Share Investor

Monday, May 2, 2011

Morningstar Revalues Sky City Entertainment Group

The latest research report out by MorningStar on Sky City Entertainment Group Ltd [SKC.NZX] has put a valuation of $3.80 on the stock. I am not sure how they came to pick that figure - it seems quite arbitrary - but it has been known to the market in general that 2012 will be a record year for the company in terms of revenue and profit from the 2011 Rugby World Cup that kicks off in October and has its impact on results in the February 2012 reporting.
announcement.

Disc I own SKC shares in the Share Investor Portfolio

The Morningstar report on SKC

Valuation: $3.80

Appropriately priced, neither buy nor sell

Last updated:

02/05/11

Investment rating

SKC offers gaming services at its casinos in NZ and Australia. The entertainment complex in Auckland is the major driver of earnings accounting for 60% of its operating profit. SKC faces little competition due to NZ government's blanket ban on new casino licenses. This has allowed the company to operate at very healthy profit margins and generate abundant cash flows. An unfavorable economic environment in NZ will constrain growth but earnings will pick up next year following the Rugby World Cup in 2011. Judicious investments are being considered to lift growth in the longer term.

Event

SKC is currently spending NZ$40m on improving the gaming floor layout ahead of the Rugby World Cup (RWC).

The motive behind this spending is to capitalize on the likely rise in tourist traffic during and in the wake of the RWC.

In the long term, management sees huge growth opportunities for its International VIP business from Asian visitors coming to Auckland. The total size of the market in Australasia is estimated to be around A$50bn

The company is currently in discussions with the South Australian government to expand the property to create a much larger gaming-based integrated entertainment complex.

Impact

There will be a one-off spike in earnings next year on the back of the RWC. Management expects EBITDA to grow by 20-25% in the first half of next financial year, driven by 30% growth in non-gaming businesses like food & beverages and hotels.

Our FY12 NPAT of NZ$155m represents a growth of 20% compared to FY10.

Capital expenditure is likely to be around NZ$125m this year, consisting of growth capital expenditure of NZ$65m. We estimate next year’s capex to be between NZ$125-145m. We don’t see any refinancing risk.

Recommendation impact (last updated: 02/05/2011)

Our fair value of NZ$3.80 is based on 15x normalized earnings of NZ25cps.

Event analysis

Auckland: Capitalising on the RWC opportunity

SKC is currently spending NZ$40m on improving the gaming floor layout ahead of the Rugby World Cup (RWC). This investment also includes redoing the federal street precinct by adding more restaurants and bars. The motive behind this spending is to capitalize on the likely rise in tourist traffic during and in the wake of the RWC.

The refurbishment involves extending the Pacific Room, renovating the Platinum Room and creating a Diamond Room by relocating the Fortuna Restaurant on level 2. The Platinum Room will have 270 machines and the Diamond facility will house 250 machines. The new and improved facilities are expected to grow revenues for the Platinum as well as Diamond tiers.

In the long term, management sees huge growth opportunities for its International VIP business from Asian visitors coming to Auckland. There is only one VIP salon at the moment. SKC wants to grow this to four salons over the next few months. Management is confident that with the right product, higher gaming capacity and improved service it will be able to gain market share from some of its competitors across the Tasman. The total size of the market in Australasia is estimated to be around A$50bn. In the first half of the current fiscal year, International VIP turnover nearly doubled over the prior period. We expect revenues to reach NZ$2.8bn this year, which compares to NZ$1.8bn in FY10. Management’s goal is to lift turnover to NZ$4bn over the next 12-18 months.

National Convention Centre: Will SKC end up funding it?

The government wants to build a National Convention Centre in Auckland and SKC is keen to participate in the venture. The idea is to have the convention centre next to the hotel and casino, connected by an over bridge. SKC envisages a significant increase in foot traffic to its casino and hotel properties. However, the funding model is still up in the air. The government could fund the project but given its fragile balance sheet, especially after the Christchurch earthquake, it might choose to tap private capital instead. The total cost of the project is estimated to be around NZ$300m. SKC sees a great opportunity but it is unclear whether it can make adequate returns under the current regulatory regime. Time will tell whether SKC and the government can thrash out a deal. We will keep a close eye on developments.

