An interview in Granny NZ Herald yesterday with Jane Hastings, general manager of Sky City Entertainment's [SKC.NZ] cinema division prompted me to have another go at this part of the Sky City asset portfolio.Long term readers of this blog (two years is a long time in the blog world) and the struggling Share Trader chat site will know that I wouldn't touch a movie chain business with a barge pole the length of a CinemaScope screen.
The Herald and its interviewee seem particularly bullish on the movie business at present. Strong attendances, a growing market share for Sky City Cinemas and good product coming up, like the latest Harry Potter and the Half-Blood Prince (2009) movie all look positive.
Add to this the very large capital expenditures that this division has made expanding the business over the last 5 years have been ameliorated of late because of oversupply and you might think you have a business that is a blockbuster ready to print money.
Balance the good news with this though.
Although cinemas are a good cash business, especially during these cash strapped hard economic times, extra revenue doesn't necessarily make for extra profit. Costs have risen along with higher attendance and there will always be more expense to improve technology and modernise facilities.
Recessions like the ones we are currently experiencing are boom times for the entertainment business and cinemas are no exception but investors in Sky City should be aware that the spike in fortunes for their cinema business are fleeting and in the normal cycles of business, the downs are far more frequent than the ups and more often than not the down times are when many cinema operators put up the going out of business sign.
Sustained acceptable returns for the cinema business are simply not the way this sector functions and history is littered with the carcasses of individuals and corporations who have sunk money into cinema that have gone bankrupt or no longer exist.
Best Sky City management use shareholders capital to repay debt as they did earlier last week.
Sky City Cinemas is no different from the rest and I must reiterate dear reader, for the sake of the shareholder, this part of the group's business must be given a Dirty Harry bullet before it drags the rest of the company down with it.
Disclosure I own SKC shares
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Coming Attractions?: Hollywood, High Tech, and the Future of Entertainment (Stanford Business Books) by Philip Meza
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