Sky City 2008 half year exceptional on cost cutting

The initial reaction by Mr Market this morning to the Sky City Entertainment [SKC.NZX] announcement was to market down the share price to new lows. At current time of writing this, 5.00pm (NZ time) the share price was up 9c to 4 bucks NZ, although it had been up to $4.10 earlier today.


Key figures at a glance

- Revenue up 1.0% to $424.2m (+$4.2m)
- EBITDA up 9.1% to $161.4m (+$13.4m)
- EBIT up 13.1% to $125.6m (+$14.5m)
- Net Profit (before Cinemas write-down) up 36.2% to $61.3m (+$16.3m)
- Net Profit after Cinemas write-down $1.3m.
- Focus on managing operating margins
- Strong results in Darwin and international VIP play
- Auckland steady through refurbishment
- Improving Adelaide performance
- Weak Cinemas result.
-Adelaide Casino no longer for sale
-Profit guidance for full year, $108m to $110m (excluding Cinemas write-down)
-New CEO Nigel Morrison starts on March 3

Full NZX SKC profit announcement

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I think shareholders who hadn't been aware of the abnormal write-off figure of NZ$60 million for the SKC cinema division and saw the 1.2m profit, down 97% from last year got spooked. It pays to do research. Media also wrote headlines like SKY City Profit Plunges. Punters don't seem to want to read further than the headline.

Although profit was impacted in the same comparable period in 2007, so comes off a low base, the NPAT at 37% higher is clearly an excellent outcome. Off a very small revenue increase that result looks even better.

The most encouraging result is a small increase in revenue at the Auckland Casino, the company's main driver of profit. Considering the gaming floor has been interrupted by renovations this is a good sign things are being managed better. Clearly costs have been cut and hopefully that means there will not be any long term impacts from that cost cutting.

The VIP gaming sector looks to have fallen the casinos way this year, last year players cleaned the casino out.

Hamilton has a small increase in revenue and a larger increase in EBIT, so costs have been lowered at this outlet as well.

One of the stars of the show, is my favourite casino in the whole bunch, Darwin.

A Casino unencumbered with too much regulation, that still allows smoking, is situated in a boomtown, and is close to the Asian market. A great recipe for future success.

Revenue has increased strongly over the half by over 10%, but EBIT has soared by almost 30%, indicating a good handle on running costs.

The future looks rosiest at this outlet and wouldn't be surprised if it became the star of the show in the distant future, overtaking the Auckland Casino for group contribution.

Adelaide Casino, looks awful. Revenue and all other profit indicators have slipped. An added factor is that smoking has been totally banned from the premises. As longer term SKC shareholders know, that has a huge impact on profit for New Zealand operations when introduced in 2005.

Quite frankly, I'm not sure if management can turn this casino around, its a drag on company profits and only seems to be there to accumulate tax losses in my mind.

The tiny Queenstown casino achieved a stellar turnaround but is largely immaterial to the group result.

Sky City Cinemas have been written off, so the less said about that white elephant the better. It needs to be sold to some other poor sap. It hasn't done well and contrary to popular belief Hoyts, Sky City Cinemas competition, isn't having the same problem indicated by SKC management that revenue was down because of "bad weather and poor product". Its bad management pure and simple.

Overall the last half year was very pleasing to this shareholder, although parts of the group clearly need working on.

My main worry is that alot of the profit increase has been brought about by cost cutting and I'm not sure whether that is a short sighted thing. Hopefully it is prudent cost cutting. It also will be worth noting whether the costs cuts are one-offs or to be attributed annually.

It is something Elmar Toime, the acting CEO, successfully did at NZ Post and it appears his appointment had the desired effect at Sky City.

It will be up to the New CEO, Nigel Morrison, to drive the revenue and therefore the profit of the company going forward.

Management are "positive" for the coming half year.


Disc: I own SKC shares in the Share Investor Portfolio


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