Adelaide: Good potential but constrained by regulatory framework

Adelaide is hamstrung by a very restrictive regulatory regime, high tax rates and a lack of parking and entertainment facilities in and around the casino. Consequently, the casino has largely underperformed its other Australasian peers in terms of visitors, revenues and EBITDA margin. The casino currently generates around A$30bn in EBITDA every year, but has the potential to generate A$80bn in EBITDA with a more friendly regulatory framework that its peers enjoy.

The company is currently in discussions with the South Australian government to expand the property to create a much larger gaming-based integrated entertainment complex. It wants to do this alongside the government’s proposed Riverbank Masterplan development. The plan envisages a significant increase in car parks, a material increase in machines and tables, construction of a hotel, and a range of restaurants and bars. The cost of the project is estimated to be approximately A$250m. SKC says it will commit to the project only if it is able to reach an agreement with the government and is able to earn an adequate return on capital.

Rugby World Cup: a one-off bonanza

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Share Investor's Letter to BioVittoria

Just a note to the owners of BioVittoria, the New Zealand natural-sweetener company that was forced to abort an attempt at listing on the NZX in 2009 due to a lack of market support.

Although I have heard of your company, your attempt to raise funds passed me by because I wasn't really informed that this was happening. Brokers in the past have emailed and called me about every other dog company under the sun - not that there have been many attempted listings since 2009 or since anytime really - but yours sadly must have gone into the spam box or the broker could see how good your company was and wanted to do his own deal.

BioVittoria folks, appears to be at the cutting edge of the "alternative" sweetener market occupied by Aspartame, otherwise known as Nutrasweet , Sucralose and a few others. These alternative sweeteners are in thousands of food products, most know that the major soda makers have these products in their brands like Coca Cola Zero, Pepsi Max etc and they are also in Wrigley products like Extra chewing gum but most of us probably dont know that alot of our everyday consumer products contain a sugar substitute.

In some of these products though, notably the soda drinks, the consumer can tell that what they are eating or drinking doesn't taste like sugar at all and in fact maybe harmful to ones health if used long-term. This is where BioVittoria comes in, not only is their product Fruit-Sweetness™ it a "Natural Sweetener" the makers claim it doesn't have any health side affects, it is calorie free and tastes great.

That and the Food and Drug Administration (FDA) has certified that its Fruit-Sweetness branded monk fruit concentrate is GRAS (Generally Recognized As Safe). The kicker is that a 12% portion of BioVittoria has just been sold to food ingredients company Tate & Lyle and T &L now has a 5 year agreement to dsitribute Fruit-Sweetness™.

Now this is going to allow BioVittoria to compete in the US$50-billion ($62.5b) a year global sweetener market.

"This agreement opens doors to some of the world's largest food and beverage companies, giving a significant boost to our expansion into international markets.'' BioVittoria CEO David Thorrold

Now I don't know about you but I would want to invest in any company that has such a significant product that appears to have no comparative competition (yet) in a fast growing market worth 50 billion bucks, especially at the very beginning.

So please take note David Thorrold and your fellow directors I am very interested in investing in your company should you want the try the NZX again and I am sure lots of my readers would be as well.

Lord knows we need some good companies to enter the NZX IPO market before it disappears completely - only half joking.

Share Investor Portfolio: Value @ 29 April 2011

The Share Investor Portfolio was significantly up in the last week of April. The portfolio was up by 2.02% or $5479.61 on the April 22 update . For the first 16 weeks of 2011 the portfolio has increased by 12.04 % or $30866.98 . This weeks rise was due, primarily, to a 10c rise in SKC, and WHS, an 8c rise in FRE and smaller rises across the board. Most of the remaining stocks were up marginally.

