Monday, May 24, 2010

Sky City Convention Centre Expansion a Money Loser: Part Two

With news out over the weekend that Sky City Entertainment Group Ltd [SKC.NZ] intends to extend its expansion of its present centre to include a bid for a much larger and far more expensive stand alone "National Convention Centre", should leave SKC shareholders in fear of future profits and indeed the viability of the company in the medium to long-term.

I have fears about the $40 million expansion of the present convention centre and the dubious reasons for spending money on something with little or negative returns.

A new National Convention Centre, if built by Sky City, would be located as a standalone development on Hobson Street by the TVNZ centre.

Estimates of a price tag range from NZ$300-$550 million would clearly need SKC to either draw down on their $1 billion credit-line or go to the market for additional funds from shareholders and/or institutions and would be the biggest single capital expenditure for the company since its flagship Auckland Casino was developed in the mid nineties.

If Sky City borrowed say $400 million at their current rates of financing at around 7.5% per annum the convention centre would have to return a net profit from it of $30 million per annum just to cover financing costs. It simply doesn't stack up if you look at the figures.

In the absense of evidence of any good return on capital expense and ongoing running costs being a massive being a permanent drain, a convention centre built by Sky City just looks like monument building and justification of this sort of cost to shareholders should be put to the vote before anything goes ahead.

Let the local politicians build such a convention centre, if it is needed at all, at least then the ongoing losses would be spread around ratepayers rather than just long suffering SKC shareholders like my good self.

Disclosure I own SKC shares in the Share Investor Portfolio

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