The gambler

By Jenny Ruth

Friday 10th March 2006

Brierley Investments floated SkyCity Entertainment in 1996 after building its flagship asset, the Auckland SkyCity casino. Since then, the complex has been augmented by the Sky Tower, Auckland Convention Centre and Grand Hotel and continues to provide the lion's share of profits. The company has also bought the Adelaide and Darwin casinos in Australia, the Hamilton casino, a 60% stake in the SkyCity Queens-town casino, a 40.5% stake in the Christchurch casino and taken over former cinema operator Force Corp. In 2004, it wrote off its $20.9 million investment in Australian online gambling company Canbet.

The numbers: The casino operator's share price has bounced around plenty over the last couple of years but in mid-January it was about where it was two years ago. The company's profitability effectively declined 14% last year, excluding the Canbet write-off in 2004. Excluding the $39.2 million write-down in 2002 of its Force Corp investment - since renamed SkyCity Leisure - profitability has pretty well stagnated for four years, notwithstanding that total assets have grown 67% to $1.5 billion over the same period. But perhaps the standout feature of the last few years is how its gearing has been ramped up: total borrowings, including capital and convertible notes, have all but doubled from $565 million at June 30, 2002, to $1.18 billion at June 30, 2005. Managing director Evan Davies told the October annual shareholders' meeting that "we would describe our gearing level as reasonably full but not under pressure." The company's market capitalisation in mid-January was $1.97 billion.

Management: Davies has been managing director since the company listed, having previously overseen the building of the Auckland complex and the gaining of its casino licence. Other long-serving executives include company secretary Alistair Ryan (with the company since 1995), capital projects general manager Bryce Morrin, and general manager of marketing and New Zealand operations Heather Shotter.

Current strategy: The Auckland complex was hit by the introduction of a smoking ban and the company has also had technical problems implementing a system allowing gamblers to load cash onto cards rather than directly into gaming machines. Those issues saw Auckland's gaming revenues fall 2.6% in the year ended June 2005 while its overall earnings before interest, tax, depreciation and amortisation (EBITDA) fell 2%. The Adelaide casino is still not producing the goods, despite an A$70 million (NZ$76.3 million) refurbishment which has been beset with delays. SkyCity paid A$183.45 million (NZ$200 million) for the casino in 2000. Its EBITDA fell from A$25.3 million (NZ$27.58 million) to A$18 million (NZ$19.62 million) in the latest year. Further troubles are likely in Adelaide due to increasing smoking restrictions.

Recent track record: The pervasive view of the company in New Zealand investment circles is that it is far too keen on buying things and not nearly focused enough on building shareholder wealth. Certainly, the price SkyCity paid for the Adelaide casino has proved far too much, its takeover of Force Corp was costly and its Canbet investment disastrous. While its Darwin, Hamilton and Christchurch purchases have been better buys, the company's failure late last year to win the bidding for Australia's Taverner hotels was greeted with relief. Still, Davies's continued insistence that he intends to continue to expand the company through acquisitions is likely to keep investors wary. The company's share buyback programme - it spent $5.2 million on buying its own shares between the end of August and late November - demonstrates at least some concern for investors' welfare.

Analysts' recommendations: Most analysts have a negative view of the company including Macquarie Equities' Steve Wheen and ABN Amro's James Miller, who isn't expecting earnings to pick up until the 2007 financial year. Forsyth Barr's Jeremy Simpson is slightly more optimistic with an "accumulate" recommendation, although he says that at $4.71, the shares are trading at about his valuation. Simpson says the catalysts for improving sentiment towards SkyCity include it delivering results in Adelaide, demonstrating a recovery in Auckland from the smoking ban and successfully negotiating regulatory issues.

Update

Since this story was written, Sky City surprised the market in late February by reporting a better-than-expected $58.6 million net profit for the six months ended December, 1.7% lower than for the previous first half. The market had been expecting a result closer to $50 million.

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