Friday, February 3, 2012

Sky City Entertainment Group Ltd: Convention Centre may mean significant gaming expansion

Artists impression of the Sky City National Convention Centre

News out during the last few weeks that Sky City Entertainment Group Ltd [SKC.NZX] may have negotiated a large increase in the number of gaming machines, tables and other concessions in return for building and funding a National Convention Centre for New Zealand and allowing it to significantly expand its revenues at the Auckland casino is clearly great news for investors. New Zealanders are also set to gain a valuable new addition to the landscape in terms of returns for surrounding businesses and opportunities for the country as a whole.

Lets have a look at how great things might get for us long suffering shareholders.

First of all a couple of negatives. $350 million in shareholder funding will be needed to build the convention centre and ongoing costs will be significant. Convention centres, as a rule, do not make money on their own, they are generally used to bring in foot traffic to other parts of a business or town to push spending in those areas.

This is where the positives for the casino may bear some fruit.

At present the company is restricted by law as to expansion of its gaming business in Auckland and indeed the rest of New Zealand so it has thus far been lowering business costs, debt levels and building attractions like a dozen more eateries and other peripheral gaming stuff to grow revenue and profit and that has been very successful under CEO Nigel Morrison.

Businesses all need to continue to grow though and with the company asking the National Government to allow them to increase the number of gaming machines by up to 1000 and increase the number of table games even agreement for a 25% increase in gaming will clearly be significant for the Auckland site and for shareholders as the vast bulk of group revenue comes from this one site.

Any increase in gaming machines is not going to be politically acceptable to the left, so SKC management are going to find any increase politically tough to push through but I am confident there will be some increase in the levels of gaming at Sky City Auckland.

While building and funding a massive new building at a time of global financial uncertainty is a huge risk. The risk for shareholders is worth taking though given the stagnant nature of revenues at Auckland. Extra foot traffic would boost gaming revenues at the site regardless of a boost in machine numbers so lets hope management have got their modelling right when they factor in the cost of the capital expense, ongoing running costs and the level of extra gaming there has to be to get an acceptable return for shareholders.


Sky City Convention Centre @ Share Investor

VIDEO - Sky City Entertainment Group : Parliamentary Question related to Convention Centre
Sky City to pay for National Convention Centre
Share Investor discusses Convention Centre proposal with CEO Nigel Morrison
Sky City Convention Centre Expansion a Money Loser: Part Two
Sky City Convention Centre Expansion a Money loser
SKC Convention Centre power-point slide illustrations & SKC submission to Auckland City Council

Sky City Entertainment Group @ Share Investor


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