Tuesday, August 26, 2008

Sky City Entertainment: 2008 Profit Analysis

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Today's 2008 full year profit announcement for Sky City Entertainment [SKC.NZ] looks like the beginning of a resurgence for the company to me.

CEO Nigel Morrison has written down the value of its cinema business to zero value-it will always struggle-a good chunk of debt has been paid down, cashflow is up, gross revenue at record highs, reduced maintenance and capital expenditure planned for 2009 and VIP revenue up strongly.

Morrison's move away from the expansionist mantra of the previous CEO, Evan Davies to focus on squeezing everything out of the company's existing assets gets the big tick from me.

The New Zealand casino revenue seems to be stagnant, with a plateauing of income at Auckland but management say that is because of a gaming floor refurbishment interfering with gaming.

This is understandable and the company say revenue has picked up since the building was finished.

The good news comes from Australia-finally-with the company's star casino in Darwin increasing revenue by more than 7%.

Darwin really looks set to do the business for the company in the future, as it is expanding its facilities and the economy in that part of Australia is booming. On present form it looks set to overtake the revenue of Adelaide casino in FY 2009.

Sky City Darwin is the only of the company's 6 casinos to be able to expand gaming facilities and it also retains a smoking environment, similarly unique. Both these attributes are important to gamblers, especially the large patronage of Asian customers.

Good news also from Adelaide. Although revenue was down 4.4% for the year, management expected a much bigger drop because of the introduction of no smoking at the casino in 2007.

Similar legislation introduced to the Auckland Casino in 2004 put a stop to the spectacular growth that it had been having up until the introduction, so Adelaide's impact has been minor so far.

Once again, the huge black spot on the whole result and company as a whole, is the pathetic result of the company's cinema division. Revenue was down by over 2% and EBITDA halved to just under $5 million.

The galling thing for me as a shareholder is that 10's of millions of dollars of shareholder money has been spent over the last few years on capital expenditure to refurbish or build new cinema facilities.

Albany 10, which I use, is lovely(but was leaky) but clearly makes no money, would have cost a good $10-15 million in 2008. Manukau 10 will cost $8 million in 2009 and doubtless there will be more to come.

Do the math Nigel. SELL IT !

Looking towards 2009, I feel very positive about the company and its prospects.

The focus on current assets is the key to increasing the bottom line profit and expansion of any business unit should only be done after the simple test of whether shareholders could do better with the money that would be spent on capital expense, than income derived from the new asset.

Its time for long term shareholders to be rewarded.

Sky City @ Share Investor

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Sky City Financial Data

Related Amazon Reading

Introduction to Casino and Gaming Operations (2nd Edition)

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