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3 reasons SkyCity Entertainment is a buy today

Forget iron ore and LNG, the next big boom industry is set to be gaming. At least six new casino developments are set to take place across Australia and New Zealand in the next five years and one of the best bets to profit from the boom could be SKYCITY Entertainment Group Limited-Ord (ASX: SKC).

There are three central reasons the company is a buy today.

1. It has a huge competitive advantage

Casino licenses are a rare commodity in Australia and New Zealand so as a monopoly and niche operator SkyCity has a significant competitive advantage from the outset. This is especially valuable with significant growth prospects for the company’s flagship Auckland hotel and casino.

Auckland city’s population is expected to grow by around 26% in the next 11 years and SkyCity will be smack in the middle of this growth with its new National Convention Centre and additional gaming tables and electronic gaming machines.

2. A juicy return on investment

According to Citibank gaming analyst Michael Goltsman SkyCity will achieve the best return on investment (ROI) of the current planned projects. The ROI of SkyCity’s developments weighs in at a chunky 12.4% for the $450 million Auckland casino and International Convention Centre, and 18.4% for the $350 million SkyCity Adelaide development.

According to Glotsman’s numbers these returns will trump those of other projects including Crown Resorts Ltd’s (ASX: CWN) Barangaroo Sydney development at 7% and Echo Entertainment Group Ltd’s (ASX: EGP) Jupiters Gold Coast expansion at 11.5%

3. Currency fears are over blown

One factor that has been weighing on SkyCity’s share price in the last 12 months has been the appreciation of the NZ dollar against the Aussie dollar. SkyCity reports net profit in NZD which resulted in a NZ$3 million hit after tax for the first half of FY14.

However investors may be missing the benefit SkyCity will also likely get from reduced costs to fund the $350 million Adelaide redevelopment, making it comparatively cheaper.

Foolish takeaway

Citibank’s Michael Goltsman rates SkyCity as a buy today, a view I would be inclined to agree with. The company has attractive prospects in the next five years and has negotiated strong terms with local governments to maximise its return on investment.

The company’s slow moving share price looks like an attractive opportunity to add shares to your long-term portfolio.

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Motley Fool contributor Regan Pearson owns shares in SkyCity Entertainment Limited

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