Win some, lose some at Sky City

By Phil Boeyen, ShareChat Business News Editor

Tuesday 26th February 2002

Sky City Entertainment Group (NZSE: SKC) has delivered an uneven interim result with some divisions doing well, others needing improvement and the overall result weighed down by writeoffs in Force Corp (NZSE: FOR).

In the six months to the end of December Sky City's bottom line profit was $10.06 million, a 70% dive from the previous $33.17 million result.

This includes a total write-off of $27.8 million in Force comprising $16.7 million for goodwill and $11.1 million relating to Force's investments in Argentina.

The company notes that the result provides for full compliance with GAAP and is a conservative treatment of the Force investment in Sky City's financial statements. It also takes into account both the past investment and the yet-to-be incurred contribution in Argentina and means no further adjustments in the second half results.

At an operating level there has been an 18% increase in group revenues to $249 million during the period with earnings before interest, tax, depreciation and amortisation up 11% from to $103 million. The New Zealand operations continue to provide the bulk of revenue, rising 8% to $170 million.

Nearly all divisions at the flagship Auckland business reported increases in revenue, ranging from 6% growth in gaming and food & beverage to a 10% improvement at Sky Tower.

Occupancy at the hotel increased to 86% from 78% previously, boosting revenue by 8% to $8.5 million. Car parking revenue was steady, as was Auckland's overall gross margin at 63%.

Sky City MD, Evan Davies, says that once again "Sky City Auckland proved to be an outstanding operation with a continued favourable response by customers to gaming and entertainment offerings."

Elsewhere in New Zealand the company reports its Queenstown revenues are below expectations at $2.4 million and cites competitive pressure from the other casino in the resort town. It has implemented restructuring and cost reduction initiatives, including reduced operating hours for table.

Construction of the Riverside Casino in Hamilton is continuing on time and on budget for its scheduled opening in September.

In Adelaide, where the company is on 'shareholder watch' to see if it can deliver off-shore results, casino revenues rose 14% to $47 million in the six months but have been accompanied by a 26% rise in expenses to A$38 million.

The company admits that cost levels are too high for revenues achieved and says the resulting fall in Ebitda from A$10.4 million to A$8.3 million is disappointing.

"Though we are still looking for improvement at Sky City Adelaide, gaming revenues were comfortably up on last year. Operating earnings nevertheless declined by 20% over the previous corresponding period and the key challenge for our management team will be to get our cost base more in line with our revenues," says Mr Davies.

SKC's other Australian investment, in Canberra-based internet betting company Canbet, recently reported a first half jump in turnover of 40% with profit at A$865,000. Sky City currently owns 22% of Canbet with an option to go to 33%.

Mr Davies says is it had been a challenging six months for the company with a number of operational challenges created by the company's recently expanded asset base.

He describes the interim result as a solid one and says the decision to take the one off write off Sky City's is prudent.

Looking forward the company plans to focus on a number of operational priorities, including completing the Riverside gaming and entertainment complex in Hamilton, reducing costs within Sky City Adelaide while maintaining revenue growth and proceeding with the development of the Convention Centre at Sky City Auckland.

SKC says the restructuring of Force subsidiary will also place that company on "an appropriate financial footing in New Zealand" and allow the two companies to pursue the synergies and efficiencies which were behind the investment in the first place.

An interim dividend of 15.5 cents per share has been declared, an increase of 1.5 cents a share over the prior interim payout.

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