Forum Archive Index - February 2004

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

Hi Macdunk
 
>
>I probably am missing something but SKC looks like a raging buy 
>right now, comments please. 
>Why the drop In price?. I picked It to go up,
>how wrong can I be.  Input please. 
>  

The purchase of the Casino in Darwin is an interesting development.     
At the risk of pre-empting SKC's number one analyst  (Gerry S) I have 
been getting my head around some of the numbers.

EBITDA for Darwin is reported as A$27m per year.   This is not a very 
useful figure as both depreciation and amortisation have to be taken 
into account.    The Casino licence in Darwin runs until 2015, which is 
near enough to ten years once SKC.NZ  gets the Darwin Casino on 
board.  Interior fittings are depreciated over ten years.   SKC.NZ has a 
policy of long depreciation times for the building shells, so I will pick a 
figure of 40 years for that.  The total purchase price was $A195m, 
which includes the casino licence and buildings  (the lot).  I'm going to 
make a few assumptions here:

Total purchase price ($A195m) is made up of:

Casino Licence $A130m
Building Shell $A50m
Internal Fittings $A15m

These are to be depreciated/amortized over 10 years, 40 years and 10 
years respectively.    Those will lead to an annual charge against 
profits of $A13m, $A1.25m and $A1.5m respectively, a grand total of 
$A15.75m.

If we put this charge against the EDITDA figure of $A27m we get a net 
contribution after amortisation and depreciation of :

$A27m-$A15.75m= $A11.25m

Based on a purchase price of $195m, that gives a gross yield of 

11.25/195= 5.8%.

In the last Annual report the interest rate being paid in Australia is 
7.3%.    This means SKC are making an after tax *loss* on this new 
investment of some $A2.9m per year on the figures as they stand.

I would like to remind readers at this point that I made all those 
depreciation figures up so I have no way of knowing how accurate my 
projected loss figure is.  Nevertheless I would be confident to say it is 
'in the ball park'.

Last years after tax profits for SKC were $NZ107m, so taking $A2.9m 
off that it  isn't going to make that much difference to the big picture.

I had a look at the MGM Mirage, previous owners of the Darwin 
Casino,  website and it looks like they had a genuine reason for 
selling.   MGM want to concentrate their resources on what they 
perceive as a rapidly developing UK market, a legitimate excuse for 
selling.  So I don't think SKC has bought a dog.

But SKC may need to keep the Darwin Casino on a tight leash to 
achieve the results they want.   SKC are betting that with a  bit of 
innovative marketing, like bringing in more performer entertainment to 
the venue, they can make 1+1 equal 3.   If they can incorporate the 
tricks from the NZ operation, then I think they have every chance of 
pulling it off.

It is interesting to compare Darwin to the Adelaide Casino acquired on 
30th June 2000.

Consideration paid for Adelaide $240.8m (on 30th June 2000).
plus extra capital spending to bring SKC Adelaide up to scratch $20m 
(estimate) can be broken down as follows:

Casino Licence (85year duration) $A225m
Building Shell (40 year life)  $A20m
Internal Fittings $A15m

These will lead to an annual charge against profits of $A2.6m, $A0.5m 
and $A1.5m respectively.    Last year EBITDA for Adelaide was 
$A25.9m, which leaves EBIT of $A21.3m.   This represents a gross 
return on the $260m invested of 8.2%.  Again we shall assume the cost 
of the borrowed money is 7.3% which means that SKC has an interest 
bill of some $A19m to pay in connection with the Adelaide Casino.   So 
we are looking at a meagre profit of some $A2.3m as the contribution 
form Sky City Adelaide.     That meagre profit has now been wiped out 
by the acquisition of Sky City Darwin.   That means SKC will have no 
imputation credits available to be passed onto Australian shareholders.
That in turn means there is no compelling reason for Australian 
'income' investors to rush out and buy this share.   However, even 
without this tax incentive a gross yield of 5.2%, or 3.5% after tax is not 
'that' bad by Australian standards.

However, because the Australian business are teetering around the 
'break even' point it does mean that any profitability improvements 
*from here* will go towards making real taxable income in Australia and 
that could make a big change to the yield picture from an Australian 
perspective.

So I say forget Auckland and the Sky Tower.    We *know* that 
business will continue to do well.   Looking a couple of years out, the 
real future of SKC will depend on how the Australian side of the 
business performs.

Is SKC a good buy now?    Yes, but almost entirely due to their ability 
to profitably expand their Auckland site, around the new Convention 
Centre.    The contribution from Australia will come later, which is 
possibly why impatient Mr Market marked down the price of SKC on 
hearing of the Darwin casino acquisition.

SNOOPY

discl: hold SKC






                  

 

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