HALFYR: SKC: Summary half year to 31/12/07 $1.3m ($45.0m) -97.1%, 11.0 cps
SUMMARY OF PRELIMINARY HALF YEAR ANNOUNCEMENT
Name of Listed Issuer: SKYCITY Entertainment Group Limited
For half year ended: 31 December 2007
CONSOLIDATED OPERATING STATEMENT
Current Half Year NZ$'000; Up/Down %; Previous Corresponding Half Year NZ$'000
Total Revenue:
$424,189; up 1.0%; $419,973
OPERATING SURPLUS BEFORE UNUSUAL ITEMS AND TAX:
$82,616; up 28.8%; $64,123
Unusual items for separate disclosure:
$60,000 Cinemas write-down; $0
OPERATING SURPLUS BEFORE TAX:
$22,616; down 64.7%; $64,123
Less tax on operating profit:
$21,992; up 15.6%; $19,030
OPERATING SURPLUS AFTER TAX ATTRIBUTABLE TO MEMBERS OF LISTED ISSUER:
$1,287; down 97.1%; $45,045
Extraordinary items after tax attributable to Members of the Listed Issuer:
$0; nil%; $0
OPERATING SURPLUS AND EXTRAORDINARY ITEMS AFTER TAX ATTRIBUTABLE TO MEMBERS OF THE LISTED ISSUER:
$1,287; down 97.1%; $45,045
Earnings per share:
0.3 cps; 10.3 cps
Interim distribution:
11.0 cps
Record Date: 12 March 2008. Date Payable: 11 April 2008
Attachments: Appendix 1, 7 and related documents
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SKYCITY ENTERTAINMENT GROUP LIMITED
Executive Director's Review
Half Year Ended 31 December 2007
1H08 Group Result
- 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.
Key Elements of 1H08 Result
- Focus on managing operating margins
- Strong results in Darwin and international VIP play
- Auckland steady through refurbishment
- Improving Adelaide performance
- Weak Cinemas result.
Distribution to Shareholders
- Interim 1H08 11 cents per share (9cps 1H07)
- Entitlement/record date 12 March, payment date 11 April
- Distribution continues at 90% x Net Profit after adding back Adelaide casino licence amortisation and excluding Cinemas write-down
- Distribution by way of non-taxable bonus shares with fully-imputed cash buyback alternative continued for 1H08
- Strike price for the bonus share issue for the 1H08 distribution will be the weighted average SKC price on the NZSX during the 5 day period 13-19 March
- Advice of the number of bonus shares to be issued in respect of the 1H08 distribution to shareholders on 26 March
- Shareholder elections (to elect the cash/buyback option) are due to the share registry (Computershare) by 9 April.
Underlying Net Profit
- Reported results include several elements that need to be separately identified to enable a like with like comparison of 1H08 core asset performance against 1H07
- Key elements adjusted for are:
- International VIP play above theoretical win rate
- Cinemas and Cinemas write-down
- Indirect expenses to cover one-off restructuring costs, due diligence costs involved in the takeover activity which has now ceased, and the Cinemas sale process
- Tax at the company's normalised rate of 28.5%
- Excluding these items show underlying operating earnings (EBITDA) growth at 3%, up from $148.2m to $152.7m and NPAT growth at 15%, up from $48.0m to $55.2m.
Cinemas Write-Down and Sale
- During 1H08 SKYCITY invited bids from parties interested in acquiring the Group's cinema assets
- Based on disappointing operating figures for 1H08 and negotiations with potential buyers, a $60m write-down in the carrying value of the Cinemas assets (market announcement 12/2/08) has been made in the FY08 interim financial statements
- The write-down includes all goodwill relating to Cinemas and a provision against non-performing cinema assets and potential sale or restructuring costs
- Negotiation with potential buyers continues. If a satisfactory price and sale structure is not able to be achieved the company will evaluate restructuring and revenue regeneration options
- Further information will be provided once negotiations are concluded and the final position determined.
Funding and Capital Management
- Control of capital expenditure and earnings retained under the profit distribution plan have reduced debt and lowered funding costs, down $4m (9%)
- SKYCITY's funding is not affected by the worldwide 'credit crunch' with long-term debt in place and no current refinancing requirements
- 1H08 average interest-bearing debt and average interest rate are $1.09 billion and 7.7% respectively.
Other Announcements/Updates
Adelaide
- The Company advises that the Adelaide casino will be retained as a core gaming asset
- performance in the half year has been encouraging
- cost control improved operating margins
- key focus remains on increasing market share in the competitive gaming machine market
Takeover Activity
- All discussions with interested parties have now ceased
- Directors and management remain focused on generating value for shareholders through improved performance
- due diligence costs (advisors, other) are provided for in the half year results
CEO Appointment
- New SKYCITY CEO Nigel Morrison commences on 3 March.
