where he might find his increase in revenue and hopefully profit in 2011?

    Educated speculation on my part of course :)


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