Forum Archive Index - November 2002

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

Hi Gerry,
 
> 
>Someone asked, "why the Buyback" on another channel and this was my
>reply:, You said "Firstly CO normally operate a buyback when
>the share price is depressed and is the best use of the CO money.
>So why is SKC doing it?" -- My comment: SKC is a powerful company
>and doesn't need to buy back shares to keep up the shareprices;
>you are so right about that!
>
>But there are competing groups of Shareholders: One vocal group, who
>wants buybacks and less dividends. This group also strongly
>believes that when good margins from potential projects do not
>exist, such plans be shelved and the money spent on "Efficient use
>of Capital".
> 
>Obviously, there are limits to that but I would appreciate any
>speed-up of this acquisition before prices rise too much. It will
>be cheaper for SKC to buy them now than having to buy them back
>when prices could be higher.
>
>

Gerry, I think the original question comes from someone who follows 
charts too closely.  It is true that SKC is trading near its 
all time high, but that is an entirely different question as to 
whether SKC is 'cheap' or not, based on fundamentals.

My opinion is that the share price is getting towards the upper end 
of what is 'fair value' (based on dividend yield and growth 
prospects).  SKC management have yet to prove themselves outside of 
their core central Auckland site.  All of their other ventures have 
lost money, so where is the future growth going to come from?

However, if there is really evidence that the Adelaide Casino 
(their biggest investment) may edge into the black, then this will 
give investors confidence that SKC management can start to 
repeat their Auckland Sky Tower site success in other places.   If 
FY2003 is indeed the 'out of Auckland' turnaround year, then I think 
you could argue that SKC is looking cheap, even at its all time high 
price.



>
> 
>Since some less successful investments a few years ago, this group
>has now more influence. However, I do strongly support SKC's
>latest proposals re Convention Centre and Hotel.
> 
>



Agreed.  I was just on the cusp of thinking that maybe I should take 
some profits on SKC.  But the Convention Centre/ Hotel project, right 
in the centre of core competance district, looks like a winner to me.

With the single stroke of announcing the 'hotel on convention centre' 
project, I think much of the downside risk has been taken out of the 
SKC share price, which, without the Convention Centre, might be 
expected to slide a bit if Adelaide continues to prove difficult.

To add my bit, in answer to the original questioner, there is another 
reason why a buyback might be a good thing.  Sometimes using a 
buyback to 'burn' cash by increasing the debt/equity ratio of a 
company can be positive for that company!  It takes a very special 
company to do this, as if the tide of business turns against you, 
such a strategy can backfire badly.  However SKC, being one of the 
very few companies to pass the 'Focus Investment Group' screening 
test, is I believe a company that can pull this stunt off 
successfully.

For a more quantitative description as to why having less capital and 
more debt can be good, readers might like to check back through the 
focus investment group archives.  On Page 5 (as I write this), there 
is a 1st May 2001 post titled: 

'Cash Borrowings Flexibility Margins &'

which explains this phenomenon.

SNOOPY





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