Jury out on Sky City's Darwin buy

By Nick Stride

Friday 20th February 2004

Sky City Entertainment's acquisition of the MGM Darwin casino has analysts split, with some applauding it and some saying the money would have been better spent elsewhere.

The company last week agreed to pay $A195 million ($220 million) for the Northern Territory complex, with the price to be funded entirely by debt.

Analysts pointed out the casino faces an array of regulatory threats.

Goldman Sachs JB Were said there was a high likelihood that the community gaming rebate would end in June next year. That would reduce the casino's ebitda (earnings before interest, tax, depreciation, and amortisation), running at about $A25 million a year, by $A4 million.

The broker also noted the Northern Territory was in the early stages of considering a formal gaming licence review process.

If that were to proceed it could introduce risks to the renewal of the casino licence in 2015.

"While the valuation impacts are not material to our overall DCF (discounted cash flow valuation), we believe a key concern for the stock is management's apparent preparedness to make potentially value-neutral acquisitions rather than return cash to shareholders," the broker said.

ABN Amro said the acquisition appeared to be value-neutral on current information but noted Sky expected earnings a share before amortisation would rise 9%.

Macquarie Equities was also unimpressed, saying Sky City had paid top dollar for few synergies and minimal growth. One regulatory concern was the capacity for partial smoking bans, at present loosely policed, to be more strictly enforced in the future, Macquarie said.

Credit Suisse First Boston and First NZ Capital, which advised Sky City on the acquisition, were more upbeat.

They said the main driver of returns would be the performance of the Darwin and Northern Territory economy which, by all accounts, looked favourable.

"This should result in reasonable earnings growth being achieved," the brokers said.

UBS Warburg said that, despite the loss of the community gambling rebate, Darwin would be earnings-accretive in 2005 and 2006, by 3.3% and 1% respectively. The buy was a better one than the Adelaide Casino.

"Sky City's history of investing in Australian casinos has not been great with its first acquisition of Adelaide Casino.

"However we believe that due to the stronger growth of Darwin, a strong market position for Darwin Casino, and capital having been spent at Darwin, it offers a better opportunity for Sky City than did Adelaide casino."

Deutsche Bank was also positive. The acquisition "greatly assists Sky's growth profile over the next three years," the broker said.

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