Share Investor: Morningstar

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Tuesday, October 23, 2012

Sky City Gaming: Morningstars look at Sky City's gaming

Sky City Casino and hotel in Auckland. Photo / Doug Sherring

This was out a few days ago. Looks like the prospects for the main driver of profit are limited but Sky Cities Australian casinos look to become the main earners. Look for Darwin's earnings getting more significant as the years pass.

Valuation: $4.00

Last updated:

21/10/12

Revenues hold up despite Rugby World cup boost, Darwin shines.

SKC offers gaming services at its casinos in NZ and Australia. The entertainment complex in Auckland is the major driver of earnings accounting for 60% of its operating profit. SKC faces little competition due to NZ government's blanket ban on new casino licenses. This has allowed the company to operate at very healthy profit margins and generate abundant cash flows. Earnings will pick up next year following the Rugby World Cup in 2011.

Judicious investments are being considered to lift growth in the longer term.

Event

At its AGM Sky City (SKC) provided a trading update and profit guidance for fiscal 2013. Not surprisingly, the Auckland casino (accounting for 70% of group EBITDA) posted lower revenues for the period to 17 October the prior year boosted by the Rugby World Cup.

Darwin, international VIP and Hamilton were the real standouts delivering double digit revenue growth
Based on the performance so far and current market conditions, management expects normalized NPAT for fiscal 2013 to be in the “NZD 140 millions”.

Impact

We are sticking with our NPAT forecast of NZD 147 million as we expect profit growth in the second-half to more than offset lower earnings in the first-half.

We expect Auckland’s earnings to remain flat with a lower first-half offset by a stronger second half. Darwin is likely to achieve 8% growth spurred on by the recently opened resort facility (established in July 2012) and the creation of new gaming facilities in FY12.

In the longer term we see good prospects for Darwin stemming from growth in international VIP players due to the casinos proximity to South East Asian countries. Potentially the international VIP business, which is practically non existent right now, could have a turnover of AUD 2 billion in the next two years. That would translate into AUD 6.5 million in incremental EBITDA or an increase of 30% from currently levels.

At its AGM Sky City (SKC) provided a trading update and profit guidance for fiscal 2013. Not surprisingly, the Auckland casino (accounting for 70% of group EBITDA) posted lower revenues for the period to 17 October the prior year boosted by the Rugby World Cup. However, Darwin, international VIP and Hamilton were the real standouts delivering double digit revenue growth. Based on the performance so far and current market conditions, management expects normalized NPAT for fiscal 2013 to be in the “NZD 140 millions”. We are sticking with our NPAT forecast of NZD 147 million as we expect profit growth in the second-half to more than offset lower earnings in the first-half. Our fair value of NZD 4.00 per share also remains intact.

Normalized group revenue was up 1.5% from 1 July to 17 October 2013 driven by Australian casinos, which make up 24% of group EBITDA. As expected the Adelaide business posted flat revenues year-to-date given challenging economic conditions in South Australia. For the full year we expect Adelaide’s EBITDA to be up modestly backed by a better performance from table games.

Darwin’s revenue surged 12.4% underpinned by the recently opened resort facility (established in July 2012) and the creation of new gaming facilities in FY12. The redevelopment of the new VIP Level 2 gaming area, expected to be completed by March 2013, is likely to further enhance the casino’s appeal. We expect Darwin’s EBITDA to increase by 8% this year. In the longer term we see good prospects for Darwin stemming from growth in international VIP players due to the casinos proximity to South East Asian countries. Potentially the international VIP business, which is practically non existent right now, could have a turnover of AUD 2 billion in the next two years. That would translate into AUD 6.5 million in incremental EBITDA or an increase of 30% from currently levels. We also think the AUD 32 billion Inpex LNG project will be very positive for the local economy and might underpin foot traffic to the casino.

Auckland reported a 4.9% decline in top line growth year-to-date. Revenue was impacted by NZD 5 million from the roll out of the new Bally gaming system. However the overall impact on EBITDA was neutral because a similar amount was deducted from expenses. Hence on a normalized basis revenue was 1.7% lower than the prior period. The previous corresponding period however included a one-off benefit of NZD 7 million from the RWC which, if excluded, results in revenue growth of nearly 3%. Considering the prevailing tough economic environment we think Auckland’s performance was creditable. The international VIP business in particular is going from strength to strength and is becoming one of the major growth drivers for the company. Revenue increased 40% year-to-date reflecting the full impact of new facilities created last year. For full year we expect Auckland’s earnings to remain flat with a lower first-half offset by a stronger second half.

Among the smaller casinos Hamilton’s performance was noteworthy. Revenue increased 14% to NZD 17.6 million driven by increased customer visits. Disposable incomes in the region are being buoyed by a strong economy underpinned by the dairy sector. Given the lack of quality hotels in Hamilton, SKC has decided to build a 4.5 star hotel near the casino with the aim of lifting foot traffic. The project will cost NZD 35 million and will be completed in Q1 FY15.

SKC expects to conclude negotiations on the AUD250 million Adelaide riverbank development by 31 December 2012. Also, it is awaiting the Auditor General’s report regarding the NZD 350 million National Convention Centre development. We have previously argued that these investments, while significant, could materially increase shareholder value in the long term.

Previous close Market cap
$3.990 $0 Million
52 week high/low
$4.080 - $3.250
Sector
Consumer Services

Intrinsic valuation

Moat rating Narrow
Business risk Medium
Pricing risk Medium
Company beta

Sector beta

Year 06/11A 06/12A 06/13E 06/14E
NPAT ($m) 130.6 142.2 146.8 152.8
EPS (c) 22.6 24.7 25.5 26.5
% change 0.1 8.9 3.2 4.1
DPS (c) 16.0 17.0 17.8 18.6
Franking (%) 0.0 0.0 0.0 0.0
Yield (%) 5.0 4.8 1.9 1.9
PER (x) 14.3 14.4 37.7 36.2
Source: Aspect Huntley analyst estimates.

