Why you should bank on SkyCity Entertainment

Auckland-based casino operator SkyCity Entertainment Group (ASX: SKC) will become the latest gaming operator to join the ranks of the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) following a rebalance of index.

SkyCity will join fellow casino operators Crown Resorts (ASX: CWN) and Echo Entertainment Group (ASX: EGP) on the board after the close of trading on December 20 and of the three casino companies SkyCity appears to be the most attractive given its current price and long-term potential.

Shares in SkyCity are up just 11% over the last 12 months compared to the 14% increase in the S&P/ASX 200 Index which is perhaps fair given the flat earnings produced the company this year.

However, given the big steps it made throughout the year towards growing long-term earnings it could also be a good opportunity to add the company to your portfolio.

Over the next six years, SkyCity has plans to invest $690 million on two significant casino expansions in Auckland and Adelaide. Both projects will see the company funding the construction of local convention centres in exchange for legislation extending casino licences and allowing more electronic gaming machines and gaming tables.

The government deals will help to overcome many of the barriers to growth that the company has come up against to date. In Auckland this includes regularly reaching car park capacity and limited property boundaries where gambling can take place. Both issues will be rectified under the new expansion.

The Adelaide redevelopment will include an expansion of the main gaming floor and a six-star all suite hotel with large VIP villas in efforts to attract more high-rolling customs to the region.

The large program of capital expenditure is able to be fully funded by the company without raising additional equity from shareholders, and within the current dividend policy which currently yields the company’s attractive 4.6% dividend.

Foolish takeaway

In October this year, SkyCity was named as one of Morningstar’s best value stocks in New Zealand. The share price has reduced further since then and in my view given the aggressive growth plans, reasonable valuation and attractive dividend, the company is one to bank on for long-term growth going into 2014.

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Motley Fool contributor Regan Pearson owns shares in SkyCity.

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