Share Investor: sky city

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

Everyday my portfolio takes another downwards trajectory. How about yours? Economic conditions in New Zealand and globally don't look good for the short to medium term.

There are more losses to hit markets in relation to the Sub Prime fallout, that initially revealed itself almost a year ago and the losses that have been crystalized in balance sheets around the world have had the consequent affect on credit markets, economic confidence and outlook. Future sub-prime losses will clearly continue this trend.

The added pressure of spiraling oil, food prices and every other good and service has left consumers pockets closed for business and those businesses are going to suffer as we all continue to prune costs.

Share prices have been reflecting this for more than six months but now we are set for more stockmarket revaluations as the economic gloom prepares to make itself at home.

Never fear though!

If like me you have been prepared for this you would have been squirreling away money while you could in anticipation of harder times then great. Some of our listed companies have hopefully been doing the same, unlike our present administration, and this is going to put you and them in good stead for a slow down.

It looks very likely that our stockmarket will be breaching the 3000 mark sometime this year and with that comes opportunity for buying.

The biggest opportunity for good wealth creation in the long term I would think would be US dollar sensitive stocks, all of which have been hammered over the last year because of the relative weakness of the US dollar.

It looks like the tide has turned for our dollar, with mutterings from Allan Bollard of interest rate cuts later in 2008 and the Fed talking up US interest rates.

Rakon[RAK.NZ], Fisher and Paykel Healthcare Ltd [FPH.NZ], Mainfreight Ltd[MFT .NZ], Sanford Ltd[SAN .NZ], Delegats Ltd[DLG .NZ], Pumpkin Patch Ltd[PPL .NZ] and Fletcher Building Ltd[FBU.NZ] will all benefit from the falling exchange rate while many of these companies are ready benefiting from the lower NZ/AU dollar cross, joined by the likes of Sky City Entertainment Group Ltd[SKC.NZ], Telecom NZ Ltd[TEL.NZ] and Michael Hill International[MHI .NZ] which have substantial operations in the West Island, Australia.

The biggest star that will benefit from this, which I conveniently hold, is Fisher and Paykel Health.

The company has profit sensitivity of approximately NZ$2.5 million, per one percentage point change in the value of the NZ dollar and as our exchange rate is off its recent high of .82c and is currently less than .76c then there is significant upside as the dollar retreats towards its historical levels of below 60c to the US dollar.

Its sales are also increasing strongly, so its upside in the medium to long term looks very good.

Apart from the opportunities related to a falling NZ currency there are also some very good companies ripe for bargain hunters flush with cash from better days and investors would be mad not to do some spending instead of getting those brokers and financial advisors wealthier by selling stocks and getting into gold, commodities, fixed interest, cash or some other over valued asset class.

Disc I own MFT, FPH, SKC, MHI, PPL, and FBU shares in the Share Investor Portfolio

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