6 month price chart

c Share Investor 2012

Monday, May 2, 2011

Morningstar Revalues Sky City Entertainment Group

The latest research report out by MorningStar on Sky City Entertainment Group Ltd [SKC.NZX] has put a valuation of $3.80 on the stock. I am not sure how they came to pick that figure - it seems quite arbitrary - but it has been known to the market in general that 2012 will be a record year for the company in terms of revenue and profit from the 2011 Rugby World Cup that kicks off in October and has its impact on results in the February 2012 reporting.
announcement.

Disc I own SKC shares in the Share Investor Portfolio

The Morningstar report on SKC

Valuation: $3.80

Appropriately priced, neither buy nor sell

Last updated:

02/05/11

Investment rating

SKC offers gaming services at its casinos in NZ and Australia. The entertainment complex in Auckland is the major driver of earnings accounting for 60% of its operating profit. SKC faces little competition due to NZ government's blanket ban on new casino licenses. This has allowed the company to operate at very healthy profit margins and generate abundant cash flows. An unfavorable economic environment in NZ will constrain growth but earnings will pick up next year following the Rugby World Cup in 2011. Judicious investments are being considered to lift growth in the longer term.

Event

SKC is currently spending NZ$40m on improving the gaming floor layout ahead of the Rugby World Cup (RWC).

The motive behind this spending is to capitalize on the likely rise in tourist traffic during and in the wake of the RWC.

In the long term, management sees huge growth opportunities for its International VIP business from Asian visitors coming to Auckland. The total size of the market in Australasia is estimated to be around A$50bn

The company is currently in discussions with the South Australian government to expand the property to create a much larger gaming-based integrated entertainment complex.

Impact

There will be a one-off spike in earnings next year on the back of the RWC. Management expects EBITDA to grow by 20-25% in the first half of next financial year, driven by 30% growth in non-gaming businesses like food & beverages and hotels.

Our FY12 NPAT of NZ$155m represents a growth of 20% compared to FY10.

Capital expenditure is likely to be around NZ$125m this year, consisting of growth capital expenditure of NZ$65m. We estimate next year’s capex to be between NZ$125-145m. We don’t see any refinancing risk.

Recommendation impact (last updated: 02/05/2011)

Our fair value of NZ$3.80 is based on 15x normalized earnings of NZ25cps.

Event analysis

Auckland: Capitalising on the RWC opportunity

SKC is currently spending NZ$40m on improving the gaming floor layout ahead of the Rugby World Cup (RWC). This investment also includes redoing the federal street precinct by adding more restaurants and bars. The motive behind this spending is to capitalize on the likely rise in tourist traffic during and in the wake of the RWC.

The refurbishment involves extending the Pacific Room, renovating the Platinum Room and creating a Diamond Room by relocating the Fortuna Restaurant on level 2. The Platinum Room will have 270 machines and the Diamond facility will house 250 machines. The new and improved facilities are expected to grow revenues for the Platinum as well as Diamond tiers.

In the long term, management sees huge growth opportunities for its International VIP business from Asian visitors coming to Auckland. There is only one VIP salon at the moment. SKC wants to grow this to four salons over the next few months. Management is confident that with the right product, higher gaming capacity and improved service it will be able to gain market share from some of its competitors across the Tasman. The total size of the market in Australasia is estimated to be around A$50bn. In the first half of the current fiscal year, International VIP turnover nearly doubled over the prior period. We expect revenues to reach NZ$2.8bn this year, which compares to NZ$1.8bn in FY10. Management’s goal is to lift turnover to NZ$4bn over the next 12-18 months.

National Convention Centre: Will SKC end up funding it?

The government wants to build a National Convention Centre in Auckland and SKC is keen to participate in the venture. The idea is to have the convention centre next to the hotel and casino, connected by an over bridge. SKC envisages a significant increase in foot traffic to its casino and hotel properties. However, the funding model is still up in the air. The government could fund the project but given its fragile balance sheet, especially after the Christchurch earthquake, it might choose to tap private capital instead. The total cost of the project is estimated to be around NZ$300m. SKC sees a great opportunity but it is unclear whether it can make adequate returns under the current regulatory regime. Time will tell whether SKC and the government can thrash out a deal. We will keep a close eye on developments.

Adelaide: Good potential but constrained by regulatory framework

Adelaide is hamstrung by a very restrictive regulatory regime, high tax rates and a lack of parking and entertainment facilities in and around the casino. Consequently, the casino has largely underperformed its other Australasian peers in terms of visitors, revenues and EBITDA margin. The casino currently generates around A$30bn in EBITDA every year, but has the potential to generate A$80bn in EBITDA with a more friendly regulatory framework that its peers enjoy.

The company is currently in discussions with the South Australian government to expand the property to create a much larger gaming-based integrated entertainment complex. It wants to do this alongside the government’s proposed Riverbank Masterplan development. The plan envisages a significant increase in car parks, a material increase in machines and tables, construction of a hotel, and a range of restaurants and bars. The cost of the project is estimated to be approximately A$250m. SKC says it will commit to the project only if it is able to reach an agreement with the government and is able to earn an adequate return on capital.

Rugby World Cup: a one-off bonanza

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c Share Investor 2011

Share Investor

Tuesday, October 23, 2012

Sky City Gaming: Morningstars look at Sky City's gaming

Monday, May 2, 2011

Morningstar Revalues Sky City Entertainment Group

Investment rating

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Impact

Recommendation impact (last updated: 02/05/2011)

Event analysis

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