Monday, November 1, 2010

Sky City Annual Meeting & 2011 - 2012 Profit Forecast

Sky City Entertainment Group Ltd [SKC.NZX] had their 2010 Annual Meeting last Friday and outlined their recent results and where the company is headed in 2011.

The following key points came from this meeting:

  • SKC held its AGM today and provided a trading update for the first quarter. Underlying revenues grew 3.3% while normalized NPAT grew by a similar margin.

  • Underlying NPAT excluding the Cinema business lifted 5%. This was a pleasing performance given the economy in NZ and headwinds in Darwin.

  • The international business revenue was up 85% compared to the first quarter. This was the standout of the first quarter’s performance. A vast majority of this growth occurred in Auckland.

  • The company is making strategic investments in Auckland, Darwin and Adelaide which will lift capital expenditure.

  • No guidance was provided but management said it would be disappointed if it did not achieve consensus NPAT of NZ$127.4m for FY11. This represents a modest decrease over the prior period. “GST increase coupled with cautious spending makes it difficult to predict the full year outcome”.

A research report from Aspect Huntly out October 30 contains the following forecast for 2011 and 2012:

We are modestly cutting our FY11 forecast to NZ$129m to bring it closer to consensus forecast. We should see a pick up in second half earnings especially for Darwin as comparisons become easier. However the Auckland performance is a big unknown. Should the economy gain strength we could see SKC deliver NPAT growth in FY11.

A significant boost in earnings is expected during the Rugby World Cup. Auckland earnings is expected to increase by 20-25% in 1H12 compared to 1H10. This growth will be evenly split between gaming and non gaming income. We are introducing our FY12 NPAT forecast of NZ$140m.

Comments by me on the two streams of forecast information from SKC management and Aspect Huntly tend to favour forecasts by management rather than Aspect. Forecasting profit can be a lot like doing the same with the weather but Aspect's point about the impact of the 2011 Rugby World Cup on the 2012 full year profit is a good one. I would add that I see the bulk of the extra revenue coming from a boost from non gaming income rather than gaming at the Auckland Casino and one should not discount revenue boosts from their other New Zealand casinos in Hamilton Christchurch and Queenstown and to a much lesser extend their casinos in Australia in Darwin and Adelaide.

Interesting that the company is also looking at taking full control of the Christchurch Casino which they currently have an approximately half share in and a big spend up in facilities across the bulk of their casino properties including further gaming possibilities across the ditch. This will clearly have implications for significant increased debt levels in 2011 onwards.

I am confident that the company can exceed their own forecast of $127.4m for FY11 based on the latest operating data for the current quarter ended on September 2010 but remain cautious about increased debt levels.

Sky City Annual Meeting Docs & Related Reading

Meeting Webcast 2010
Annual Meeting Presentation 2010
NZX - 29.10.10 Annual Meeting
Aspect Huntly Research

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