By David McEwen
Friday 7th February 2003
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The company's profits were up but its margins were down while it digested underperforming acquisitions such as the Adelaide casino and Force Corporation (since renamed Sky City Leisure).
As I concluded at the time, "Sky City's casino in Auckland is a hugely efficient moneymaker. Investors will be hoping the company is not taking a gamble on expanding beyond this."
A little over a year later Sky City's share price has risen 70% even after paying out 20c a share in special dividends.
Investors like Sky City's recession-resistant business, its virtual monopoly (courtesy of a government ban on new casinos) and its high growth rate.
Its defensive qualities are among the reasons for the recent rush for Sky City shares, amid considerable global uncertainty.
Its latest report shows a profit "before non-recurring items" of $85.1 million for the year to June 30, a 21% increase on the previous year, which in turn was up 19% on the year before.
After allowing for writedowns associated with its troubled Force Corporation investment and a blowout in losses being incurred by subsidiaries from $1.8 million to $10.5 million (not specified but probably Force and the Sky Alpine Queenstown casino), net profit was down 16% to $57 million.
Pre-tax returns for Sky City's shareholders were 24.4%, compared with the NZSE40 gross index average return of 5.6%.
It has lifted its gross margin but only slightly. In 2001 its pre-tax and abnormals profit represented 24.2% of income. In 2002 it was 25.3%, making it still well short of 2000's margin of 30.5%.
Sky City has very strong net operating cashflows, up 16% last year, and can fund both its expansion and a high dividend payout.
At the same time, it has a high level of debt $406 million in long-term borrowings and $149 million in capital notes which dwarfs shareholders' funds of $256 million.
This is not such a concern as it might be for other companies because of its superb cashflows.
Also, this leverage is working in the company's favour and will continue to do so as long as it can produce high returns.
Meanwhile, the push for more growth continues. Sky plans to build a $75 million, 14-level hotel atop its planned convention centre across the road from its Auckland casino complex.
Part of the reason Sky City's share price has appreciated so far is that it has achieved the rare feat of attracting Australian investors who are increasingly buying into its growth and yield story.
Unlike many local companies trying to lure Australian investors, Sky City communicates very well.
Notably, its presentation to Australian investors late last year which was heavy on strategy and numbers and light on hype went down very well. Its annual report, while typically heavy on the glamour at the front-end, avoids unnecessary spin while remaining informative at the back end.
Consensus earnings forecasts for the current financial year are for Sky City to deliver earnings growth of about 17% (all eyes will be on the interim result due later this month for verification).
In 2004, however, that growth is expected to slow to 9%.
In light of this and the dramatic rise in the company's share price in the past couple of years, it seems likely that investor demand will settle down along with its growth rate.
Growth in all areas seems assured for some time, meaning Sky City will be retained as a core holding in many portfolios. However, investors looking for the next big thing may consider cashing in some of their chips.
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