The total of unspent dividends and interest in the bank from the 2010 - 2011 earnings years is $23479.21 at close of reporting season for 2010 and near the end of the 2011 year. There are also approx $50000.00 in tax credits earned from the portfolio since it began in late 2002.

The Share Investor Portfolio has increased in value by 16.83% or $44624.23 since I began tracking it for this blog on October 11 2010.

Share Investor Portfolio as at 17:30:00, Friday 29 April, 2011 (NZT)

Stock

Quantity

Cost price

Total cost

Market price

Market value

Change

AIA

2,000

$1.700

$3,400.00

$2.220

$4,440.00

$1,040.00

30.59%

AIA

2,000

$1.510

$3,020.00

$2.220

$4,440.00

$1,420.00

47.02%

AIA

558

$0.000

$0.00

$2.220

$1,238.76

AIA

754

$2.150

$1,621.10

$2.220

$1,673.88

$52.78

3.26%

ASBPB

3,027

$0.000

$0.00

$0.660

$1,997.82

ASBPB

6,973

$1.000

$6,973.00

$0.660

$4,602.18

$2,370.82

34.00%

BGR

619

$0.000

$0.00

$1.430

$885.17

BGR

2,381

$0.990

$2,357.19

$1.430

$3,404.83

$1,047.64

44.44%

FBU

284

$0.000

$0.00

$9.190

$2,609.96

FBU

830

$9.750

$8,092.50

$9.190

$7,627.70

$464.80

5.74%

FPH

3,000

$2.350

$7,050.00

$3.090

$9,270.00

$2,220.00

31.49%

FPH

541

$0.000

$0.00

$3.090

$1,671.69

FPH

1,459

$3.720

$5,427.48

$3.090

$4,508.31

$919.17

16.94%

FRE

2,054

$0.000

$0.00

$3.440

$7,065.76

FRE

6,577

$3.630

$23,874.51

$3.440

$22,624.88

$1,249.63

5.23%

GFF

586

$0.000

$0.00

$1.480

$867.28

GFF

1,414

$2.330

$3,294.62

$1.480

$2,092.72

$1,201.90

36.48%

HLG

299

$0.000

$0.00

$3.950

$1,181.05

HLG

701

$2.530

$1,773.53

$3.950

$2,768.95

$995.42

56.13%

KIP

190

$0.000

$0.00

$1.030

$195.70

KIP

810

$1.480

$1,198.80

$1.030

$834.30

$364.50

30.41%

MFT

1,000

$7.960

$7,960.00

$9.280

$9,280.00

$1,320.00

16.58%

MFT

1,838

$8.000

$14,704.00

$9.280

$17,056.64

$2,352.64

16.00%

MFT

657

$0.000

$0.00

$9.280

$6,096.96

MFT

1,505

$4.200

$6,321.00

$9.280

$13,966.40

$7,645.40

120.95%

MHI

1,646

$0.860

$1,415.56

$0.910

$1,497.86

$82.30

5.81%

MHI

7,000

$0.630

$4,410.00

$0.910

$6,370.00

$1,960.00

44.44%

MHI

494

$1.050

$518.70

$0.910

$449.54

$69.16

13.33%

MHI

860

$0.000

$0.00

$0.910

$782.60

PPG

$0.000

$0.00

$0.260

$8.06

PPG

1,500

$0.440

$660.00

$0.260

$390.00

$270.00

40.91%

PPG

1,004

$0.800

$803.20

$0.260

$261.04

$542.16

67.50%

PPL

1,000

$3.090

$3,090.00

$1.280

$1,280.00

$1,810.00

58.58%

PPL

1,000

$2.870

$2,870.00

$1.280

$1,280.00

$1,590.00

55.40%

PPL

939

$4.200

$3,943.80

$1.280

$1,201.92

$2,741.88

69.52%

PPL

975

$0.000

$0.00

$1.280

$1,248.00

PPL

1,086

$1.530

$1,661.58

$1.280

$1,390.08

$271.50

16.34%

RYM

459

$0.000

$0.00

$2.540

$1,165.86

RYM

4,586

$1.970

$9,034.42

$2.540

$11,648.44

$2,614.02

28.93%

SKC

5,750

$7.430

$42,722.50

$3.560

$20,470.00

$22,252.50

52.09%

SKC

1,000

$7.600

$7,600.00

$3.560

$3,560.00

$4,040.00

53.16%

SKC

2,750

$7.700

$21,175.00

$3.560

$9,790.00

$11,385.00

53.77%

SKC

1,431

$8.750

$12,521.25

$3.560

$5,094.36

$7,426.89

59.31%

SKC

272

$4.720

$1,283.84

$3.560

$968.32

$315.52

24.58%

SKC

25,712

$0.000

$0.00

$3.560

$91,534.72

STU

$0.000

$0.00

$2.700

$210.60

STU

303

$4.740

$1,436.22

$2.700

$818.10

$618.12

43.04%

WHS

4,500

$3.730

$16,785.00

$3.650

$16,425.00

$360.00

2.14%

WHS

6,979

$6.000

$41,874.00

$3.650

$25,473.35

