Tuesday, June 15, 2010

Share Investor discusses Convention Centre proposals with Sky City CEO Nigel Morrison

I have been very critical of the plans that Sky City Entertainment Group [SKC.NZ] have for either expansion of their present convention centre or the building of a new one. They are known money losers.

With this in mind I sat down with CEO Nigel Morrison yesterday and discussed the details and various proposals along with a few sidebars along the way. It is the first time I have met him personally, previous interviews have been conducted via email questions.

Here is what I can tell you at present about SKC's convention centre plans, there is detail that Nigel had to keep to himself.

We sat down at the Rebo Cafe just off Federal Street.

On the extension of the present convention centre located in the Sky City Grand Hotel complex Mr Morrison indicated that shareholder money would be spent on upgrading and allowing for more delegates beyond its present capacity but costs would be hopefully mitigated by increased revenue from foot traffic to the casino (via the current footbridge) and patronage to a number of bars and eating establishments to be developed in the Federal Street precinct. Some Council money will also be used to fund this expansion and there are negotiations underway at present as to how much that will be.

Interestingly Nigel would not be opposed to being a landlord in respect of any food and beverage outlets developed and for existing operators in other parts of the city to occupy spaces in Sky City owned real estate.

A very exciting possibility exists in Federal Street (see power-point slide illustrations & SKC submission to Auckland City Council for more detail) to lever off patronage there and get customers to the door of the casino. The Auckland Casino has been pretty much flat revenue wise over the last few years and Nigel indicated that this was the best use of shareholders money to enable the possibility of growth again, more attractions means more revenue in theory.

In terms of the National Convention Centre, which would be built on Hobson Street next to TVNZ, if it went ahead, around $400 million would be spent developing it, with the bulk of the money coming from the taxpayer, with a relatively small input from Sky City shareholders.

I had previously thought that the bulk of the funding would come from SKC but to leverage off the taxpayer in this way would be a major benefit for the company (sadly the benefit to the taxpayer is a negative one)

Nigel himself admitted many convention centres make little or no margin - they in fact tend to lose money - and also indicated that the rationale for getting into both their convention proposals was that that had to return a net income on investment of at least 15% before they went ahead. This 15% margin would come from increased patronage to the casino floor and the bars and food offerings that the company are keen on expanding.

Off the topic of convention centres Nigel indicated that the Australian casino sector was likely to consolidate over the next couple of years with Tabcorp Ltd [TAH.ASX] a company under a fair amount of pressure as its Victorian gaming/wagering licenses expire.

Mr Morrison indicated that the Sydney casino Star City was the jewel in the crown in terms of gaming in Australia and while well run, its potential was not being fully exploited.

SKC has paid down a considerable amount of debt over the last year or so, with a capital raising in 2009 so far contributing the bulk of that. Mr Morrison indicated that his company has a balance sheet and credit resources that would make it open to any opportunity to purchase the right gaming assets at the right price should a shake up in the Australian gaming sector arise and he seems confident that this will happen in the next few years.

Nigel knows the Australian gaming sector well and has almost 20 years experience in this industry.

On the possibility of expansion of the casino sector in New Zealand he doesn't see the likelihood that Government would relax the present restrictions allowing more competition but that if it did (after a suggestion that Wellington would be a good place for a casino) they would be interested in a casino in at location.

Little indication of how well the second half of 2010 has gone from Nigel (2 weeks until year end) but if there is any indication at all results are tracking to a record profit of between $126-132 million and that has been forecast by SKC management itself.

I think given cost reductions, a sale of the cinema assets and reduced interest costs on paid down debt the profit is likely to be on the higher side of this estimate, if not higher.

Disclosure: I own SKC shares in the Share Investor Portfolio

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