Tuesday, October 23, 2012

Sky City Gaming: Morningstars look at Sky City's gaming


Sky City Casino and hotel in Auckland. Photo / Doug Sherring
Sky City Casino and hotel in Auckland. Photo / Doug Sherring

This was out a few days ago. Looks like the prospects for the main driver of profit are limited but Sky Cities Australian casinos look to become the main earners. Look for Darwin's earnings getting more significant as the years pass.

Valuation: $4.00

Last updated:

21/10/12

Revenues hold up despite Rugby World cup boost, Darwin shines.


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. 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

At its AGM Sky City (SKC) provided a trading update and profit guidance for fiscal 2013. Not surprisingly, the Auckland casino (accounting for 70% of group EBITDA) posted lower revenues for the period to 17 October the prior year boosted by the Rugby World Cup.

Darwin, international VIP and Hamilton were the real standouts delivering double digit revenue growth
Based on the performance so far and current market conditions, management expects normalized NPAT for fiscal 2013 to be in the “NZD 140 millions”.

Impact

We are sticking with our NPAT forecast of NZD 147 million as we expect profit growth in the second-half to more than offset lower earnings in the first-half. 

We expect Auckland’s earnings to remain flat with a lower first-half offset by a stronger second half. Darwin is likely to achieve 8% growth spurred on by the recently opened resort facility (established in July 2012) and the creation of new gaming facilities in FY12.

In the longer term we see good prospects for Darwin stemming from growth in international VIP players due to the casinos proximity to South East Asian countries. Potentially the international VIP business, which is practically non existent right now, could have a turnover of AUD 2 billion in the next two years. That would translate into AUD 6.5 million in incremental EBITDA or an increase of 30% from currently levels.

At its AGM Sky City (SKC) provided a trading update and profit guidance for fiscal 2013. Not surprisingly, the Auckland casino (accounting for 70% of group EBITDA) posted lower revenues for the period to 17 October the prior year boosted by the Rugby World Cup. However, Darwin, international VIP and Hamilton were the real standouts delivering double digit revenue growth. Based on the performance so far and current market conditions, management expects normalized NPAT for fiscal 2013 to be in the “NZD 140 millions”. We are sticking with our NPAT forecast of NZD 147 million as we expect profit growth in the second-half to more than offset lower earnings in the first-half. Our fair value of NZD 4.00 per share also remains intact.

Normalized group revenue was up 1.5% from 1 July to 17 October 2013 driven by Australian casinos, which make up 24% of group EBITDA. As expected the Adelaide business posted flat revenues year-to-date given challenging economic conditions in South Australia. For the full year we expect Adelaide’s EBITDA to be up modestly backed by a better performance from table games.

Darwin’s revenue surged 12.4% underpinned by the recently opened resort facility (established in July 2012) and the creation of new gaming facilities in FY12. The redevelopment of the new VIP Level 2 gaming area, expected to be completed by March 2013, is likely to further enhance the casino’s appeal. We expect Darwin’s EBITDA to increase by 8% this year. In the longer term we see good prospects for Darwin stemming from growth in international VIP players due to the casinos proximity to South East Asian countries. Potentially the international VIP business, which is practically non existent right now, could have a turnover of AUD 2 billion in the next two years. That would translate into AUD 6.5 million in incremental EBITDA or an increase of 30% from currently levels. We also think the AUD 32 billion Inpex LNG project will be very positive for the local economy and might underpin foot traffic to the casino.

Auckland reported a 4.9% decline in top line growth year-to-date. Revenue was impacted by NZD 5 million from the roll out of the new Bally gaming system. However the overall impact on EBITDA was neutral because a similar amount was deducted from expenses. Hence on a normalized basis revenue was 1.7% lower than the prior period. The previous corresponding period however included a one-off benefit of NZD 7 million from the RWC which, if excluded, results in revenue growth of nearly 3%. Considering the prevailing tough economic environment we think Auckland’s performance was creditable. The international VIP business in particular is going from strength to strength and is becoming one of the major growth drivers for the company. Revenue increased 40% year-to-date reflecting the full impact of new facilities created last year. For full year we expect Auckland’s earnings to remain flat with a lower first-half offset by a stronger second half.

Among the smaller casinos Hamilton’s performance was noteworthy. Revenue increased 14% to NZD 17.6 million driven by increased customer visits. Disposable incomes in the region are being buoyed by a strong economy underpinned by the dairy sector. Given the lack of quality hotels in Hamilton, SKC has decided to build a 4.5 star hotel near the casino with the aim of lifting foot traffic. The project will cost NZD 35 million and will be completed in Q1 FY15.

SKC expects to conclude negotiations on the AUD250 million Adelaide riverbank development by 31 December 2012. Also, it is awaiting the Auditor General’s report regarding the NZD 350 million National Convention Centre development. We have previously argued that these investments, while significant, could materially increase shareholder value in the long term.


Previous close Market cap
$3.990 $0 Million
52 week high/low
$4.080 - $3.250
Sector
Consumer Services

Intrinsic valuation

Moat rating Narrow
Business risk Medium
Pricing risk Medium
Company beta

Sector beta

Year 06/11A 06/12A 06/13E 06/14E
NPAT ($m) 130.6 142.2 146.8 152.8
EPS (c) 22.6 24.7 25.5 26.5
% change 0.1 8.9 3.2 4.1
DPS (c) 16.0 17.0 17.8 18.6
Franking (%) 0.0 0.0 0.0 0.0
Yield (%) 5.0 4.8 1.9 1.9
PER (x) 14.3 14.4 37.7 36.2
Source: Aspect Huntley analyst estimates.

6 month price chart



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Share Investor 2012