$16,400.65

39.17%

WHS

$3.710

$55.65

$3.650

$54.75

$0.90

1.62%

WHS

3,506

$0.000

$0.00

$3.650

$12,796.90

28.66%

	Total cost	Market value	Change
	$270,928.45	$348,570.44	$77,641.99

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c Share Investor 2011

Friday, April 29, 2011

Contact Energy Rights Issue: Management Sells Company Short

Rights issues are typically done when a listed company needs more capital to repay debt or needs money to expand their business when more debt is inappropriate. In the case of Contact Energy Ltd [CEN.NZX] their $350 million rights issue, announced yesterday, will go towards expanding geothermal power facilities.

The only question raised by the announcement though is why the rights issue was set at such a massive discount to the current share price. It is usual to discount rights issue placements but not to the extent CEN shares have been discounted. The $5.05 rights issue price is almost 15% less than the trading price of CEN the day before the announcement.

For some reason management have opted to heavily undervalue the issue and one can only speculate as to why. My cynical side is thinking Origin Energy Ltd [ORG.ASX], the current majority owner of the company at around 51%, is looking to creep their share of the company through the rights issue process - they will take up their full entitlement - but my practical side is thinking that the company already has a massive debt burden of nearly $1.3 billion so simply cannot sustain increased borrowing based on their dwindling customer base and subsequent lower profits, so are choosing to dilute shareholding (if rights are not taken up) to finance normal business activities.

Long term investors need to consider their participation in the rights issue in the following manner. If they do not take up the 1:9 rights offer their current shareholding will be diluted but they are likely to be able to sell them on the NZX. However, joint managers Deutsche Bank Craigs and Goldman Sachs will aggregate the rights which are not taken up in June and sell the unwanted shares in a book-build process.

If shares sold through this process go at a premium to the $5.05 being offered to existing investors, those who opt not to take part in the rights issue will get the difference, proportionate to their entitlement.

Those not currently CEN shareholders thinking of buying CEN shares to participate in the rights issue might want to wait until after the extra shares are issued to see if they can buy at a level closer to the $5.50 issue price but some investors will be gambling that demand for the rights to participate will propel the main shares higher and make the whole process a profitable one.

CEN shares initially increased by 15c on the news yesterday but finished down 1c to finish at $5.85.

CEN Rights Issue Documents

Contact Energy @ Share Investor

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Rights Issue Documents

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c Share Investor 2011

Share Investor

Monday, May 2, 2011

Morningstar Revalues Sky City Entertainment Group

Investment rating

Event

Impact

Recommendation impact (last updated: 02/05/2011)

Event analysis

Share Investor's Letter to BioVittoria

Share Investor Portfolio: Value @ 29 April 2011

Friday, April 29, 2011

Contact Energy Rights Issue: Management Sells Company Short

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