SkyCity's Morrison says sorry for Adelaide performance which has turned around

Friday 13th November 2015

SkyCity Entertainment Group chief executive Nigel Morrison apologised to shareholders at today’s annual general meeting in Auckland for “stuffing it up” at the company's refurbished Adelaide Casino last year, but has since turned around the South Australian operation.

Earnings before interest, tax, depreciation and amortisation rose 14 percent to $107.2 million in the four months ended Oct. 31 thanks to improved results from its “hero” property in Auckland and the Adelaide Casino where it is close to making a decision on a A$300 million upgrade. Morrison said the company won't need extra funds for the Adelaide development until 2018, and is working through options on how to pay for the expansion.

One shareholder questioned the board on how investors could be assured the Adelaide expansion would deliver a return on assets given it had already been particularly poor over the past year at less than a 2 percent return on assets.

“We wouldn’t proceed with investment in any property if we didn’t achieve a WACC (weighted average cost of capital) of at least 9.5 percent and I’m confident we can get double digit returns to shareholders on that basis,” Morrison said.

The fundamental problems for the Adelaide casino are that it lacks a carpark, a hotel for high-rollers to stay in, and critical mass of restaurants to attract local punters into the city, he said.

International business attracts half the tax paid on local gaming in South Australia and Morrison said he's confident that business can grow further, providing the development goes ahead. SkyCity has a virtual monopoly on gaming activity in Adelaide and tax certainty through until 2035.

A final decision is due to be made within the next three to four months after further negotiations with the South Australian government over the lease on the land and confirmation SkyCity will get at least 750 spaces in the planned 1,500 to 1,900 space carpark being built as part of the broader development of the Riverbank precinct.

The company expects to begin ground works on the Adelaide expansion, which includes a hotel, villas and suites for its international business, and an expanded gaming area, in the first half of next year. The building costs are an estimated A$250-A$270 million for the hotel, a further A$10 to A$12 million for the land, and A$30 to A$35 million for other associated costs.

Meantime, SkyCity has started work on the New Zealand International Convention Centre in Auckland which is forecast to cost some $580 million, and will be funded from future operating cash flows and an undrawn $300 million debt facility.

Morrison said shareholders will be updated on funding options in February as SkyCity has until 2018 before it needs extra cash to help pay for the Adelaide expansion. The options include selling the Federal St Carpark in Auckland which is likely to reap around $35 million and the sale of the Hobson St hotel which is now being touted to international investors. The capital costs of the hotel including the land are around $160 million to $170 million and Morrison said he'd expect to “do a deal that gets that back and more”.

Another option is increasing debt, he said, though the company remains committed to maintaining its current credit rating, and keeping dividends at the current level, along with the 2 percent discount on the dividend reinvestment plan.

Morrison has spent a significant amount of time in Adelaide in an effort to turn the business around, and the unit boosted earnings 77 percent to A$14.7 million on a 24 percent gain in revenue to A$70.3 million in the latest four-month period.

The Adelaide casino had various parts progressively closed for seven months of the last financial year in a $50 million refurbishment, which Morrison said hurt its performance. He’d gambled on a significant uplift in revenue as soon as that work was completed and geared up staffing and other resources to meet the expected demand which never came.

Morrison has had to shed 40 staff and cut other costs, and while gaming continues to be soft, new restaurants and the increased international business helped bolster Adelaide’s margin to about 21 per cent in the first four months of the current financial year from 14 percent in 2015, he said.

The share rose 0.5 percent to $4.24.

BusinessDesk.co.nz

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