Profit Guidance FY08
- SKYCITY reaffirms its FY08 NPAT guidance as previously provided, namely in the range of $108m to $110m (excluding Cinemas write-down)
- Based on the half year result the company expects to be at the upper end of this range
- Factors to consider in the guidance include:
- international business performance for 2H08 budgeted at theoretical win levels
- customer reaction to the full opening of the Auckland main gaming floor
- ongoing effect of no smoking on Adelaide performance
- continued management focus on operating margins
- excludes Cinemas write-down.
Business Unit Results: 1H08
Auckland
- Total Revenue up 0.8% to $205.3m (+$1.6m)
- EBITDA up 0.4% to $107.7m (+$0.4m)
- EBIT up 1.6% to $91.2m (+$1.4m)
- Gaming revenues flat with a 4% decline in gaming machines, as a result of the main gaming floor refurbishment, offset by table games growth of 7%
- All non-gaming activities achieved modest revenue gains on 1H07
- Cost management held direct/indirect expenses to 1% increase, effectively absorbing inflationary wage and cost increases
- The new baccarat area, one of the early stages of the main gaming floor refurbishment, contributed to the improved local table games performance
- The main gaming floor refurbishment includes the redesigned Aces Bar and Deli, each achieving revenue growth of more than 60% over 1H07 and the new Baccarat Bar has also performed well
- SKYCITY Grand Hotel occupancy up from 44% to 50% for the half year
- Conventions revenue up 4.6% with number of events and delegates up 4% and 3% respectively over 1H07.
Adelaide
- Total Revenue down 2.2% to A$62.5m (-$1.4m)
- EBITDA up 7.1% to A$12.0m (+$0.8m)
- EBIT up 19.4% to A$7.4m (+$1.2m)
- SKYCITY board has confirmed retention of the Adelaide casino as a core gaming asset
- Smoke-free regulations introduced in South Australia from 1 November 2007. November/December 2007 revenues were down 8% on November/December 2006. Table games revenues were favourable by 1% but gaming machine revenues were unfavourable by 13%
- Smoke-free impact reduced in January 2008 with gaming machine revenue down 8% compared to January 2007
- Table games not significantly impacted as smoking restrictions within one metre of gaming tables have applied since December 2004
- Effective cost management with direct/indirect costs down 4%
- EBITDA/EBIT contribution and margins moving in the right direction with work still to be done.
Darwin
- Total Revenue up 10.9% to A$54.9m (+$5.4m)
- EBITDA up 25.7% to A$23.5m (+$4.8m)
- EBIT up 29.9% to A$20.0m (+$4.6m)
- Strong growth momentum continues with significant EBITDA/EBIT growth and improved margins
- Good overall performance with growth from gaming machines, food and beverage and hotel
- Gaming machines up 14% on 1H07 and 24% up on 2H07 due to increased visitation from lower to mid-range players
- Food and beverage revenue up 11% and convention revenue up 5%
- Strong hotel performance with occupancy of 88% (1H07 85%) and average room rate up 10% to A$189. Hotel was joint winner of 2007 AHA National Awards for Excellence "Best Superior Accommodation"
- Increased revenue and cost management lifted EBITDA margin from 38% to 43%
- A$30m stage 1 expansion of the Darwin property commenced October 2007. Includes an indoor/outdoor restaurant, destination bar and balconies with sea views, improvement of back of house support facilities and additional car parking. Completion estimated December 2008
- 2H08 growth not anticipated to continue at same rate with some disruption expected from the gaming floor expansion through peak season.
Hamilton
- Total Revenue up 2.6% to $20.0m (+$0.5m)
- EBITDA up 2.0% to $10.0m (+$0.2m)
- EBIT up 4.1% to $7.7m (+$0.3m)
- Gaming revenues up 3.1% with growth flowing through to EBIT
- New gaming machine product, plus the opening of the new Vue Bar in December 2007, has improved gaming floor visitation and average spend.
Group International Business (IB)
- Group total win net of commissions, comps and taxes $15.6m (1H07 $2.7m), theoretical $4.1m (1H07 $12.1m), above/(below) theoretical +$11.5m (1H07 -$9.4m), Group total EBIT contribution $12.6m (1H07 -$1.2m)
- Auckland win net of commissions, comps and taxes $5.4m (1H07 -$2.9m), theoretical $2.1m (1H07 $10.0m), above/(below) theoretical +$3.3m (1H07 -$12.9m), EBIT contribution $3.9m (1H07 -$5.0m). Auckland 1H07 saw significant commission programme play turnover, resulting in higher commission costs.
