Auckland based gaming and tourism company SKYCITY Entertainment Group Limited-Ord (ASX: SKC) reported a strong set of figures earlier today.
Headline results
Both reported and normalised results were improvements on last year. Reported revenue was up 14.8% to NZ$917.4 million and reported net profit was up 30.7% to NZ$128.7 million. Normalised revenue rose 8.6% to NZ$916.1 million and normalised net profit increased 8.8% to NZ$134.1 million.
When translated into Australian dollars the results look even better given the New Zealand dollar has strengthened against the Aussie over the last year.
The main difference between the normalised and reported figures is that the normalised figures use a theoretical rather than actual win rate to calculate revenues in SKYCITY's International Business division.
Customers of the International Business division are foreign high rollers often from Asia and the win rate represents the casino's cut, effectively the percentage of revenue generated by the casino for each dollar bet. Whilst the actual win rate can fluctuate from period to period, the theoretical win rate, in this case 1.35%, is what the casino expects to make over the long term.
The actual win rate jumped from 0.97% in 2014 to 1.36% in 2015 explaining why growth in the reported figures was more impressive than that in the normalised result.
An unfranked final dividend of NZ10 cents was declared, bringing the total for the year to NZ20 cents. This represents a pay-out ratio of 90.9% of reported earnings and 87.3% of normalised earnings. Based on the share price earlier today of $3.77, the stock pays a dividend yield of about 4.8%.
Divisional performance
SKYCITY owns a big casino in Auckland and two small ones in Hamilton and Queenstown. In Australia, it has a casino in Adelaide and one in Darwin. Revenues and profits were up across all locations except Adelaide and Darwin.
The Auckland division generated NZ$473.7 million of revenue representing 51.6% of the group total and up 10% on last year. Earnings before interest, tax and corporate costs were NZ$159.3 million, 69.3% of the group total and up 13.3% on last year.
In Adelaide, revenue was up 1.2% to NZ$152.3 million but earnings before interest and tax fell 66% to NZ$6.9 million. The decline in profits was due to disruption from refurbishment works completed in January 2015. Meanwhile in Darwin, revenues fell 5.8% to NZ$123.2 million and profits slipped just 1.2% to NZ$26.7 million.
The most impressive division was International Business which saw a 101% improvement in revenues and swung from a loss of NZ$2.3 million to a profit of NZ$29.9 million thanks to the improved actual win rate.
Corporate costs were up 22.9% to NZ$33.3 million due to higher bonuses, increased sponsorship commitments and increased surveillance.
Balance sheet
The company advises that its property assets have a market value of NZ$1.41 billion but are held on the books at just NZ$0.89 billion. The market value of these assets represents over 40% of the company's current enterprise value and indicates that SKYCITY is conservatively leveraged given it has NZ$689 million of net debt.
During the year, maintenance capital expenditure was NZ$52.6 million and project capital expenditure was NZ$59.4 million mainly due to the Adelaide refurbishment. As the name suggests, maintenance capital expenditure can be thought of as the investment a company needs to make to maintain its current level of business, whereas project capital expenditure is expected to deliver additional profits.
Outlook
The new financial year has started well with normalised group revenue for the month of NZ$95.5 million, up 11.4% on last year. The international business continues to improve, recording a win rate of 1.54% for the first month of the year.
Maintenance capital expenditure in 2016 is expected to be NZ$60 million to NZ$65 million and project capital expenditure will be between NZ$90 million and NZ$100 million mostly related to the New Zealand International Convention Centre (NZICC) project.
A preliminary design for the Auckland-based NZICC was agreed in May 2015 and construction is expected to start before the end of 2015. The development is expected to cost between NZ$450 and NZ$470 million in total.
The fortunes of SKYCITY are tied to the tourism sector in Australia and New Zealand which is expected to grow on the back of demand from Asia. This will encourage new competition and SKYCITY will need to keep investing in its casinos to make them as attractive as possible to customers, especially the high rolling variety.
