Forum Archive Index - February 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

>
>
>What do people think of skc 
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It's good
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>& why is it going down?
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>
I suspect the downturn in Sky City price is a reaction to the 
uncertain debt position of its newly acquired subsidiary 'Force 
Corporation', and the effect that any increased debt might have on 
its parent SKC.

Force is currently undertaking a $NZ31million dollar capital raising. 
 The expectation is that the other shareholders will not take up 
their entitlement to this rights issue, and Sky City will end up with 
an up to 95% stake in the company as a result.   Let's say that Sky 
City ends up with 100% of Force as it now is.  (that will make the 
'what if' scenario I will paint below relatively simple).

If we turn to page 39 of the latest SKC annual report, the balance 
sheet, we can see that there are total liabilities of $NZ563m listed, 
and this includes around $NZ45m of Force loans consolidated into the 
SKC books (SKC being roughly a 50% controlling shareholder).   

In the half year since these figures were tabled there has been a 
significant deterioration in the financial position of Force which 
has resulted in a further $NZ10m in debt yet to formally appear of 
the SKC books.(1)  You can get this from the Force half year profit 
announcement as posted to the 'sharechat' website.

If SKC do end up with full ownership of Force, this will require them 
to consolidate a further $NZ55m of debt into their balance sheet (2).

Furthermore SKC will have to fully fund the $NZ31m convertible note 
issue (3), and my reading of the situation is that this is in 
addition to the direct capital advance of $US4.25m ($NZ10m) (4) that 
they have already had to inject to sort out the Force debt problems. 
It has been flagged that under the new loan deal, a potential 
liability for a further $US4m ($NZ10m) bailout exists. (5).

If we add the total  affects (1-5) of our worst case scenario 
together, we get an increase of $NZ116m in debt, all to be tacked 
onto the SKC balance sheet liabilities.   All other things being 
equal, this will create a balance sheet with $NZ391m in equity 
compared with $NZ563m plus $NZ116m which equals $NZ679m in debt. This 
gives a debt ratio of 679/(679+391) which equals 63%.  This is high 
by some standards (some people use a rule of thumb of 50% for maximum 
desirable debt)!  Or is it?

Last year, when the SKC share price climbed to its greatest heights, 
the debt ratio was 572/(572+227)= 72%.  So by my reckoning the debt 
now is less than it was then, in relative terms.

What has changed is the ability to service that debt.  If we assume a 
flat profit year of $NZ70.1m (due to the other earners apart from the 
Auckland heartland still being brought up to speed) this means it 
will now take SKC 9.7 years to pay down their debt completely, should 
they choose to do so.   This is a deterioration from last years figure 
of 8.2 years, but not a grave deterioration.  9.7 years, while 
perhaps a bit higher than desirable on a long term basis, is not out 
of line IMHO.   Also remember that the SKC board is in this position 
by choice.  They did have the option of letting Force go bankrupt if 
they felt this new increased debt position was unmanageable.

So to summarize...

There are some investors out there who see the debt of SKC going up 
to what might be for some less well managed companies concerning 
levels.  They are selling out of SKC while there is uncertainty 
surrounding the outcome of the Force situation, and until other 
investments, particularly the Adelaide Casino show a turnaround in 
their profit trends.   I invite any curious sharechat readers to 
check my debt figures (I have been known to make mistakes cobbling 
together these late night reports).   But my instinct says that over 
the next few weeks we may be presented with a rare opportunity to top 
up on one of NZs best shares, SKC,  on the cheap!  I don't think the 
recent share price drop is justified in the long term.

Disclosure:  Hold SKC.   

Disclaimer:  All this is only my opinion, and I am sure it would be 
particularly useful to hear from those on this forum who have a 
contrary view. 

SNOOPY




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"You can tell me I'm wrong twice, 
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