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SkyCity chair Campbell the likely driver of surprise share buyback

Wednesday 13th February 2019

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SkyCity Entertainment Group investors could get a boost this year, with the company saying it will buy back 5 percent of its shares on the NZX over the course of 2019.

The buyback, starting next week, would be worth $135 million at the current share price.

SkyCity’s announcement came as it reported an 11.4 percent fall in first-half net profit to $82.8 million even as revenue was up 1 percent at $460.2 million.

Like those of other casino operators worldwide, SkyCity's results are complicated by an accounting convention which sees it reporting both actual and 'normalised' earnings.

The latter takes the volatile earnings from international high-rollers - rich foreigners who tend to fly in, often in a private jet, play baccarat madly and fly out again - and applies a theoretical 1.35 percent ‘win rate’ to the amount of money the casino makes from them.

Because the high-rollers actually only gave SkyCity’s casinos 0.98 percent of their winnings in the six months ended Dec. 31, the company’s 'normalised' theoretical figures look a lot healthier than their reported ones. Normalised profit was up 11.4 percent at $97 million, and revenue rose 10.9 percent to $598 million.

Josh Wilson, senior portfolio manager for NZ Funds, says stock markets normally react positively to news of a share buyback - it’s good to have a big buyer in the ring.

And the move likely shows the influence of the company’s chair Rob Campbell, he says.

A former union organiser, anarchist bookshop owner and also chair of Tourism Holdings, Summerset Group and WEL Networks, Campbell joined SkyCity just over a year ago. He has a reputation for making sure a company’s capital is allocated to its highest-returning asset, Wilson says.

Campbell would argue “if nothing is competing for the company to invest in, the money is best going back to shareholders.”

Wilson says the buyback is a surprise given SkyCity’s ambitious building projects at its Auckland and Adelaide casinos. But it would also be a signal to the market that SkyCity isn’t expecting the projects to blow out financially.

Delays at SkyCity’s Fletcher Building-led International Convention Centre and Horizon Hotel developments have been well-signalled.

Contractual completion deadlines have come and gone for both projects, with the hotel now expected to be finished “within 12 months” and the convention centre to open in the second half of 2020, SkyCity said.

SkyCity also said this morning that all aluminium composite panels (ACP) on the convention centre facade will need to be replaced, adding an additional $25 million to the cost of the project. Highly-flammable ACP panels led to the devastating Grenfell Tower fire in London in 2017.

Subject to resolving the ACP issue, the total project cost for SkyCity - net of liquidated damages - is not expected to be materially above the original $703 million budget, the company said.

This statement suggests there could be some cost-overruns attributable to SkyCity, rather than Fletcher Building, but they are unlikely to be significant, Wilson says.

Fletcher today confirmed that it remained within the construction provisions it announced on a series of problematic contracts a year ago.

Fletcher Construction chief executive Peter Reidy said the company is working to make specification changes to some of the facade elements at SkyCity's request and that the timetable for completion had shifted to 2020.

“We are unable to give further details as we are bound by confidentiality clauses in our contracts.”

Carolyn Holmes, head of equity research at financial service provider ShareClarity, said the result was basically in line with what the market had been expecting and was unlikely to “turn the dial”.

She says SkyCity’s diversification strategy into hotels, the convention centre and even an All Blacks museum are all “nice to have”, but the main issue would be whether they drove significant additional business into the casinos - the company’s big profit-generators.

The shares fell 2.5 percent to $3.89, giving up some of their recent gains since flagging the higher 'normalised' earnings at the end of January. 

(BusinessDesk)

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