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.
- 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.
- 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.
Our fair value of NZ$3.80 is based on 15x normalized earnings of NZ25cps.
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
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. Hotel occupancy is likely to be at a record high. The gaming business is expected to increase by 13% during the same period. Our FY12 NPAT forecast of NZ$155m is predicated on these assumptions. Auckland constitutes around 60-65% of group EBITDA. Other NZ properties at Hamilton and Queenstown are also expected to be up significantly. 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. Our fair value of NZ$3.80 is based on 15x normalised earnings of NZ25cps.
