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3 reasons SkyCity is on a growth roll

The windfall in revenue from 2011’s Rugby World Cup proved a hard act to follow for Auckland-based casino operator SkyCity Entertainment Group (ASX: SKC). But despite a drop in first-half 2013 revenue, the company’s long-term growth prospects look rosy.

At its interim result announcement on Wednesday, SkyCity reported revenues of NZ$487.3 million, down 1.4% on the same period in 2012, however excluding the impact for the RWC revenue was up 2.7%. Not exactly an earnings jackpot, but the aces are in place to set up SkyCity to be a long-term winner.

The first ‘ace’ is the enviable position the company holds as a monopoly operator in the New Zealand cities it owns (Auckland, Hamilton, and Queenstown). This is the result of the New Zealand government’s blanket ban on issuing new casino licences. The company derives 60% of its revenue from the flagship Auckland casino and has been working hard to increase international and ‘high-roller’ business at the site, which grew 55%. The monopoly position allows the company to retain significant benefit from the investment in attracting the business.

Another key source of future earnings growth are the existing growth plans the company has in place, which includes a $28 million upgrade of the SkyCity Hamilton hotel complex, a $300 million redevelopment of its Adelaide Casino, and $270 million for a national convention centre in Auckland, which is waiting to be given the green light.

A third ‘ace’ is the rumour the company is considering a venture into the Philippines, though any plans are likely in their infancy.  An expansion to the Philippines would be a positive move to capitalize on the quickly growing region which had estimated GDP growth of 6.6% 2012.

These growth plans, plus any new casinos which may be announced, are all good news for the sales of gaming machine providers such as Aristocrat Leisure (ASX: ALL) and Ainsworth Game Technology (ASX: AGI).

With SkyCity’s result out, eyes will turn toward the other key gaming and entertainment operators, including results from casino operator Echo Entertainment Group (ASX: EGP) on 21 February, closely followed by Crown Limited (ASX: CWN), which will announce its interim results on 22 February.

Foolish Takeaway

SkyCity’s growth plans will involve significant capital expenditure, which adds risk for investors. However if prudent management is maintained, the long-term result will be an increase in cash flow and a potentially golden return for investors.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Regan Pearson owns shares in SKC.

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