- Adelaide win net of commissions, comps and taxes A$4.1m (1H07 A$4.4m), theoretical A$1.2m (1H07 A$1.5m), above/(below) theoretical +A$2.9m (1H07 A$2.9m), EBIT contribution A$3.2m (1H07 A$3.2m)
- Darwin win net of commissions, comps and taxes A$4.6m (1H07 -A$0.3m), theoretical A$0.2m (1H07 A$0.2m), above/(below) theoretical +A$4.2m (1H07 -A$0.5m), EBIT contribution A$4.2m (1H07 -A$0.5m)
- IB EBIT comprises gross revenue $21.9m (1H07: $18.0m) less commissions, complimentaries and taxes $6.3m (1H07: $15.3m) equals net win after commissions complimentaries and taxes $15.6m (1H07: $2.7m) less IB expenses $3.0m (1H07: $3.9m) equals IB EBIT $12.6m (1H07: -$1.2m)
- The International Business model has been reviewed with improved/increased marketing bringing in a greater range of players across all programmes
- Significant individual and group play can produce volatility in International Business performance. The intent of marketing initiatives is to diversify and spread this risk across a broader customer base
- 1H08 experienced growth in visitation from key Asian markets, which has continued into 2H08 with group visits into Auckland and Darwin over Chinese New Year
- Win was $11.5m above theoretical compared to $9.4m below theoretical in 1H07.
SKYCITY Queenstown Casino (60% shareholding)
- Revenue growth of 20% over 1H07 with gains from gaming machines (+12%), table games (+22%) and food and beverage (+18%)
- Additional marketing activity has driven visitation and revenue with positive improvement to EBITDA and EBIT
- Strong January/February Queenstown tourist activity has seen a positive start to 2H08.
Christchurch Casino (41% shareholding)
- 1H08 contribution up $0.2m to $2.7m.
SKYCITY Cinemas
- Total Revenue $32.5m (1H07 $35.0m)
- EBITDA $2.0m (1H07 $4.6m)
- EBIT -$1.3m (1H07 $1.7m)
- Cinemas 1H07 includes revenue of $2.0m from SKYCITY Metro which was sold in June 2007. Adjusted, Cinemas revenue is down 1.5% on 1H07. Cinemas EBITDA is down 28.6% on 1H07 after excluding SKYCITY Metro 1H07 contribution
- Cinemas revenues continued to disappoint being flat against 1H07 with no uplift being achieved from a full six months operation from Chartwell, Hamilton (opened May 2007)
- Flat revenue compounded by increased costs and depreciation has led to a decline in profit and margin
- Poor performance during 1H08 has affected value which has led to the decision to write-down the Cinema assets by $60m.
Group/Unallocated
- Revenue of $2.7m relates mainly to interest received
- Indirect expenses of $17.3m include $3.1m of costs relating to takeover activity and the process to sell Cinemas, and $1.7m of restructuring costs
- After allowing for non-recurring costs, indirect expenses are down $2.9m, 19%.
Capital Expenditure
- 1H08 capital expenditure was at reduced levels as business plans and major projects underwent further review
- Material projects during 1H08 have been the Auckland main gaming floor refurbishment, Hamilton entertainment bar, commencement of Darwin Stage 1 expansion and new cinema developments
- Guidance provided with the FY07 result included the SKYCITY Adelaide redevelopment and car park project which is on hold pending a review of the Adelaide business plan
- Plans for the proposed SKYCITY resort and the associated Little Mindil site reclamation are yet to be finalised
- Main items of capital expenditure expected during 2H08 are completion of the Auckland main gaming floor refurbishment, Darwin Stage 1 expansion and purchase of the Little Mindil land
- Group (excluding Cinemas) maintenance capex for FY08 expected to be below or at the lower end of previous guidance of $37m-$45m
- FY08 depreciation and amortisation guidance (excluding Cinemas) is reduced from $72m to $68m.
Conclusion
- Looking past the disappointing Cinemas outcome, 1H08 has delivered more acceptable results given:
- the disruptions of management change, takeover approaches, and asset sale reviews
- work on the Auckland main gaming floor.
- Looking forward, the company anticipates continuing positive trends in performance, based on:
- appointment of Nigel Morrison
- completion of the Auckland renovation
- Adelaide opportunity and expansion in Darwin
- ongoing focus on the core gaming business.
Disclosure: I own SKC shares
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